<PAGE>
Semiannual Report
April 30, 1996
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) STRATEGIC INCOME FUND
[A picture of two men in a window.]
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<TABLE>
<CAPTION>
MFS(R) STRATEGIC INCOME FUND
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, CUSTODIAN
Cambridge Trust Company State Street Bank and Trust Company
Marshall N. Cohan - Private Investor AUDITORS
Ernst & Young LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; INVESTOR INFORMATION
Professor of Surgery, Harvard Medical School For MFS stock and bond market
outoooks call toll free: 1-800-637-4458
The Hon. Sir J. David Gibbons, KBE - Chief anytime from a a touch-tone telephone.
Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd. For information on MFS mutual funds,
call your financial adviser or, for an
Abby M. O'Neill - Private Investor; information kit, call toll free:
Director, Rockefeller Financial Services, Inc. 1-800-637-2929 any business day from
(investment adviser) 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Walter E. Robb, III - President and Treasurer,
Benchmark Advisors, Inc. (corporate INVESTOR SERVICE
financial consultants); President, Benchmark MFS Service Center, Inc.
Consulting Group, Inc. (office services); P.O. Box 2281
Trustee, Landmark Funds (mutual funds) Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
J. Dale Sherratt - President, Insight Resources,
Inc. (acquisition planning specialists) (To use this service, your phone must
be equipped with a Telecommunications Device for the
Ward Smith - Former Chairman (until 1994), Deaf.)
NACCO Industries; Director, Sundstrand
Corporation
For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a
500 Boylston Street touch-tone telephone.
Boston, MA 02116-3741
DISTRIBUTOR TOP RATED SERVICE
MFS Fund Distributors, Inc. For the second year in a row,
500 Boylston Street [DALBAR MFS earned a #1 ranking in
Boston, MA 02116-3741 LOGO] DALBAR, Inc.'s Broker/Dealer
Survey, Main Office Operations
PORTFOLIO MANAGER Service Quality category. The
James T. Swanson* firm achieved a 3.49 overall score - on a
scale of 1 to 4 - in the 1995 survey. A total
TREASURER of 71 firms responded, offering input on the
W. Thomas London* quality of service they receive from 36
mutual fund companies nationwide. The survey
ASSISTANT TREASURER contained questions about service quality in
James O. Yost* 17 categories, including "knowledge of phone
service contracts," "accuracy of transaction
*Affiliated with the Investment Adviser processing," and "overall ease of doing
business with the firm."
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The past six months have seen both euphoria and shock in the world bond
markets. The euphoria of late 1995 followed a year-long period when bond
prices, for the most part, progressively rose, while the yield on 30-year U.S.
Treasury bonds fell to 5.87% in a market driven by optimism on inflation.
However, this optimism disappeared in February of this year as the federal
government reported unusually high job growth. As a result, bond prices in the
United States and overseas suddenly declined, and continued to fall well into
the second quarter. This new information caused the markets to conclude that
consumer prices could be on their way up, destroying purchasing power in 1996.
However, the weakness in the bond markets in the first quarter did not erase
1995's gains, and Class A shares of the Fund provided a total return of 3.66%
for the six months ended April 30, 1996, Class B shares 3.26%, and Class C
shares 3.45%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges. A discussion of the Fund's
performance may be found in the Portfolio Performance and Strategy section of
this letter, while complete performance data may be found on pages four and
five of this report.
Economic Outlook
We believe the U.S. economy will continue to show moderate growth in 1996,
although this growth may be somewhat uneven as we move from quarter to
quarter. Thus, while one quarter may experience an annualized rate of growth
in gross domestic product of less than 1%, another quarter may see annualized
growth in excess of 3% - but, for the year, we believe growth could stay
within our expected range of 2% to 2 1/2%. While some increase in consumer
spending took place in the early months of this year, consumers, who represent
two-thirds of the economy, remain in a somewhat weakened position, due in part
to an increase in consumer installment debt in excess of 30% over the past two
years. Meanwhile, growth is also being constrained by ongoing economic
doldrums in Europe and Japan, important markets for U.S. exports. Here again,
we are seeing a few tentative signs, particularly in Japan, of modest
recoveries that could lead to improved prospects for U.S. exporters. Also, the
"lag effect" of increases in short-term interest rates by the Federal Reserve
Board in 1994 and into 1995 is helping to keep growth in check. This lag
effect can last up to two years, and although the Fed did reduce short-term
rates late last year and earlier this year, we expect it to continue its
diligent anti-inflationary policies. Finally, it appears that inflation is
likely to remain under control this year, due in part to a continued
moderation in wage pressures and the subdued level of economic growth. At the
same time, we believe the current upward pressure on energy prices bears close
scrutiny, as energy is an important component of the inflation outlook.
Interest Rates
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996. However, should
signs of economic growth and, particularly, of higher inflation continue, we
would expect the Fed to maintain its anti-inflationary stance. This would
likely mean no further reductions in short-term interest rates, and could lead
to some modest increases. In the beginning of the year, bond markets were
trading in a narrow range, as investors shifted between concern about the lack
of a budget resolution in Washington and hopes that sluggish economic reports
and low inflation might lead to lower interest rates. Later, fixed-income
markets began reacting to conflicting signals regarding the strength of the
economy with more-volatile trading patterns marked by an upward bias in
interest rates. Interest rates may move even higher over the coming months,
but we believe the current rise in bond yields is reaching a point where
fixed-income markets are becoming attractively valued.
Portfolio Performance and Strategy
The Fund derives much of its diversification from investing in markets other
than the U.S. government bond market such as international bonds, corporate
bonds, and emerging market bonds. This has provided a favorable mix of assets
that has helped us cushion moves in U.S. interest rates while providing a
measure of stability to the Fund's net asset value.
Over the past six months, for example, our management of the U.S.
government portion of the portfolio has sought to benefit from low inflation
and further increases in bond prices. These strategies helped the Fund in the
latter half of 1995 and into early 1996. We altered this approach early in
1996 as interest rates began rising and we began to give back earlier gains.
Thus, we took a temporarily more cautious approach in the first quarter, while
de-emphasizing our U.S. government weighting. Going forward, we believe
increases in interest rates will be moderate but that the risk of rising
inflation spurred by higher oil and metals prices is higher now than earlier
in this business cycle. Thus, bond vigilance will become ever more critical to
managing fixed-income assets.
In the Fund's corporate bond segment, the biggest share remains in below-
investment-grade bonds, and more funds were dedicated to this sector during
the market turmoil of the first quarter. Because high-yield corporate bonds
often benefit from economic growth, we believe they can be an excellent
diversifier when rates begin to rise. Their prices also have the advantage of
being less sensitive to rising interest rates. While this sector is no longer
particularly cheap, we believe that, with careful research and intelligent
industry selection, high-yield corporate bonds can continue to benefit the
Fund.
Movements in the international bond market have been highly correlated to
the U.S. bond market in recent months, and while prices there have declined
with those of the U.S. market, this sector remains our best hope for capital
appreciation in the coming months. We have particularly focused our
international investments in central Europe (Germany) and in some of the other
higher-yielding countries in Europe. Europe has proven to be less flexible
than the United States in coming to grips with slow growth and in maintaining
a flexible labor force. As a result, we believe that interest rates in
countries such as Italy and Spain are too high to be sustained, and that the
real rates of return on bonds (nominal yields minus local inflation rates)
could provide significant relative value. Looking ahead, we foresee somewhat
higher bond prices in Europe and weaker currency returns. As a result, much of
our international holdings are hedged back into U.S. dollars.
We have been maintaining a 10% to 25% weighting in emerging market debt
(mostly U.S. dollar Brady bonds), and the Fund has benefited greatly in the
last six months from credit improvements in Poland (which has received an
investment-grade rating) and Mexico. We may soon shift some money away from
this sector because of its recent strong relative performance.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[A photo of A. Keith Brodkin, [A Photo of James T. Swanson,
Chairman and President] Portfolio Manager]
/s/ A. Keith Brodkin /s/ James T. Swanson
Chairman and President Portfolio Manager
May 10, 1996
<PAGE>
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+ -
6 Months 1 Year 5 Years 4/30/96
- ------------------------------------------------------------------------------
Cumulative Total Return* +3.66% +12.29% +52.85% +109.41%
- ------------------------------------------------------------------------------
Average Annual Total Return* -- +12.29% + 8.86% + 9.07%
- ------------------------------------------------------------------------------
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% on the initial investment for the 1- and 5-year
periods ended March 31, 1996 and for the period from October 29, 1987+ to
March 31, 1996, were +10.33%, +8.30% and +8.45%, respectively.
+Commencement of offering of this class of shares.
*These results do not include the sales charge. If the charge had been
included, the results would have been lower.
Class B Investment Results
(net asset value change including reinvested distributions)
9/07/93+ -
6 Months 1 Year 4/30/96
- ------------------------------------------------------------------------------
Cumulative Total Return++ +3.26% +11.52% +14.58%
- ------------------------------------------------------------------------------
Average Annual Total Return++ -- +11.52% + 5.28%
- ------------------------------------------------------------------------------
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 contingent deferred sales charge (CDSC) of 4%
for the 1-year period ended March 31, 1996, and 3% for the period from
September 7, 1993+ to March 31, 1996, were +10.98% and +4.17%, respectively.
Class C Investment Results
(net asset value change including reinvested distributions)
9/01/94+ -
6 Months 1 Year 4/30/96
- ------------------------------------------------------------------------------
Cumulative Total Return(S) +3.45% +11.68% +19.57%
- ------------------------------------------------------------------------------
Average Annual Total Return(S) -- +11.68% +11.34%
- ------------------------------------------------------------------------------
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 for the 1-year period ended March 31, 1996 and for the period from
September 1, 1994+ to March 31, 1996, were +14.91% and +11.48%, respectively.
All results represent past performance and are not 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 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 at any time.
+ Commencement of offering of this class of shares.
++ These results do not include any CDSC. If the charge had been included, the
results would have been lower.
(S) Class C shares have no initial sales charge but, along with Class B
shares, have higher annual fees and expenses than Class A shares. Class C
share purchases made on or after April 1, 1996, will be subject to a 1%
CDSC if redeemed within 12 months of purchase.
<PAGE>
PORTFOLIO OF INVESTMENTS - April 30, 1996
Bonds - 83.5%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Dollar Denominated - 60.1%
Foreign - U.S. Dollar Denominated - 9.4%
Bell Cablemedia PLC, 0s, 2005 $ 250 $ 163,125
Diamond Cable Communications PLC, 0s, 2005 250 150,625
Federal Republic of Brazil, 8.75s, 2001 13,950 12,782
Federal Republic of Brazil, 6.5625s, 2009 1,000 690,000
Federal Republic of Brazil, 6.5s, 2024 2,500 1,690,625
Hidroelectrica Alicura, 8.375s, 1999## 500 475,000
Israel State U.S. Government, 5.89s, 2005 250 231,722
Mexico UMS Par CL A, 6.25s, 2019 250 164,687
Poland Discount Notes, 3.75s, 2014 2,000 1,535,000
Republic of Ecuador, 3.25s, 2025 5,000 1,775,000
-----------
$ 6,888,566
- -----------------------------------------------------------------------------
Industrials - 28.1%
Automotive - 0.7%
Harvard Industries, Inc., 12s, 2004 $ 500 $ 515,000
- -----------------------------------------------------------------------------
Building - 0.3%
Nortek, Inc., 9.875s, 2004 $ 250 $ 237,187
UDC Homes, 14.5s, 2000 6 2,771
-----------
$ 239,958
- -----------------------------------------------------------------------------
Cellular Telephones - 0.7%
Vanguard Cellular, 9.375s, 2006 $ 500 $ 495,625
- -----------------------------------------------------------------------------
Chemicals - 1.5%
NL Industries, Inc., 11.75s, 2003 $ 250 $ 258,750
UCC Investors Holdings, Inc., 0s, 2005 1,000 805,000
-----------
$ 1,063,750
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.7%
Ithaca Industries, Inc., 11.125s, 2002+ $ 100 $ 42,000
Revlon, Inc., 10.5s, 2003 200 204,000
Westpoint Stevens, Inc., 9.375s, 2005 250 245,000
-----------
$ 491,000
- -----------------------------------------------------------------------------
Containers - 1.2%
Calmar, Inc., 11.5s, 2005 $ 250 $ 247,500
Gaylord Container Co., 11.5s, 2001 500 517,500
Ivex Packaging Corp., 12.5s, 2002 100 105,000
-----------
$ 870,000
- -----------------------------------------------------------------------------
Entertainment - 2.1%
SCI Television, Inc., 11s, 2005 $ 455 $ 474,337
Turner Broadcasting Systems, Inc.,
8.375s, 2013 1,000 959,890
United Artist Theater Circuit, Inc.,
11.5s, 2002 100 106,000
-----------
$ 1,540,227
- -----------------------------------------------------------------------------
Financial Institutions - 3.7%
Arkwright CSN Trust, 9.625s, 2026## $ 1,000 $ 1,005,620
Banco de Boston S.A., 9.125s, 2004## 1,500 1,501,875
Tiphook Finance Corp., 8s, 2000 250 187,500
-----------
$ 2,694,995
- -----------------------------------------------------------------------------
Forest and Paper Products - 0.7%
Fort Howard Corp., 9.25s, 2001 $ 500 $ 495,000
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 1.5%
Beverly Enterprises, 9s, 2006 $ 460 $ 432,400
Integrated Health Services, Inc.,
10.75s, 2004 100 104,000
Tenet Healthcare Corp., 10.125s, 2005 500 535,000
-----------
$ 1,071,400
- -----------------------------------------------------------------------------
Oil Services - 0.4%
Ferrell Gas LP, 10s, 2001 $ 200 $ 210,000
Tuboscope Vetco International, Inc.,
10.75s, 2003 100 103,500
-----------
$ 313,500
- -----------------------------------------------------------------------------
Oils - 0.7%
Gulf Canada, 9.25s, 2004 $ 500 $ 500,000
- -----------------------------------------------------------------------------
Special Products and Services - 3.4%
Gillett Holdings, Inc., 12.25s, 2002 $ 49 $ 51,624
IMO Industries, Inc., 12s, 2001 128 131,520
K & F Industries, Inc., 11.875s, 2003 250 270,000
Mark IV Industries, Inc., 8.75s, 2003 500 510,000
Polymer Group, Inc., 12.25s, 2002 500 540,000
Talley Manufacturing & Technology, Inc.,
10.75s, 2003 500 505,000
Thermadyne, 10.75s, 2003 500 500,000
-----------
$ 2,508,144
- -----------------------------------------------------------------------------
Steel - 1.2%
AK Steel Holdings Corp., 10.75s, 2004 $ 500 $ 546,250
Kaiser Aluminum & Chemical Corp., 9.875s,
2002 300 301,500
-----------
$ 847,750
- -----------------------------------------------------------------------------
Stores - 0.3%
Limited, Inc., 7.5s, 2023 $ 250 $ 212,500
- -----------------------------------------------------------------------------
Supermarkets - 2.1%
Dominick's Finer Foods, 10.875s, 2005 $ 500 $ 525,000
Pathmark Stores, Inc., 9.625s, 2003 500 480,000
Ralph's Grocery Co., 10.45s, 2004 500 488,750
-----------
$ 1,493,750
- -----------------------------------------------------------------------------
Telecommunications - 6.9%
American Radio Systems, 9s, 2006 $ 500 $ 486,250
Bell & Howell Co., 10.75s, 2002 100 107,000
Brooks Fiber Properties, 0s, 2006## 500 273,750
Cablevision Industries Corp., 9.25s, 2008 100 106,500
Comcast Corp., 9.375s, 2005 500 500,000
Continental Cablevision, 8.3s, 2006## 250 255,625
Echostar Satellite Broadcasting, 0s,
2004## 1,000 622,500
Falcon Holdings Group, Inc., 0s, 2003 205 197,498
Jones Intercable, Inc., 10.5s, 2008 500 532,500
MFS Communications Corp., 0s, 2006 1,000 627,500
Marcus Cable Operations Co., 0s, 2004 500 360,000
Mobilemedia Communications, Inc., 0s, 2003 275 209,000
Pronet, Inc., 11.875s, 2005 200 213,500
Rogers Cablesystems Ltd., 10.125s, 2012 500 507,500
-----------
$ 4,999,123
- -----------------------------------------------------------------------------
Total Industrials $20,351,722
- -----------------------------------------------------------------------------
Transportation - 0.9%
Continental Airlines, Inc., 11.75s, 1995+ $ 500 $ 50
Delta Airlines, 9.75s, 2021 500 574,025
Moran Transportation Co., 11.75s, 2004 100 99,000
-----------
$ 673,075
- -----------------------------------------------------------------------------
Utilities - Electric - 12.8%
CMS Energy Corp., 9.5s, 1997 $ 500 $ 511,250
Coastal Bancorp, Inc., 10s, 2002 120 118,800
First PV Funding Corp., 10.3s, 2014 1,000 1,058,570
First PV Funding Corp., 10.15s, 2016 600 630,000
Maxus Energy Corp., 11.25s, 2013 1,000 1,025,000
Midland Cogeneration Venture Corp., 10.33s, 2002 964 1,011,400
Midland Funding Corp. II, "A", 11.75s, 2005 1,100 1,153,647
Niagara Mohawk Power Corp., 6.875s, 2001 500 450,365
Niagara Mohawk Power Corp., 8s, 2004 500 453,040
Niagara Mohawk Power Corp., 8.77s, 2018 1,000 909,420
Niagara Mohawk Power Corp., 8.75s, 2022 500 440,840
Texas & New Mexico Power Co., 10.75s, 2003 1,500 1,590,000
-----------
$ 9,352,332
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 7.6%
U.S. Treasury Notes, 7.75s, 1999 $ 500 $ 522,420
U.S. Treasury Notes, 8s, 1999 2,000 2,100,320
U.S. Treasury Notes, 7.875s, 2004 2,500 2,691,025
U.S. Treasury Notes, 5.875s, 2005 250 235,780
-----------
$ 5,549,545
- -----------------------------------------------------------------------------
Federal National Mortgage Association - 0.1%
FNMA, 9.5s, 2025 $ 28 $ 29,353
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 1.2%
FHLMC, 8.5s, 2025 $ 841 $ 863,703
- -----------------------------------------------------------------------------
Total U.S. Dollar Denominated $43,708,296
- -----------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 23.4%
Australian Dollars - 0.5%
Commonwealth of Australia, 7s, 1998 AUD 500 $ 384,059
- -----------------------------------------------------------------------------
Belgian Francs - 1.7%
Kingdom of Belgium, 9s, 1998 BEF 10,000 $ 350,954
Kingdom of Belgium, 8.75s, 2002 10,000 364,558
Kingdom of Belgium, 7.25s, 2004 10,000 335,346
Kingdom of Belgium, 8.5s, 2007 5,000 180,292
-----------
$ 1,231,150
- -----------------------------------------------------------------------------
British Pounds - 2.1%
United Kingdom Gilts, 8s, 2000 GBP 475 $ 731,340
United Kingdom Gilts, 9s, 2000 500 794,045
-----------
$ 1,525,385
- -----------------------------------------------------------------------------
Canadian Dollars - 1.0%
Government of Canada, 7.5s, 2003 CAD 1,045 $ 762,435
- -----------------------------------------------------------------------------
Czech Republic Korunas - 1.5%
Czech Electric, 16.5s, 1998 CZK 30,000 $ 1,102,186
- -----------------------------------------------------------------------------
Danish Kroner - 2.7%
Kingdom of Denmark, 8s, 2001 DKK 10,830 $ 1,972,758
- -----------------------------------------------------------------------------
French Francs - 1.5%
Government of France, 7s, 1999 FRF 4,150 $ 853,031
Government of France, 7s, 2000 3,550 232,599
-----------
$ 1,085,630
- -----------------------------------------------------------------------------
German Marks - 5.5%
German Unity Fund, 8.5s, 2001 DEM 904 $ 669,105
Treuhandanstalt Obligationen, 6.375s, 1999 4,806 3,306,262
-----------
$ 3,975,367
- -----------------------------------------------------------------------------
Italian Lire - 2.0%
Republic of Italy, 9.225s, 1996 ITL 715,000 $ 466,215
Republic of Italy, 8.5s, 1999 1,000,000 637,068
Republic of Italy, 8.5s, 2004 520,000 314,430
-----------
$ 1,417,713
- -----------------------------------------------------------------------------
New Zealand Dollars - 0.4%
Government of New Zealand, 9s, 1996 NZD 400 $ 273,834
- -----------------------------------------------------------------------------
Spanish Pesetas - 2.8%
Government of Spain, 8.3s, 1998 ESP 139,200 $ 1,103,200
Spanish Government Bonds, 10.1s, 2001 60,000 500,716
Spanish Government Bonds, 10s, 2005 55,000 454,447
-----------
$ 2,058,363
- -----------------------------------------------------------------------------
Swedish Kronor - 1.7%
Kingdom of Sweden, 11s, 1999 SEK 2,200 $ 355,615
Kingdom of Sweden, 10.25s, 2000 5,400 875,338
-----------
$ 1,230,953
- -----------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $17,019,833
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $61,089,821) $60,728,129
- -----------------------------------------------------------------------------
Common Stocks - 1.4%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Atlantic Gulf Communities Corp.*++ 100 $ 600
Cablevision Systems Corp.*## 5,071 495,690
Gillett Holdings, Inc.*++ 22,594 542,256
- -----------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $732,110) $ 1,038,546
- -----------------------------------------------------------------------------
Preferred Stocks - 4.7%
- -----------------------------------------------------------------------------
First Nationwide Bank 30,000 $ 3,345,000
Time Warner, Inc.## 100 100,000
- -----------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $3,587,500) $ 3,445,000
- -----------------------------------------------------------------------------
Warrants - 0.1%
- -----------------------------------------------------------------------------
American Media, Inc.* 27,000 $ 845
ICO, Inc.* 62,500 40,626
- -----------------------------------------------------------------------------
Total Warrants (Identified Cost, $0) $ 41,471
- -----------------------------------------------------------------------------
Call Options Purchased - 0.1%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
Australian Dollars
July/0.80 AUD 976 $ 4,699
Canadian Dollars
October/1.3858 CAD 1,911 6,887
Italian Lire/German Marks
June/1060 ITL/DEM 667,746 14,023
Japanese Government Bonds
May/115.893 JPY 107,000 0
June/108.961 87,000 3,654
September/110.292 99,000 99
December/96.199 85,000 2,210
Japanese Yen
May/106.0501 148,292 14,533
Spanish Pesetas/German Marks
June/83.97 ESP/DEM 119,524 6,932
- -----------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $65,918) $ 53,037
- -----------------------------------------------------------------------------
Put Options Purchased - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted) Value
- -----------------------------------------------------------------------------
French Francs/German Marks
July/3.6 FRF/DEM 14,323 $ 0
German Marks
May/1.50 DEM 3,196 47,415
July/1.55 7,217 42,839
Italian Lire/German Marks
April/1155.85 ITL/DEM 3,248,380 12,993
Japanese Yen
June/107.56 JPY 239,644 11,024
Swiss Francs/German Marks
July/0.805 CHF/DEM 1,170 10,224
- -----------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $146,884) $ 124,495
- -----------------------------------------------------------------------------
Short-Term Obligation - 1.3%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted)
- -----------------------------------------------------------------------------
Eurolira Time Deposit, due 10/21/96, at
Amortized Cost ITL 1,510,000 $ 963,932
- -----------------------------------------------------------------------------
Repurchase Agreement - 6.2%
- -----------------------------------------------------------------------------
Goldman Sachs Group L.P., dated 4/30/96,
due 5/01/96, total to be received
$4,495,666 (secured by $1,000,367 par,
FNMA at 7.58s, due 4/19/06, market
value $999,987; $603,670 par, FNMA at
6.17s, due 12/30/03, market value
$571,510; $446,265 par, FNMA at 5.3s,
due 12/10/98, market value $434,548;
$2,164,369 par, FHLMC at 0s, due 5/23/
96, market value $2,156,852; and
$388,462 par, FHLB at 7.65s, due 3/25/
97, market value $395,238),
at Cost $ 4,495 $ 4,495,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $71,081,165) $70,889,610
- -----------------------------------------------------------------------------
Call Options Written - (0.1)%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- -----------------------------------------------------------------------------
German Marks
July/1.492 DEM 6,947 $ (31,316)
Italian Lire/German Marks
April/1015 ITL/DEM 2,852,538 (19,967)
- -----------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $53,095) $ (51,283)
- -----------------------------------------------------------------------------
Put Options Written - (0.1)%
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted) Value
- -----------------------------------------------------------------------------
Canadian Dollars
June/1.385 CAD 1,114 $ (681)
October/1.3858 1,988 (6,887)
Japanese Government Bonds
May/115.893 JPY 107,000 (6,420)
May/110.292 99,000 (10,395)
June/108.961 87,000 (11,310)
June/96.199 85,000 (8,500)
Japanese Yen
June/109.5 126,666 (2,407)
Spanish Pesetas/German Marks
June/86.35 ESP/DEM 122,911 0
- -----------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $53,315) $ (46,600)
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 2.7% $ 1,948,560
- -----------------------------------------------------------------------------
Net Assets - 100.0% $72,740,287
- -----------------------------------------------------------------------------
*Non-income producing security.
+Non-income producing security - in default.
++Restricted security.
##SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
AUD = Australian Dollars DKK = Danish Kroner ITL = Italian Lire
BEF = Belgian Francs ESP = Spanish Pesetas JPY = Japanese Yen
CAD = Canadian Dollars FIM = Finnish Markkaa NLG = Dutch Guilders
CHF = Swiss Francs FRF = French Francs NZD = New Zealand Dollars
CZK = Czech Republic Korunas GBP = British Pounds SEK = Swedish Kronor
DEM = German Marks HKD = Hong Kong Dollars
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
April 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $71,081,165) $70,889,610
Cash 47,338
Foreign currency, at value (identified cost, $1,575) 1,728
Net receivable for forward foreign currency exchange
contracts sold 1,115,082
Net receivable for forward foreign currency exchange
contracts 28,774
Premium receivable on options written 6,887
Net receivable for interest rate swap agreements 8,410
Receivable for Fund shares sold 152,259
Receivable for investments sold 516,496
Interest receivable 1,762,262
Receivable from investment adviser 399,260
-----------
Total assets $74,928,106
-----------
Liabilities:
Payable for Fund shares reacquired $ 109,947
Payable for investments purchased 701,629
Written options outstanding, at value (premiums received,
$106,410) 97,883
Net payable for forward foreign currency exchange contracts
purchased 1,130,830
Payable to affiliates -
Management fee 4,451
Shareholder servicing agent fee 1,242
Distribution fee 14,646
Accrued expenses and other liabilities 127,191
-----------
Total liabilities $ 2,187,819
-----------
Net assets $72,740,287
===========
Net assets consist of:
Paid-in capital $72,692,067
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (173,291)
Accumulated distributions in excess of net realized gain on
investments and foreign currency transactions (15,976)
Accumulated undistributed net investment income 237,487
-----------
Total $72,740,287
===========
Shares of beneficial interest outstanding 9,125,062
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $50,813,607 / 6,362,272 shares of
beneficial interest outstanding) $7.99
=====
Offering price per share (100/95.25) $8.39
=====
Class B shares:
Net asset value and offering price per share
(net assets of $17,851,639 / 2,248,312 shares of
beneficial interest outstanding) $7.94
=====
Class C shares:
Net asset value, offering price, and redemption price per share
(net assets of $4,075,041 / 514,478 shares of beneficial
interest outstanding) $7.92
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A,
Class B and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Six Months Ended April 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $2,523,236
Dividends 86,250
----------
Total investment income $2,609,486
----------
Expenses -
Management fee $ 333,300
Trustees' compensation 19,557
Shareholder servicing agent fee (Class A) 34,092
Shareholder servicing agent fee (Class B) 14,036
Shareholder servicing agent fee (Class C) 1,895
Distribution and service fee (Class A) 83,859
Distribution and service fee (Class B) 62,421
Distribution and service fee (Class C) 12,633
Custodian fee 49,735
Auditing fees 25,400
Postage 13,116
Printing 6,626
Legal fees 2,036
Miscellaneous 30,237
----------
Total expenses $ 688,943
Fees paid indirectly (13,448)
Preliminary reduction of expenses by investment adviser (254,917)
----------
Net expenses $ 420,578
----------
Net investment income $2,188,908
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 532,513
Written option transactions 99,737
Foreign currency transactions (611,683)
----------
Net realized gain on investments $ 20,567
----------
Change in unrealized appreciation (depreciation) -
Investments and interest rate swap agreements $ (807,825)
Written options (7,298)
Translation of assets and liabilities in foreign currencies 306,553
----------
Net unrealized loss on investments $ (508,570)
----------
Net realized and unrealized loss on investments and
foreign currency $ (488,003)
----------
Increase in net assets from operations $1,700,905
==========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- -----------------------------------------------------------------------------------------------
Six Months Ended Year Ended
April 30, 1996 October 31, 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase in net assets:
From operations -
Net investment income $ 2,188,908 $ 3,769,276
Net realized gain on investments and foreign
currency transactions 20,567 1,067,286
Net unrealized gain (loss) on investments and
foreign currency translation (508,570) 1,875,133
---------- ------------
Increase in net assets from operations $ 1,700,905 $ 6,711,695
----------- ------------
Distributions declared to shareholders -
From net investment income (Class A) $(1,684,901) $ (3,165,100)
From net investment income (Class B) (406,403) (442,955)
From net investment income (Class C) (72,835) (28,052)
From net realized gain on investments and
foreign currency transactions (Class A) (400,584) --
From net realized gain on investments and
foreign currency transactions (Class B) (87,623) --
From net realized gain on investments and
foreign currency transactions (Class C) (10,866) --
----------- ------------
Total distributions declared to shareholders $(2,663,212) $ (3,636,107)
----------- ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $27,104,956 $ 10,564,774
Net asset value of shares issued to shareholders in
reinvestment of distributions 1,175,262 1,251,060
Cost of shares reacquired (5,691,294) (13,172,718)
----------- ------------
Increase (decrease) in net assets from Fund
share transactions $22,588,924 $ (1,356,884)
----------- ------------
Total increase in net assets $21,626,617 $ 1,718,704
Net assets:
At beginning of period 51,113,670 49,394,966
---------- ------------
At end of period (including accumulated undistributed
net investment income of $237,487 and $212,718,
respectively) $72,740,287 $ 51,113,670
=========== ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended October 31,
Six Months Ended ------------------------------------------------------------------------
April 30, 1996 1995 1994 1993 1992 1991
- --------------------------------------------------------------------------------------------------------------------------------
Class A
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.07 $ 7.57 $ 8.34 $ 8.00 $ 8.12 $ 7.56
------ ------ ------ ------ ------ ------
Income from investment operations<F3> -
Net investment income<F6> $ 0.30 $ 0.60 $ 0.48 $ 0.52 $ 0.63 $ 0.73
Net realized and unrealized
gain (loss) on investments and
foreign currency transactions -- 0.48 (0.74) 0.42 0.08 0.95
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.30 $ 1.08 $(0.26) $ 0.94 $ 0.71 $ 1.68
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income
$(0.30) $(0.58) $ -- $(0.24) $(0.56) $(0.73)
From net realized gain on
investments and foreign
currency transactions (0.08) -- -- (0.32) -- --
In excess of net investment
income and foreign currency
transactions -- -- (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)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.38) $(0.58) $(0.51) $(0.60) $(0.83) $(1.12)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.99 $ 8.07 $ 7.57 $ 8.34 $ 8.00 $ 8.12
====== ====== ====== ====== ====== ======
Total return<F5> 3.66%<F2> 15.00% (3.15)% 12.36% 9.02% 23.78%
Ratios (to average net
assets)/Supplemental data<F6>:
Expenses<F4> 1.25%<F1> 1.54% 1.71% 1.98% 2.02% 1.87%
Net investment income 7.30%<F1> 7.86% 6.11% 5.92% 7.47% 9.26%
Portfolio turnover 132% 249% 153% 275% 423% 671%
Net assets at end of period (000
omitted) $50,814 $41,688 $44,032 $60,120 $77,487 $76,312
<FN>
<F1> Annualized.
<F2> Not annualized.
<F3> Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
<F4> For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<F5> Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
<F6> 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 ratios would have been:
Net investment income $ 0.26 $ 0.53 $ 0.44 $ 0.49 $ 0.61 $ 0.71
Ratios (to average net assets):
Expenses<F4> 2.09%<F1> 2.47% 2.21% 2.14% 2.21% 2.16%
Net investment income 6.46%<F1> 6.89% 5.62% 5.76% 7.55% 8.97%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- ------------------------------------------------------------------------------
Six Months
Year Ended October 31, Ended
---------------------------------- April 30,
1990 1989 1988 1987* 1996
- ------------------------------------------------------------------------------
Class A Class B
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 8.93 $ 9.60 $ 9.21 $ 9.35 $ 8.03
------ ------ ------ -------- ------
Income from investment
operations# -
Net investment income(S) $ 0.86 $ 0.94 $ 0.93 $ 0.0025 $ 0.27
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions (1.03) (0.38) 0.56 (0.1425) --
------ ------ ------ -------- ------
Total from investment
operations $(0.17) $ 0.56 $ 1.49 $(0.1400) $ 0.27
------ ------ ------ -------- ------
Less distributions declared
to shareholders -
From net investment income $(0.82) $(1.18) $(0.69) $ -- $(0.28)
From net realized gain on
investments and foreign
currency transactions -- -- (0.41) -- (0.08)
From paid-in capital (0.38) (0.05) -- -- --
------ ------ ------ -------- ------
Total distributions
declared to
shareholders $(1.20) $(1.23) $(1.10) $ -- $(0.36)
------ ------ ------ -------- ------
Net asset value - end of
period $ 7.56 $ 8.93 $ 9.60 $ 9.21 $ 7.94
====== ====== ====== ======== ======
Total return++ (1.62)% 5.85% 16.60% (1.50)% 3.26%
Ratios (to average net
assets)/Supplemental data(S):
Expenses## 1.47% 1.82% 1.75% 0.57%+ 1.95%+
Net investment income 10.42% 10.05% 9.74% 4.88%+ 6.68%+
Portfolio turnover 400% 157% 270% 0% 132%
Net assets at end of period
(000 omitted) $74,555 $87,978 $93,819 $78,479 $17,852
*For the period from October 29, 1987 (commencement of investment operations)
to October 31, 1987.
+Annualized.
#Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++Total returns for Class A shares do not include the applicable sales charge.
If the charge had been included, the results would have been lower.
(S)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 ratios would have been:
Net investment income $ 0.83 -- -- -- $ 0.24
Ratios (to average net
assets):
Expenses## 1.81% -- -- -- 2.79%+
Net investment income 10.08% -- -- -- 5.84%+
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Six Months
Year Ended October 31, Ended Year Ended October 31,
------------------------------------------- April 30, ----------------------------
1995 1994 1993<F1> 1996 1995 1994<F2>
- -----------------------------------------------------------------------------------------------------------------------------------
Class B Class C
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value - beginning
of period $ 7.53 $ 8.33 $ 8.28 $ 8.00 $ 7.53 $ 7.53
------ ------ ------ ------ ------ ------
Income from investment
operations<F5> -
Net investment income<F7> $ 0.55 $ 0.45 $ 0.04 $ 0.28 $ 0.54 $ 0.12
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions 0.48 (0.78) 0.05 -- 0.48 (0.03)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 1.03 $(0.33) $ 0.09 $ 0.28 $ 1.02 $ 0.09
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.53) $ -- $(0.03) $(0.28) $(0.55) --
From net realized gain on
investments and foreign
currency transactions -- -- (0.01) (0.08) -- --
In excess of net
investment income and
foreign currency
transactions -- (0.05) -- -- -- --
In excess of net realized
gain on investments and
foreign currency transactions -- (0.03) -- -- -- --
From paid-in capital -- (0.39) -- -- -- (0.09)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.53) $(0.47) $(0.04) $(0.36) $(0.55) $(0.09)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 8.03 $ 7.53 $ 8.33 $ 7.92 $ 8.00 $ 7.53
====== ====== ====== ====== ====== ======
Total return 14.23% (3.97)% 1.15%<F4> 3.45% 14.17% 1.23%<F4>
Ratios (to average net
assets)/Supplemental data<F7>:
Expenses<F6> 2.27% 2.43% 3.03%<F3> 1.87%<F3> 2.20% 2.16%<F3>
Net investment income 7.15% 5.97% 5.22%<F3> 6.89%<F3> 7.23% 8.99%<F3>
Portfolio turnover 249% 153% 275% 132% 249% 153%
Net assets at end of period
(000 omitted) $8,365 $5,350 $265 $4,075 $1,060 $13
<FN>
<F1> For the period from the commencement of offering of Class B shares,
September 7, 1993 to October 31, 1993.
<F2> For the period from the commencement of offering of Class C shares,
September 1, 1994 to October 31, 1994.
<F3> Annualized.
<F4> Not annualized.
<F5> Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
<F6> For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
<F7> 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 ratios would have been:
Net investment income $ 0.48 $ 0.41 -- $ 0.24 $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses<F6> 3.20% 2.92% -- 2.70%<F3> 3.13% 2.65%<F3>
Net investment income 6.18% 5.48% -- 6.05%<F3> 6.26% 8.50%<F3>
</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.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal 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. 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, 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.
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.
Swap Agreements - The Fund may enter into swap agreements. A swap is an
exchange of cash payments between the Fund and another party which is based on
a specific financial index. Cash payments are exchanged at specified intervals
and the expected income or expense is recorded on the accrual basis. The value
of the swap is adjusted daily and the change in value is recorded as
unrealized appreciation or depreciation. Risks may arise upon entering into
these agreements from the potential inability of counterparties to meet the
terms of their contract and from unanticipated changes in the value of the
financial index on which the swap agreement is based. The Fund uses swaps for
both hedging and non-hedging purposes. For hedging purposes, the Fund may use
swaps to reduce its exposure to interest and foreign exchange rate
fluctuations. For non-hedging purposes, the Fund may use swaps to take a
position on anticipated changes in the underlying financial index.
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 discounts are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Dividend income is recorded on the ex-dividend date for dividends received in
cash. Dividend and interest payments received in additional securities are
recorded on the ex-dividend or ex-interest date in an amount equal to the
value of the security on such date.
The Fund invests in high-yield securities rated below investment grade.
Investments in high-yield securities involve greater degrees of credit and
market risks than investments in higher-rated securities, and tend to be more
sensitive to economic conditions.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is recorded
ratably by the Fund at a constant yield to maturity. Legal fees and other
related expenses incurred to preserve and protect the value of a security
owned are added to the cost of the security; other legal fees are expensed.
Capital 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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 tax return
of capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are 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. The three classes of shares differ in their
respective shareholder servicing agent, distribution, and service fees. All
shareholders bear 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.
(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 effective annual rate
of 0.50% of average daily net assets and 7.14% of investment income. The
investment adviser did not impose a portion of its fee, which is reflected as
a preliminary reduction of expenses on 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 and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $5,557
for the period ended April 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$14,628 for the year ended April 30, 1996 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 of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer which
amounted to $9,479 for the period ended April 30, 1996. Fees incurred under
the distribution plan during the period ended April 30, 1996 were 0.35% of
average daily net assets attributable to Class A shares on an annualized
basis.
The Class B and Class C distribution plans provide that the Fund will pay MFD
a monthly distribution fee of 0.75% per annum, and a service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class
B and Class C shares. MFD will pay to securities dealers that enter into a
sales agreement with MFD all or a portion of the service fee attributable to
Class B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $1,130 and
$7 for Class B and Class C shares, respectively, for the period ended April
30, 1996. Fees incurred under the distribution plans during the period ended
April 30, 1996 were 1.00% of average daily net assets attributable to Class B
and Class C shares on an annualized basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of shareholder redemptions within twelve months following such purchase.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
twelve months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the period ended April 30, 1996 were $0 and $10,192 for Class A and
Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the 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 $18,168,047 $15,269,758
=========== ===========
Investments (non-U.S. government securities) $73,346,327 $56,923,519
=========== ===========
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 $71,166,585
===========
Gross unrealized depreciation $(1,497,549)
Gross unrealized appreciation 1,220,574
-----------
Net unrealized depreciation $ (276,975)
===========
(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:
<TABLE>
Class A Shares
<CAPTION>
Period Ended Year Ended
April 30, 1996 October 31, 1995
------------------------- ------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,574,303 $ 12,801,291 599,130 $ 4,692,705
Shares issued to shareholders in reinvestment
of distributions 99,493 799,907 127,484 978,866
Shares reacquired (477,822) (3,843,630) (1,380,515) (10,598,878)
--------- ------------ --------- ------------
Net increase (decrease) 1,195,974 $ 9,757,568 (653,901) $ (4,927,307)
========= ============ ========= ============
Class B Shares
Period Ended Year Ended
April 30, 1996 October 31, 1995
------------------------- ------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------
Shares sold 1,350,499 $ 10,895,892 584,310 $ 4,523,648
Shares issued to shareholders in reinvestment
of distributions 38,268 305,921 33,442 256,014
Shares reacquired (182,200) (1,453,206) (286,518) (2,212,002)
--------- ------------ --------- ------------
Net increase 1,206,567 $ 9,748,607 331,234 $ 2,567,660
========= ============ ========= ===========
Class C Shares
Period Ended Year Ended
April 30, 1996 October 31, 1995
------------------------- ------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------------------------------------
Shares sold 422,748 $ 3,407,773 174,377 $ 1,348,421
Shares issued to shareholders in reinvestment
of distributions 8,710 69,434 2,067 16,180
Shares reacquired (49,538) (394,458) (45,641) (361,838)
--------- ------------ --------- ------------
Net increase 381,920 $ 3,082,749 130,803 $ 1,002,763
========= ============ ========= ===========
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the period ended April
30, 1996 was $339.
(7) Financial Instruments
The Fund trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts and futures contracts. The notional or contractual amounts
of these instruments represent the investment the Fund has in particular
classes of financial instruments and does not necessarily represent the
amounts potentially subject to risk. The measurement of the risks associated
with these instruments is meaningful only when all related and offsetting
transactions are considered. A summary of obligations under these financial
instruments at April 30, 1996, is as follows:
<PAGE>
Written Option Transactions
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
--------------------------------- ---------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ---------------------------------------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
<S> <C> <C> <C> <C>
Australian Dollars 420 $ 5,108 401 $ 5,249
Deutsche Marks 1,154 3,095 1,497 5,450
Deutsche Marks/British Pounds 1,996 12,813 -- --
Italian Lire/Deutsche Marks 2,103,796 34,865 2,103,796 77,464
Japanese Yen 70,728 12,307 39,000 4,258
Options written -
Australian Dollars 949 5,462 318 1,945
Canadian Dollars 1,505 1,545 3,102 9,380
Deutsche Marks 9,981 61,545 -- --
Deutsche Marks/British Pounds 2,524 11,220 -- --
Italian Lire/Deutsche Marks 2,852,538 20,736 -- --
Japanese Yen 303,795 23,815 628,666 54,195
Japanese Yen/Deutsche Marks -- -- 456,269 16,266
New Zealand Dollars -- -- 2,443 3,632
Spanish Pesetas/Deutsche Marks -- -- 122,911 2,973
Options terminated in closing transactions -
Australian Dollars (1,369) (10,570) (318) (1,945)
Deutsche Marks (3,034) (29,186) -- --
Deutsche Marks/British Pounds (3,258) (18,423) -- --
Italian Lire/Deutsche Marks (2,103,796) (34,865) (2,103,796) (77,464)
Japanese Yen (374,523) (36,122) (163,000) (17,491)
Japanese Yen/Deutsche Marks -- -- (456,269) (16,266)
New Zealand Dollars -- -- (2,443) (3,632)
Options expired -
Australian Dollars -- -- (401) (5,249)
Canadian Dollars (1,505) (1,545) -- --
Deutsche Marks (1,154) (3,095) (1,497) (5,450)
Deutsche Marks/British Pounds (1,262) (5,610) -- --
--------- ------- ------- -------
OUTSTANDING, END OF PERIOD 2,859,485 $53,095 630,679 $53,315
========= ======= ======= =======
OPTIONS OUTSTANDING AT END OF PERIOD
CONSIST OF -
Canadian Dollars
-- $ -- 3,102 $ 9,380
Deutsche Marks 6,947 32,359 -- --
Italian Lire/Deutsche Marks 2,852,538 20,736 -- --
Japanese Yen -- -- 504,666 40,962
Spanish Pesetas/Deutsche Marks -- -- 122,911 2,973
--------- ------- ------- -------
2,859,485 $53,095 630,679 $53,315
========= ======= ======= =======
</TABLE>
At April 30, 1996, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 5/20/96 - 5/21/96 AUD 1,645,095 $ 1,290,306 $ 1,292,017 $ (1,711)
5/22/96 BEF 40,257,881 1,303,561 1,281,167 22,394
5/31/96 - 11/01/96 CAD 1,916,302 1,410,818 1,407,625 3,193
5/28/96 - 5/31/96 CHF 4,772,964 4,119,493 3,844,319 275,174
5/28/96 - 4/28/97 DEM 35,263,278 23,737,355 23,100,882 636,473
5/31/96 DKK 11,803,735 2,050,776 2,000,969 49,807
5/28/96 ESP 240,305,199 1,922,561 1,886,876 35,685
8/02/96 FIM 5,033,652 1,042,617 1,045,127 (2,510)
5/31/96 FRF 19,927,159 3,946,807 3,858,057 88,750
5/31/96 GBP 706,970 1,076,906 1,063,021 13,885
12/04/96 HKD 5,879,360 757,162 760,160 (2,998)
5/06/96 - 8/06/96 ITL 9,141,353,102 5,758,778 5,778,275 (19,497)
5/07/96 - 7/25/96 JPY 768,868,312 7,399,372 7,377,954 21,418
10/18/96 NZD 414,274 276,570 279,320 (2,750)
8/02/96 SEK 4,275,301 626,418 628,649 (2,231)
----------- ----------- -----------
$56,719,500 $55,604,418 $ 1,115,082
=========== =========== ===========
Purchases 5/20/96 AUD 1,781,503 $ 1,404,822 $ 1,399,155 $ (5,667)
5/31/96 CAD 922,078 677,152 677,491 339
5/28/96 - 5/31/96 CHF 4,675,472 3,985,041 3,765,815 (219,226)
5/28/96 - 8/29/96 DEM 36,583,006 24,767,906 23,936,537 (831,369)
5/28/96 ESP 184,185,120 1,493,127 1,446,222 (46,905)
8/02/96 FIM 1,678,229 347,515 348,448 933
5/31/96 FRF 29,274,235 5,792,340 5,667,726 (124,614)
5/31/96 GBP 1,109,818 1,688,494 1,668,756 (19,738)
5/06/96 - 4/28/97 ITL 10,334,913,572 6,504,534 6,570,899 66,365
5/31/96 - 8/29/96 JPY 1,119,779,554 10,691,367 10,740,419 49,052
----------- ----------- -----------
$57,352,298 $56,221,468 $(1,130,830)
=========== =========== ===========
</TABLE>
Forward foreign currency exchange contract purchases and sales under master
netting arrangements and closed forward foreign currency exchange contracts
excluded from above amounted to a net receivable of $28,774 at April 30, 1996.
At April 30, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
Interest Rate Swap Agreements
<TABLE>
<CAPTION>
Rate Type
-------------------------------------------
Swap Notional Termination Payments made Payments received Unrealized
Counterparty Amount Date by the Fund by the Fund Appreciation
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
J.P. Morgan 1,510,000,000 ITL 4/20/99 Floating - 6M LIBOR Fixed - 9.535% $8,410
</TABLE>
At April 30, 1996, the Fund had sufficient cash and/or securities to cover
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, 1996,
the Fund owned the following restricted securities (constituting 7.25% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). The Fund does not have the right to
demand that such securities be registered. The value of these securities is
determined by valuations supplied by a pricing service or brokers or, if not
available, in good faith by or at the direction of the Trustees. Certain of
these securities may be offered and sold to "qualified institutional buyers"
under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Share/
Description Acquisition Par Amount Cost Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Arkwright CSN Trust, 9.625s, 2026 4/17/96 1,000,000 $999,680 $1,005,620
Atlantic Gulf Communities Corp. 9/21/89 - 9/25/95 100 0 600
Banco de Boston, S.A., 9.125s, 2004 1/30/96 1,500,000 1,499,325 1,501,875
Brooks Fiber Properties, 1s, 2006 3/04/96 500,000 303,750 273,750
Cablevision System Corp. 3/04/96 5,071 518,750 495,690
Continental Cablevision, 8.3s, 2006 3/26/96 250,000 260,625 255,625
Echostar Satellite Broadcasting, 0s, 2004 3/19/96 1,000,000 603,530 622,500
Gillett Holdings, Inc. 10/08/92 22,594 213,360 542,256
Hidroelectrica Alicura, 8.375s, 1999 4/08/94 500,000 470,625 475,000
Time Warner, Inc. 4/03/96 100 100,000 100,000
---------
$5,272,916
==========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
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, 1996, the related
statement of operations for the six month period ended April 30, 1996, and the
statement of changes in net assets for the six month period ended April 30,
1996 and for the year ended October 31, 1995, and the financial highlights for
the six month period ended April 30, 1996 and for each of the two years in the
period ended October 31, 1995. 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 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, 1996, 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 at October 31, 1995, the results of its operations for
the six month period ended April 30, 1996, the changes in its net assets for
the six month period ended April 30, 1996 and for the year ended October 31,
1995, and the financial highlights for the six months period ended April 30,
1996 and for each of the two years in the period ended October 31, 1995, in
conformity with generally accepted accounting principles.
Boston, Massachusetts /s/ Ernst & Young LLP
May 31, 1996
--------------------------------------------
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>
MFS(R) STRATEGIC -----------------
INCOME FUND [DALBAR LOGO] BULK RATE
U.S. POSTAGE
P A I D
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-----------------
[Logo]
THE FIRST NAME IN MUTUAL FUNDS
MSI-3 6/96 10.5M 34/234/334
