<PAGE>
[LOGO] M F S(R) Annual Report for
THE FIRST NAME IN MUTUAL FUNDS Year Ended
October 31, 1995
- -------------------------------------------------------------------------------
MFS(R) STRATEGIC INCOME FUND
- -------------------------------------------------------------------------------
Front Cover
A photo of rolls of sheet metal.
<PAGE>
MFS(R) STRATEGIC INCOME FUND
<TABLE>
<C> <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 outlooks,
call toll free: 1-800-637-4458 anytime from
The Hon. Sir J. David Gibbons, KBE - Chief 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, (To use this service, your phone must be
Inc. (acquisition planning specialists) equipped with a Telecommunications Device for
the Deaf.)
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand For share prices, account balances and
Corporation exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
INVESTMENT ADVISER telephone.
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
--------------------------------------------------------
DISTRIBUTOR TOP RATED SERVICE
MFS Fund Distributors, Inc.
500 Boylston Street NUMBER For the second year in a row, MFS earned
Boston, MA 02116-3741 1 a #1 ranking in DALBAR, Inc's.
DALBAR Broker/Dealer Survey, Main Office
PORTFOLIO MANAGER Operations Service Quality category.
James T. Swanson* The firm achieved a 3.49 overall score - on
a scale of 1 to 4 - in the 1995 survey. A total of
TREASURER 71 firms responded, offering input on the quality
W. Thomas London* of service they receive from 36 mutual fund companies
nationwide. The survey contained questions about service
ASSISTANT TREASURER quality in 17 categories, including "knowledge of phone
James O. Yost* service contacts," "accuracy of transaction processing,"
and "overall ease of doing business with the firm."
*Affiliated with the Investment Adviser --------------------------------------------------------
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The decline in interest rates and the favorable inflation environment in much
of the world helped the Fund enjoy strong performance over the past year. In
February, the Federal Reserve Board ended its year-long string of tightening
steps and left interest rates unchanged through the spring. The Federal
Reserve subsequently lowered the federal funds' target by 25 basis points
(0.25%) to 5.75% on July 6, citing the reduced threat of higher inflation. The
fixed-income markets responded positively to this, as well as to signs of an
economic slowdown. For the fiscal year ended October 31, 1995, Class A shares
of the Fund provided a total return of +15.00%, Class B shares +14.23%,
and Class C shares +14.17%. 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. Complete performance data may be found on pages three, four
and five of this report.
Economic Outlook
Moderate, but sustainable, growth appears to be the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy
growing at an annual rate of 4.2% in the third quarter, this surprisingly
strong growth was mainly driven by a pickup in consumer spending and an
increase in business and government outlays. Although impressive, this growth
rate is not expected to continue in coming months. Recent retail sales have
been disappointing, in part because of rising levels of consumer debt. An
extended period of lower mortgage rates seems to have relieved much of the
pent-up demand for housing. Growth is not expected to get much help from the
manufacturing sector, either, as order flows from manufacturers have
moderated. Export activity, meanwhile, is also expected to remain modest as
continued weakness abroad has limited demand for many U.S. goods. However, the
Federal Reserve's consistent and, so far, successful efforts to fight
inflation seem to be giving consumers and businesses enough longer term
confidence to help maintain modest growth in real (adjusted for inflation)
gross domestic product into 1996.
Interest Rates
Given the unexpected strength of the economy in the third quarter, prospects
for further decreases in short-term interest rates by the Federal Reserve seem
uncertain in the near term. Long-term rates, meanwhile, have moved noticeably
downward in recent months in anticipation of more modest fourth-quarter growth
with continued low inflation. While there have been some increases in
commodity prices, companies have found it difficult to pass these on at the
consumer level as they continue to fight for market share. Additionally, unit
labor costs remain under control and seem to be growing at a pace that is near
or below the ongoing inflation rate. Thus, with long-term government bonds
yielding over 6% in an environment of 2% to 3% inflation, real rates of return
in the fixed-income markets remain relatively attractive.
Portfolio Performance and Strategy
For more than a year, we have been pursuing a more quantitative and
disciplined approach to the weighting of asset classes in the Fund. The
central thrust of this approach has been to seek the best relative value among
the world's various bond markets, without placing extreme weight in any
individual market, in an effort to reduce risk.
The Fund has also been helped by the past year's favorable investment
environment. For example, throughout the world consumer prices have been
increasing slowly and, in some cases, decreasing, and bond yields have fallen
as a result. The U.S. Government bond market, meanwhile, has seen spectacular
gains during this period, while bond yields in Europe have also fallen. These
trends have been particularly evident in some of the core markets as sluggish
growth and moderate inflation have become predominant investment themes.
In the domestic corporate market, steady improvements in a wide range of
industries have boosted the overall quality of balance sheets and enhanced
companies' ability to make future bond payments. This has helped boost bond
prices in the U.S. market as well as in world bond markets.
Among emerging markets, the December 1994 debt crisis in Mexico passed
with time, and most of these countries have since posted gains. Also, the
decline in interest rates in the developed world has helped reduce pressure on
developing countries to meet debt obligations because their absolute level of
debt service has decreased, an occurence that could enhance credit quality.
Looking ahead, we will continue to change the weightings in the Fund based
on our measure of historic risk patterns together with anticipated future
returns and risks. The Fund's dividend distribution rate will reflect the rise
and fall of bond yields generated by the Fund's various fixed-income sectors.
Given the themes mentioned above, we would expect dividend yields to face
downward pressure in the coming year.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- --------------------- -----------------
A photo of A photo of
A. Keith Brodkin, 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
November 10, 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.
PERFORMANCE
The information on the following page illustrates the historical performance
of MFS Strategic Income Fund Class A shares in comparison to various market
indicators. Fund results in the graph reflect the deduction of the 4.75%
maximum sales charge. Benchmark comparisons are unmanaged and do not reflect
any fees or expenses. You cannot invest in an index. All results reflect the
reinvestment of all dividends and capital gains.
Class B shares were offered effective September 7, 1993. Information on Class
B share performance appears on the next page.
Please note that effective September 1, 1994, Class C shares were offered.
Information on Class C share performance appears on the next page.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from November 1, 1987 to October 31, 1995)
- --------------------------------------------------------------------------------
Line graph representing the growth of a $10,000 investment for the nine-year
period ended October 31, 1995. The graph is scaled from $5,000 to $30,000 in
$5,000 segments. The years are marked in 12-month segments from 1987 to 1995.
There are six lines drawn to scale. One is a solid line representing MFS
Strategic Income Fund (Class A), a second line of very-short dashes represents
the S&P 500, a third line of short dashes represents the Salomon Brothers
Composite High-Yield Bond Index, a fourth line of one long and one short dashes
represents the Salomon Brothers World Government Bond Index, and a fifth line of
one long and two short dashes represents the Lehman Brothers Government
Corporate Bond Index, and a sixth line of medium-short dashes represents the
Consumer Price Index.
MFS Strategic Income Fund (Class A) $19,532
S&P 500 $29,688
Salomon Brothers Composite High-Yield Bond Index $26,147
Salomon Brothers World Government Bond Index $21,715
Lehman Brothers Gov't/Corporate Bond Index $21,005
Consumer Price Index $13,334
- --------------------------------------------------------------------------------
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Life of Class
through
1 Year 3 Years 5 Years 10/31/95
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Strategic Income Fund (Class A) including
4.75% sales charge + 9.51% + 6.02% + 9.97% + 8.51%<F1>
- ----------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class A) at net asset value +15.00% + 7.76% +11.05% + 9.17%<F1>
- ----------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class B) with CDSC<F2> +10.23% -- -- + 3.67%<F3>
- ----------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class B) without CDSC +14.23% -- -- + 4.96%<F3>
- ----------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class C) +14.17% -- -- +13.24%<F4>
- ----------------------------------------------------------------------------------------------------------
Average flexible income fund +13.20% + 7.84% +10.54% + 9.46%
- ----------------------------------------------------------------------------------------------------------
Lehman Brothers Government Corporate Bond Index<F5> +16.16% + 7.97% + 9.92% + 9.72%
- ----------------------------------------------------------------------------------------------------------
Salomon Brothers World Government Bond Index<F6> +15.20% +10.16% +11.12% +10.18%
- ----------------------------------------------------------------------------------------------------------
Salomon Brothers Composite High-Yield Bond Index<F7> +18.46% +12.11% +19.25% +12.77%
- ----------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index<F8> +26.41% +14.69% +17.22% +14.57%
- ----------------------------------------------------------------------------------------------------------
Consumer Price Index<F9> + 2.81% + 2.72% + 2.86% + 3.66%
- ----------------------------------------------------------------------------------------------------------
<FN>
<F1> For the period from the commencement of offering of Class A shares, October 29, 1987 to October 31,
1995. Benchmark comparisons begin on November 1, 1987.
<F2> These returns reflect the current Class B contingent deferred sales charge (CDSC) of 4% for the 1-year
period and 3% for the period commencing September 7, 1993.
<F3> For the period from the commencement of offering of Class B shares, September 7, 1993 to October 31,
1995.
<F4> For the period from the commencement of offering of Class C shares, September 1, 1994 to October 31,
1995. 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.
<F5> The Lehman Brothers Government Corporate Bond Index is an unmanaged, market-value-weighted index of
U.S. Treasury and government agency securities, excluding mortgage-backed securities, and
investment-grade debt obligations of domestic corporations.
<F6> The Salomon Brothers World Government Bond Index is an unmanaged, market-value-weighted index of
straight issue bonds from the complete universes of 14 government sectors with remaining maturities of
at least one year.
<F7> The Salomon Brothers Composite High-Yield Bond Index is an unmanaged, market-value-weighted index of
public, non-convertible cash pay and deferred-interest U.S. corporate bonds with a remaining maturity
of at least seven years and a credit rating between CCC and BB+.
<F8> The Standard & Poor's 500 Composite Index is a popular, unmanaged index of common stock performance.
<F9> The Consumer Price Index is a popular measure of change in prices.
</FN>
</TABLE>
In the table on the previous page, we have included the average annual total
returns of all flexible income funds (including the Fund) tracked by Lipper
Analytical Services, Inc. (an independent firm which reports mutual fund
performance) for the applicable time periods. Because these returns do not
reflect any applicable sales charges, we have also included the Fund's results
at net asset value (no sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a
mutual fund will vary with changes in market conditions, 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.
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS - October 31, 1995
Bonds - 89.6%
- --------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Dollar Denominated - 54.3%
Foreign - U.S. Dollar Denominated - 17.7%
Federal Republic of Brazil, 8.75s, 2001 $ 14,550 $ 12,440
Federal Republic of Brazil, 0s, 2009 1,000 585,000
Federal Republic of Brazil, 4s, 2014 6,805 3,453,499
Hidroelectrica Alicura, 8.375s, 1999<F4> 500 440,000
Mexico Discount Notes, 0s, 2019 850 567,375
Mexico UMS Par CL A, 6.25s, 2019 250 146,250
Poland Discount Notes, 3.25s, 2014 3,000 1,927,500
Poland Discount Notes, 0s, 2024 2,000 932,500
Republic of Argentina, 0s, 2005 500 296,875
Republic of Argentina, 0s, 2023 500 281,250
YPF Sociedad Anonima, 8s, 2004 500 426,875
-----------
$ 9,069,564
- --------------------------------------------------------------------------------------------
Industrials - 22.2%
Automotive - 1.0%
Harvard Industries, Inc., 12s, 2004 $ 500 $ 530,000
- --------------------------------------------------------------------------------------------
Building - 0.4%
Atlantic Gulf Communities Corp., 0s, 1996 $ 150 $ 131,633
Atlantic Gulf Communities Corp., 0s, 1998 161 84,286
-----------
$ 215,919
- --------------------------------------------------------------------------------------------
Chemicals - 2.5%
NL Industries, Inc., 11.75s, 2003 $ 250 $ 265,000
Rexene Corp., 11.75s, 2004 250 268,750
UCC Investors Holdings, Inc., 0s, 2005 1,000 747,500
-----------
$ 1,281,250
- --------------------------------------------------------------------------------------------
Conglomerates - 0.2%
Bell & Howell Co., 10.75s, 2002 $ 100 $ 106,500
- --------------------------------------------------------------------------------------------
Consumer Goods and Services - 1.8%
Fieldcrest Cannon, Inc., 11.25s, 2004 $ 250 $ 257,500
Ithaca Industries, Inc., 11.125s, 2002 100 88,000
Revlon, Inc., 10.5s, 2003 200 205,000
Revlon Worldwide Corp., 0s, 1998 200 149,000
Westpoint Stevens, Inc., 9.375s, 2005 250 250,000
-----------
$ 949,500
- --------------------------------------------------------------------------------------------
Containers - 0.7%
Ivex Packaging Corp., 12.5s, 2002 $ 100 $ 107,500
Stone Container Corp., 9.875s, 2001 250 247,500
-----------
$ 355,000
- --------------------------------------------------------------------------------------------
Entertainment - 3.1%
SCI Television, Inc., 11s, 2005 $ 455 $ 480,025
Turner Broadcasting Systems, Inc., 8.375s, 2013 1,000 1,001,570
United Artist Theater Circuit, Inc., 11.5s, 2002 100 107,000
-----------
$ 1,588,595
- --------------------------------------------------------------------------------------------
Food and Beverage Products - 1.4%
Envirodyne Industries, Inc., 10.25s, 2001 $ 418 $ 329,175
Nabisco, Inc., 7.55s, 2015 400 399,800
-----------
$ 728,975
- --------------------------------------------------------------------------------------------
Medical and Health Products - 1.1%
Tenet Healthcare Corp., 10.125s, 2005 $ 500 $ 540,000
- --------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.2%
Integrated Health Services, Inc., 10.75s, 2004 $ 100 $ 106,000
- --------------------------------------------------------------------------------------------
Metals and Minerals - 0.6%
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 $ 300 $ 307,500
- --------------------------------------------------------------------------------------------
Oil Services - 0.6%
Ferrell Gas LP, 10s, 2001 $ 200 $ 208,500
Tuboscope Vetco International, Inc., 10.75s, 2003 100 101,000
-----------
$ 309,500
- --------------------------------------------------------------------------------------------
Special Products and Services - 3.0%
Gillett Holdings, Inc., 12.25s, 2002 $ 92 $ 96,535
IMO Industries, Inc., 12s, 2001 128 131,200
K & F Industries, Inc., 11.875s, 2003 250 265,000
Mark IV Industries, Inc., 8.75s, 2003 500 517,500
Polymer Group, Inc., 12.25s, 2002<F4> 500 515,000
-----------
$ 1,525,235
- --------------------------------------------------------------------------------------------
Steel - 1.1%
AK Steel Holdings Corp., 10.75s, 2004 $ 500 $ 545,000
- --------------------------------------------------------------------------------------------
Supermarkets - 2.0%
Dominick's Finer Foods Co., 10.875s, 2005 $ 500 $ 526,250
Ralph's Grocery Co., 11s, 2005 500 485,000
-----------
$ 1,011,250
- --------------------------------------------------------------------------------------------
Telecommunications - 2.5%
Cablevision Industries Corp., 9.25s, 2008 $ 100 $ 106,500
Falcon Holdings Group, Inc., 11s, 2003 194 185,743
Jones Intercable, Inc., 10.5s, 2008 500 537,500
Mobilemedia Communications, Inc., 0s, 2003 275 206,250
Pronet, Inc., 11.875s, 2005<F4> 200 214,000
-----------
$ 1,249,993
- --------------------------------------------------------------------------------------------
Total Industrials $ 11,350,217
- --------------------------------------------------------------------------------------------
Transportation - 0.6%
Continental Airlines, Inc., 11.75s, 1995<F2> $ 500 $ 27,500
Moran Transportation Co., 11.75s, 2004 100 93,500
Tiphook Finance Corp., 8s, 2000 250 195,000
-----------
$ 316,000
- --------------------------------------------------------------------------------------------
Utilities - Electric - 13.8%
BVPS II Funding Corp., 8.33s, 2007 $ 1,000 $ 988,330
CMS Energy Corp., 0s, 1997 500 515,625
Coastal Bancorp, Inc., 10s, 2002 250 245,000
First PV Funding Corp., 10.3s, 2014 1,000 1,031,250
First PV Funding Corp., 10.15s, 2016 600 607,500
Maxus Energy Corp., 11.25s, 2013 1,000 1,030,000
Midland Cogeneration Venture Funding Corp.,
10.33s, 2002 1,005 1,050,346
Midland Funding Corp. II, "A", 11.75s, 2005 350 369,586
Niagara Mohawk Power Corp., 8.77s, 2018 1,000 968,750
Texas & New Mexico Power Co., 10.75s, 2003 225 242,867
-----------
$ 7,049,254
- --------------------------------------------------------------------------------------------
Total U.S. Dollar Denominated $27,785,035
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Foreign - Non-U.S. Dollar Denominated - 25.5%
Australian Dollars - 3.1%
Commonwealth of Australia, 8.75s, 2001 AUD 1,000 $ 772,035
Commonwealth of Australia, 9.5s, 2003 1,000 794,484
-----------
$ 1,566,519
- --------------------------------------------------------------------------------------------
Canadian Dollars - 1.5%
Government of Canada, 8.5s, 2002 CAD 1,000 $ 789,063
- --------------------------------------------------------------------------------------------
Czech Republic Korunas - 2.4%
Czech Electric, 16.5s, 1998 CZK 30,000 $ 1,227,768
- --------------------------------------------------------------------------------------------
Danish Kroner - 1.1%
Kingdom of Denmark, 6s, 1999 DKK 3,000 $ 539,143
- --------------------------------------------------------------------------------------------
Dutch Guilders - 1.6%
Dutch State Loan, 6.25s, 1998 NLG 100 $ 65,661
Netherlands Gov't, Dutch State Loan, 8.25s, 2007 1,040 740,550
-----------
$ 806,211
- --------------------------------------------------------------------------------------------
French Francs - 1.2%
Government of France, 7.75s, 2000 FRF 2,930 $ 627,407
- --------------------------------------------------------------------------------------------
German Marks - 7.8%
Republic of Germany, 8.5s, 2000 DEM 600 $ 477,733
Germany Unity Fund, 8.5s, 2001 200 159,599
Nordrhein Westfalen, 6.25s, 2002 4,740 3,346,516
-----------
$ 3,983,848
- --------------------------------------------------------------------------------------------
Italian Lire - 0.9%
Republic of Italy, 8.5s, 1999 ITL 625,000 $ 367,453
Republic of Italy, 9.5s, 1999 175,000 104,032
-----------
$ 471,485
- --------------------------------------------------------------------------------------------
New Zealand Dollars - 2.7%
Government of New Zealand, 9s, 1996 NZD 1,300 $ 868,988
Government of New Zealand, 10s, 2002 700 525,684
-----------
$ 1,394,672
- --------------------------------------------------------------------------------------------
Spanish Pesetas - 1.2%
Spanish Government Bond, 10.9s, 2003 ESP 76,000 $ 626,822
- --------------------------------------------------------------------------------------------
Thai Baht - 2.0%
Siam Commercial Bank, 7s, 1995<F3> THB 25,000 $ 994,932
- --------------------------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $13,027,870
- --------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Obligations - 6.6%
U.S. Treasury Note, 6.875s, 1999 $ 2,000 $ 2,072,180
U.S. Treasury Note, 7.75s, 1999 500 534,845
U.S. Treasury Bond, 7.625s, 2025 650 754,611
- --------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations $ 3,361,636
- --------------------------------------------------------------------------------------------
Federal National Mortgage Association - 0.1%
FNMA, 9.5s, 2025 $ 31 $ 33,011
- --------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 3.1%
FHLMC, 9.5s, 2025 $ 1,500 $ 1,583,895
- --------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $45,446,881) $45,791,447
- --------------------------------------------------------------------------------------------
Common Stocks - 0.9%
- --------------------------------------------------------------------------------------------
<CAPTION>
Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Atlantic Gulf Communities Corp.<F1> 100 $ 687
Gillett Holdings, Inc.<F1><F3> 22,594 474,474
- --------------------------------------------------------------------------------------------
Total Common Stocks (Identified Cost, $213,360) $ 475,161
- --------------------------------------------------------------------------------------------
Convertible Preferred Stock
- --------------------------------------------------------------------------------------------
UDC Homes, Inc. (Identified Cost, $44,869) 5,542 $ 8,313
- --------------------------------------------------------------------------------------------
Warrants - 0.1%
- --------------------------------------------------------------------------------------------
<CAPTION>
Warrants
- --------------------------------------------------------------------------------------------
<S> <C> <C>
American Media, Inc.<F1> 27,000 $ 844
Atlantic Gulf Communities Corp.<F1> 3,109 97
Forest Oil Corp.<F1> 2,250 1,547
ICO, Inc.<F1> 62,500 40,625
- --------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $4,664) $ 43,113
- --------------------------------------------------------------------------------------------
Call Options Purchased - 0.1%
- --------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted) Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Canadian Dollars
November/1.38 CAD 1,156 $ 6,418
German Marks
December/1.51 DEM 1,444 445
Japanese Government Bonds
November/114.165 JPY 148,000 12,315
December/112.062 39,000 3,861
December/115.156 164,000 33,292
- --------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $46,046) $ 56,331
- --------------------------------------------------------------------------------------------
Put Option Purchased - 0.1%
- --------------------------------------------------------------------------------------------
German Marks/British Pounds
January/2.23 (Premiums Paid, $12,813) DEM/GBP 2,096 $ 18,796
- --------------------------------------------------------------------------------------------
Repurchase Agreement - 11.8%
- --------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
Issuer (000 Omitted)
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Lehman Brothers, dated 10/31/95, due 11/01/95,
total to be received $6,054,984 (secured by
$4,625,000 U.S. Treasury Bonds, 9.25s, due 2/15/
16, market value $6,181,146), at Cost $ 6,054 $ 6,054,000
- --------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $51,822,633) $52,447,161
- --------------------------------------------------------------------------------------------
Call Options Written - (0.1)%
- --------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted)
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollars
January/0.77 AUD 420 $ (3,989)
German Marks
November/1.38 DEM 1,154 (2,584)
German Marks/British Pounds
January/2.1238 DEM/GBP 1,996 (4,701)
Italian Lire/German Marks
August/1125 ITL/DEM 2,104 (29,453)
Japanese Yen
July/75 JPY 70,728 (425)
- --------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $68,188) $ (41,152)
- --------------------------------------------------------------------------------------------
Put Options Written - (0.2)%
- --------------------------------------------------------------------------------------------
<CAPTION>
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted) Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Australian Dollars
January/0.745 AUD 409 $ (3,271)
German Marks
December/1.56 DEM 1,492 (37)
Italian Lire/German Marks
August/1125 ITL/DEM 2,104 (96,775)
Japanese Government Bonds
September/112.062 JPY 39,000 (3,549)
- --------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $92,421) $ (103,632)
- --------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (2.3)% $(1,188,707)
============================================================================================
Net Assets - 100.0% $51,113,670
- --------------------------------------------------------------------------------------------
<FN>
<F1> Non-income producing security.
<F2> Non-income producing security - in default.
<F3> Restricted security.
<F4> 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.
</FN>
<C> <C> <C> <C>
AUD = Australian Dollars FRF = French Francs
CAD = Canadian Dollars GBP = British Pounds
CHF = Swiss Francs ITL = Italian Lire
CZK = Czech Korunas JPY = Japanese Yen
DEM = German Marks NLG = Dutch Guilders
DKK = Danish Kroner NZD = New Zealand Dollars
ESP = Spanish Pesetas SEK = Swedish Kronor
FIM = Finnish Markka THB = Thai Baht
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
October 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $45,768,633) $46,393,161
Repurchase agreement, at value 6,054,000
Foreign currency, at value (identified cost, $1,575) 1,880
Net receivable for forward foreign currency exchange
contracts purchased 358,411
Receivable for Fund shares sold 150,680
Receivable for investments sold 10,573
Interest receivable 1,216,736
Other assets 251,454
-----------
Total assets $54,436,895
-----------
Liabilities:
Cash overdraft $ 900,430
Payable for Fund shares reacquired 154,103
Payable for investments purchased 1,303,149
Written options outstanding, at value
(premiums received, $160,609) 144,784
Net payable for forward foreign currency exchange contracts
sold 590,508
Net payable for forward foreign currency exchange contracts 77,500
Payable to affiliates -
Management fee 3,130
Shareholder servicing agent fee 673
Distribution fee 15,773
Accrued expenses and other liabilities 133,175
-----------
Total liabilities $ 3,323,225
-----------
Net assets $51,113,670
===========
Net assets consist of:
Paid-in capital $50,103,143
Unrealized appreciation on investments and translation of
asset and liabilities in foreign currencies 335,279
Accumulated undistributed net realized gain on investments
and foreign currency transactions 462,530
Accumulated undistributed net investment income 212,718
-----------
Total $51,113,670
===========
Shares of beneficial interest outstanding 6,340,601
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $41,688,447 / 5,166,298 shares of
beneficial interest outstanding) $8.07
=====
Offering price per share (100/95.25) $8.47
=====
Class B shares:
Net asset value and offering price per share
(net assets of $8,364,724 / 1,041,745 shares of
beneficial interest outstanding) $8.03
=====
Class C shares:
Net asset value, offering price, and redemption price
per share (net assets of $1,060,499 / 132,558 shares
of beneficial interest outstanding) $8.00
=====
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>
Statement of Operations
- -----------------------------------------------------------------------------
Year Ended October 31, 1995
- -----------------------------------------------------------------------------
Net investment income:
Income -
Interest $4,549,488
----------
Expenses -
Management fee $ 565,213
Trustees' compensation 41,455
Shareholder servicing agent fee (Class A) 62,399
Shareholder servicing agent fee (Class B) 14,421
Shareholder servicing agent fee (Class C) 611
Distribution and service fee (Class A) 145,521
Distribution and service fee (Class B) 65,549
Distribution and service fee (Class C) 4,070
Custodian fee 75,314
Printing 54,818
Auditing fees 52,613
Postage 28,082
Legal fees 1,055
Miscellaneous 141,601
----------
Total expenses $1,252,722
Fees paid indirectly (20,802)
Reduction of expenses by investment adviser (451,708)
----------
Net expenses $ 780,212
----------
Net investment income $3,769,276
----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $1,742,364
Written option transactions 101,795
Foreign currency transactions (612,770)
Futures contracts (164,103)
----------
Net realized gain on investments $1,067,286
----------
Change in unrealized appreciation (depreciation) -
Investments $2,030,575
Written options 213,259
Translation of assets and liabilities in foreign currencies (368,701)
----------
Net unrealized gain on investments $1,875,133
----------
Net realized and unrealized gain on investments and
foreign currency $2,942,419
----------
Increase in net assets from operations $6,711,695
==========
See notes to financial statements
<PAGE>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Year Ended October 31, 1995 1994
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 3,769,276 $ 3,180,267
Net realized gain (loss) on investments
and foreign currency transactions 1,067,286 (3,757,716)
Net unrealized gain (loss) on
investments and foreign currency
translation 1,875,133 (1,180,502)
------------ ------------
Increase (decrease) in net assets from
operations $ 6,711,695 $ (1,757,951)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (3,165,100) $ --
From net investment income (Class B) (442,955) --
From net investment income (Class C) (28,052) --
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 $ (3,636,107) $ (3,401,486)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 10,564,774 $ 9,558,938
Net asset value of shares issued to
shareholders in reinvestment of
distributions 1,251,060 949,565
Cost of shares reacquired (13,172,718) (16,339,414)
------------ ------------
Decrease in net assets from Fund share
transactions $ (1,356,884) $ (5,830,911)
------------ ------------
Total increase (decrease) in net
assets $ 1,718,704 $(10,990,348)
Net assets:
At beginning of year 49,394,966 60,385,314
------------ ------------
At end of year (including accumulated
undistributed net investment income
(accumulated distributions in excess
of net investment income) of $212,718
and $(37,878), respectively) $ 51,113,670 $ 49,394,966
============ ============
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.57 $ 8.34 $ 8.00 $ 8.12 $ 7.56
------ ------ ------ ------ ------
Income from investment operations<F1> -
Net investment income $ 0.60<F4> $ 0.48<F4> $ 0.52<F4> $ 0.63<F4> $ 0.73<F4>
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 $ 1.08 $(0.26) $ 0.94 $ 0.71 $ 1.68
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.58) $ -- $(0.24) $(0.56) $(0.73)
From net realized gain on investments and
foreign currency transactions -- -- (0.32) -- --
In excess of net investments 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 $(0.58) $(0.51) $(0.60) $(0.83) $(1.12)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.07 $ 7.57 $ 8.34 $ 8.00 $ 8.12
====== ====== ====== ====== ======
Total return<F3> 15.00% (3.15)% 12.36% 9.02% 23.78%
Ratios (to average net assets)/Supplemental data:
Expenses<F2> 1.54%<F4> 1.71%<F4> 1.98%<F4> 2.02%<F4> 1.87%<F4>
Net investment income 7.86%<F4> 6.11%<F4> 5.92%<F4> 7.47%<F4> 9.26%<F4>
Portfolio turnover 249% 153% 275% 423% 671%
Net assets at end of period (000 omitted) $41,688 $44,032 $60,120 $77,487 $76,312
<FN>
<F1> Per share data for periods subsequent to October 31, 1993 is based on average shares outstanding.
<F2> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<F3> 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.
<F4> 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 $ 0.53 $ 0.44 $ 0.49 $ 0.61 $ 0.71
Ratios (to average net assets):
Expenses<F2> 2.47% 2.21% 2.14% 2.21% 2.16%
Net investment income 6.89% 5.62% 5.76% 7.55% 8.97%
</FN>
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1990 1989 1988 1987<F1>
- ------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 8.93 $ 9.60 $ 9.21 $ 9.35
------ ------ ------ --------
Income from investment operations<F3> -
Net investment income $ 0.86<F5> $ 0.94 $ 0.93 $ 0.0025
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)
------ ------ ------ --------
Less distributions declared to shareholders -
From net investment income $(0.82) $(1.18) $(0.69) $ --
From net realized gain on investments and foreign
currency transactions -- -- (0.41) --
In excess of net investments income and foreign currency
transactions -- -- -- --
In excess of net realized gain on investments and foreign
currency transactions -- -- -- --
From paid-in capital (0.38) (0.05) -- --
------ ------ ------ --------
Total distributions declared to shareholders $(1.20) $(1.23) $(1.10) $ --
------ ------ ------ --------
Net asset value - end of period $ 7.56 $ 8.93 $ 9.60 $ 9.21
====== ====== ====== ========
Total return<F4> (1.62)% 5.85% 16.60% (1.50)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.47%<F5> 1.82% 1.75% 0.57%<F2>
Net investment income 10.42%<F5> 10.05% 9.74% 4.88%<F2>
Portfolio turnover 400% 157% 270% 0%
Net assets at end of period (000 omitted) $74,555 $87,978 $93,819 $78,479
<FN>
<F1> For the period from the commencement of investment operations, October 29, 1987 to October 31, 1987.
<F2> Annualized.
<F3> Per share data for periods subsequent to October 31, 1993 is based on average shares outstanding.
<F4>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.
<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 $ 0.83 -- -- --
Ratios (to average net assets):
Expenses 1.81% -- -- --
Net investment income 10.08% -- -- --
</FN>
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
Year Ended October 31, 1995 1994 1993<F1> 1995 1994<F2>
- -----------------------------------------------------------------------------------------------------------------------
Class B Class C
- -----------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.53 $ 8.33 $ 8.28 $ 7.53 $ 7.53
------ ------ ------ ------ ------
Income from investment operations<F4> -
Net investment income $ 0.55<F6> $ 0.45<F6> $ 0.04 $ 0.54<F6> $ 0.12<F6>
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 $ 1.02 $ 0.09
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.53) $ -- $(0.03) $(0.55) $ --
From net realized gain on investments and
foreign currency transactions -- -- (0.01) -- --
In excess of net investments 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) $(0.55) $(0.09)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.03 $ 7.53 $ 8.33 $ 8.00 $ 7.53
====== ====== ====== ====== ======
Total return 14.23% (3.97)% 1.15% 14.17% 1.23%
Ratios (to average net assets)/Supplemental data:
Expenses<F5>
2.27%<F6> 2.43%<F6> 3.03%<F3> 2.20%<F6> 2.16%<F3><F6>
Net investment income
7.15%<F6> 5.97%<F6> 5.22%<F3> 7.23%<F6> 8.99%<F3><F6>
Portfolio turnover 249% 153% 275% 249% 153%
Net assets at end of period (000 omitted) $ 8,365 $ 5,350 $ 265 $ 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> Per share data for the periods subsequent to October 31, 1993 is based on average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<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 the ratios would have been:
Net investment income $ 0.48 $ 0.41 -- $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses<F5> 3.20% 2.92% -- 3.13% 2.65%<F3>
Net investmentincome 6.18% 5.48% -- 6.26% 8.50%<F3>
</FN>
See notes to financial statements
</TABLE>
<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 Fund changed its name
from MFS Income & Opportunity Trust 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 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, 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 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 futures contracts is designed
only to hedge against anticipated future changes in interest or exchange rates
or securities prices. Investments in interest rate futures for purposes other
than hedging may be made to modify the duration of the portfolio without
incurring the additional transaction costs involved in buying and selling the
underlying securities. Investments in currency futures for purposes other than
hedging may be made to change the Fund's relative position in one or more
currencies without buying and selling portfolio assets. Investments in equity
index contracts, or contracts on related options, for purposes other than
hedging may be made when the Fund has cash on hand and wishes to participate in
anticipated market appreciation while the cash is being invested. Should
interest or exchange rates or securities prices move unexpectedly, the Fund may
not achieve the anticipated benefits of the futures contracts and may realize a
loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund 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 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 can invest up to 50% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities,
and tend to be more sensitive to economic conditions.
The Fund 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 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 classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended October 31, 1995, $117,427 was reclassified to
accumulated undistributed net investment income from accumulated net realized
gain on investments due to differences between book and tax accounting for
mortgage-backed securities, currency transactions and default bonds. This change
had no effect on the net assets or net asset value per share. At October 31,
1995, accumulated undistributed net investment income (realized gain on
investments and foreign currency transactions) under book accounting was
different from tax accounting due primarily to temporary differences in currency
transactions.
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 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.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.50% 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 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 $10,080 for the year ended
October 31, 1995.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$12,776 for the year ended October 31, 1995, 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 $20,012 for the year
ended October 31, 1995. Fees incurred under the distribution plan during the
year ended October 31, 1995 were 0.34% 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 $667 and $13 for Class B
and Class C shares, respectively, for the year ended October 31, 1995. Fees
incurred under the distribution plans during the year ended October 31, 1995
were 1.00% of average daily net assets attributable to Class B and Class C
shares on an annualized basis.
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
shareholder 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 year ended October 31, 1995 were $0 and $28,517 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 $17,220,130 $ 6,291,381
=========== ============
Investments (non-U.S. Government securities) $92,452,542 $105,125,466
=========== ============
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 $51,832,841
===========
Gross unrealized appreciation $ 1,194,926
Gross unrealized depreciation (580,606)
-----------
Net unrealized appreciation $ 614,320
===========
(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:
Class A Shares
Year Ended October 31, 1995 Year Ended October 31, 1994
--------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 599,130 $ 4,692,705 461,520 $ 3,566,190
Shares issued to
shareholders in
reinvestment of
distributions 127,484 978,866 96,409 749,696
Shares reacquired (1,380,515) (10,598,878) (1,946,056) (15,444,256)
--------- ------------- --------- -------------
Net decrease (653,901) $ (4,927,307) (1,388,127) $ (11,128,370)
========= ============= ========= =============
Class B Shares
Year Ended October 31, 1995 Year Ended October 31, 1994
--------------------------- ---------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 584,310 $ 4,523,648 768,786 $5,979,512
Shares issued to
shareholders in
reinvestment of
distributions 33,442 256,014 25,130 199,850
Shares reacquired (286,518) (2,212,002) (115,220) (895,151)
------- ----------- ------- ----------
Net increase 331,234 $ 2,567,660 678,696 $5,284,211
======= =========== ======= ==========
Class C Shares
Year Ended October 31, 1995 Period Ended October 31, 1994+
--------------------------- -----------------------------
Shares Amount Shares Amount
- -------------------------------------------------------------------------------
Shares sold 174,377 $1,348,421 1,754 $13,236
Shares issued to
shareholders in
reinvestment of
distributions 2,067 16,180 2 19
Shares reacquired (45,641) (361,838) (1) (7)
------- ---------- ----- -------
Net increase 130,803 $1,002,763 1,755 $13,248
======= ========== ===== =======
+ For the period from the commencement of offering of Class C shares, September
1, 1994 to October 31, 1994.
(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 year ended October 31,
1995 was $704.
(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 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 October 31, 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
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
German Marks 4,865 $ 61,779 2,611 $ 7,461
Japanese Yen 244,913 33,372 156,000 16,766
Options written -
Australian Dollars 1,195 11,873 2,085 25,382
British Pounds 557 9,619 520 9,619
Canadian Dollars 940 1,971 1,978 8,177
German Marks 10,228 36,754 22,563 163,079
German Marks/British Pounds 2,162 13,893 2,011 6,876
Italian Lire/German Marks 4,464,200 49,678 3,791,986 95,854
Japanese Yen 885,834 207,754 2,634,019 275,275
Spanish Pesetas/German Marks -- -- 51,950 3,404
Swiss Francs/German Marks 671 2,825 -- --
Swedish Kronor/German Marks 1,833 1,384 -- --
Options terminated in closing transactions -
Australian Dollars (775) (6,765) (1,676) (20,133)
British Pounds (557) (9,619) -- --
Canadian Dollars (940) (1,971) (1,978) (8,177)
German Marks (1,948) (9,670) (18,899) (148,576)
German Marks/British Pounds (166) (1,080) (2,011) (6,876)
Italian Lire/German Marks -- -- (388,970) (2,910)
Japanese Yen (757,084) (195,343) (2,751,019) (287,783)
Spanish Pesetas/German Marks -- -- (51,950) (3,404)
Swedish Kronor/German Marks (1,833) (1,384) -- --
Options exercised -
German Marks (6,072) (65,636) -- --
Italian Lire/German Marks -- -- (906,420) (12,325)
Swiss Francs/German Marks (671) (2,825) -- --
Options expired -
British Pounds -- -- (520) (9,619)
German Marks (5,919) (20,132) (4,783) (16,514)
Italian Lire/German Marks (2,360,404) (14,813) (392,800) (3,155)
Japanese Yen (302,935) (33,476) -- --
--------- ---------- --------- ---------
OUTSTANDING, END OF PERIOD - 2,178,094 $ 68,188 2,144,697 $ 92,421
========= ========== ========= =========
Options outstanding at end of period consist of -
Australian Dollars 420 $ 5,108 409 $ 5,249
German Marks 1,154 3,095 1,492 5,450
German Marks/British Pounds 1,996 12,813 -- --
Italian Lire/German Marks 2,103,796 34,865 2,103,796 77,464
Japanese Yen 70,728 12,307 39,000 4,258
--------- ---------- --------- ---------
2,178,094 $ 68,188 2,144,697 $ 92,421
========= ========== ========= =========
</TABLE>
At October 31, 1995, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<PAGE>
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
11/27/95 - 12/20/95 AUD 4,763,935 $ 3,595,084 $ 3,619,692 $ (24,608)
11/09/95 - 11/30/95 CAD 2,608,805 1,934,078 1,940,978 (6,900)
11/08/95 - 12/15/95 CHF 12,400,806 10,755,140 10,935,803 (180,663)
11/02/95 - 1/24/96 DEM 29,649,341 20,598,202 21,093,229 (495,027)
11/09/95 - 4/12/96 DKK 4,895,165 897,090 896,863 227
12/07/95 ESP 115,050,282 930,877 940,191 (9,314)
12/15/95 FIM 1,178,464 267,894 277,929 (10,035)
11/17/95 - 4/12/96 FRF 8,927,989 1,794,797 1,826,839 (32,042)
11/14/95 GBP 610,583 952,513 965,057 (12,544)
12/07/95 - 12/11/95 ITL 5,255,999,018 3,241,825 3,290,256 (48,431)
11/27/95 - 12/07/95 JPY 607,045,913 6,315,802 5,968,987 346,815
11/24/95 NLG 1,122,375 709,237 712,179 (2,942)
11/15/95 - 12/20/95 NZD 1,245,918 805,496 821,395 (15,899)
11/20/95 - 12/21/95 SEK 13,715,778 1,962,201 2,061,346 (99,145)
----------- ----------- ---------
$54,760,236 $55,350,744 $(590,508)
=========== =========== =========
Purchases
11/27/95 - 12/20/95 AUD 2,926,409 $ 2,197,904 $ 2,222,951 $ 25,047
11/30/95 CAD 1,271,794 940,410 946,140 5,730
11/09/95 - 12/14/95 CHF 13,409,509 11,623,657 11,829,641 205,984
1/24/96 CZK 26,519,000 1,000,000 1,002,869 2,869
11/07/95 - 2/07/96 DEM 33,435,015 23,505,738 23,789,040 283,302
11/09/95 - 4/12/96 DKK 6,408,038 1,157,267 1,173,853 16,586
12/07/95 ESP 48,985,191 385,067 400,307 15,240
12/14/95 FIM 1,150,871 268,147 271,417 3,270
4/12/96 FRF 2,936,825 600,556 600,061 (495)
11/14/95 GBP 487,334 764,552 770,256 5,704
12/07/95 - 1/31/96 ITL 4,965,186,054 3,073,937 3,106,925 32,988
11/27/95 - 12/07/95 JPY 979,976,040 10,121,382 9,634,097 (487,285)
12/04/95 - 12/20/95 NZD 1,787,537 1,165,373 1,177,625 12,252
11/20/95 - 12/15/95 SEK 23,276,549 3,263,896 3,501,115 237,219
----------- ----------- ---------
$60,067,886 $60,426,297 $ 358,411
=========== =========== =========
</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 payable of $77,500 at October 31, 1995.
At October 31, 1995, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
(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 October 31,
1995, the Fund owned the following restricted securities (constituting 5.2% 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>
Shares/
Description Date of Acquisition Par Amount Cost Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gillett Holdings, Inc. 10/08/92 22,594 $213,360 $ 474,474
Hidroelectrica Alicura, 8.375s, 1999 4/08/94 500,000 470,625 440,000
Polymer Group, Inc., 12.25s, 2002 7/19/94 500,000 503,750 515,000
Pronet, Inc., 11.875s, 2005 6/12/95 200,000 198,556 214,000
Siam Commercial Bank, 7s, 1995 9/01/94 25,000,000 975,819 994,932
----------
$2,638,406
==========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees 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 October 31, 1995, and the related
statement of operations for the year then ended and the statement of changes in
net assets and financial highlights for each of the two years in the period then
ended. 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 of MFS Strategic Income Fund 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
October 31, 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 at October 31, 1995, the results of its operations for the
year then ended and the changes in its net assets, and financial highlights for
each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Boston, Massachusetts
December 8, 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>
-------------
MFS(R) STRATEGIC [LOGO: NUMBER 1 DALBAR BULK RATE
INCOME FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116 -------------
[LOGO: M F S(R)
THE FIRST NAME IN MUTUAL FUNDS]
MSI-2 12/95 10.5M 34/234/334
