<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) STRATEGIC INCOME FUND
ANNUAL REPORT o OCTOBER 31, 1998
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 22
Notes to Financial Statements ............................................. 29
Independent Auditors' Report .............................................. 39
Trustees and Officers ..................................................... 41
MFS CELEBRATES ITS DIAMOND ANNIVERSARY!
MARCH 21, 1999, MARKS THE 75TH ANNIVERSARY OF MFS' INVENTION OF
THE MUTUAL FUND. THE MUTUAL FUND INDUSTRY HAS BROUGHT THE POWER
OF INVESTING TO EVERY AMERICAN, OFFERING THEM THE OPPORTUNITY FOR
COLLEGE DEGREES, HOME OWNERSHIP, AND COMFORTABLE RETIREMENT.
IMAGINE TODAY'S WORLD WITHOUT MUTUAL
FUNDS. WE COULDN'T. AND WHILE THE MFS 75 YEARS
YEARS AHEAD WILL BRING A NUMBER OF [graphic omitted]
CHALLENGES, OUR 75 YEARS OF EXPERIENCE EXPERIENCE THE FUTURE(SM)
WILL HELP GUIDE A NEW GENERATION OF
INVESTORS INTO THE FUTURE.
- ------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- ------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
In 1999, MFS celebrates its 75\t/\h/ anniversary. The nation's first mutual
fund -- our Massachusetts Investors Trust (MIT) -- was introduced to the
public on March 21, 1924. Since then, MFS Investment Management(R), the
company that grew out of that original fund, has helped guide shareholders
through many economic and investment cycles, primarily by focusing on the
long-term opportunities created by an expanding global economy. As of October
31, 1998, MFS manages nearly $87 billion, and the firm's 2,000 people serve
3.8 million investors and their financial advisers worldwide. Meanwhile, MIT's
assets have grown to over $10 billion, and 56 mutual funds are offered in the
MFS Family of Funds(R).
One of the elements to the success of MIT did not exist before our founders
invented it in 1924. That is liquidity. This innovation means that if you want
to sell your investment in any MFS mutual fund, you have the security of
knowing that you may do so immediately and the money may be exchanged into
another MFS fund or that you may add other MFS funds to your portfolio as your
investment needs change. If you need your money for other purposes, it can
quickly be wired or mailed to you. This daily redemption feature, through
which new shares were created when people invested in MIT and were redeemed
when people sold, brought another important change to the industry. Now, the
price of a mutual fund's shares wasn't determined by supply and demand, but by
the value of the securities owned by each portfolio.
Another factor in our growth was the development of one of the industry's
first in-house research departments in 1932. Unlike many other companies that
rely on Wall Street research reports, which can be used by many investors at
the same time, MIT's managers built its long-term track record by visiting
companies, talking to managers and competitors, and "kicking the tires" so
they could judge the quality and potential of each company's products and
services for themselves. Today, MFS has more than 100 full-time portfolio
managers, stock analysts, and credit analysts who track the equity and bond
markets. That number includes nearly 40 equity analysts who specialize in
industries such as aviation, media, technology, automobiles, and utilities.
While MIT was the first mutual fund, it was not our only invention. We also
established the nation's first global bond fund, first high-yield municipal
bond fund, and first high-yield municipal closed-end bond fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial
advisers. Not only do we believe investors can benefit from the advice of
these experts but, as was shown during the market volatility of 1998, people
who work with financial advisers are less likely to abandon their carefully
designed, long-term investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. Today, the MFS Service Center handles millions of
transactions and phone calls every year. Supporting the work of financial
advisers, promptly sending out statements and confirmations, and answering
hundreds of investors' questions every day are crucial elements in maintaining
long-term relationships with our fund shareholders. That link to our investors
has also been enhanced by our site on the World Wide Web: WWW.MFS.COM. Since
1996, this site has given investors and the general public access to up-to-
date information about MFS products and services, as well as market outlooks
and retirement information. The site has rapidly become one of our primary
vehicles for communicating with our investors and educating the public about
mutual funds in general and MFS in particular.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible
investment management and shareholder service, just as we have done for the
past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead and
build on our 75 years of innovation and experience to help meet your
investment needs in the next century. We appreciate your confidence and
welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
November 16, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James T. Swanson]
James T. Swanson
For the 12 months ended October 31, 1998, Class A shares of the Fund returned
- -2.21%, Class B and Class C shares -2.84%, and Class I shares -2.00%. These
returns include the reinvestment of distributions but exclude the effects of any
sales charges. For the same period, the Lehman Brothers Government/Corporate
Bond Index, an unmanaged, market-value-weighted index of all debt obligations of
the U.S. Treasury and U.S. government agencies and of all publicly issued
fixed-rate, nonconvertible, investment-grade domestic corporate debt, returned
10.33%. The Salomon Brothers World Government Bond Index, an unmanaged index of
government bonds with remaining maturities of at least five years, returned
12.58% for the period, and the Credit Suisse First Boston High Yield Index, an
unmanaged, trader-priced portfolio constructed to mirror the high-yield debt
market, returned -2.49%.
Q. WHAT HAVE BEEN SOME OF THE CRITICAL FACTORS AFFECTING THE FUND IN THE
PAST YEAR?
A. Most multisector bond funds, including this one, have had a difficult 12
months. Macroeconomic events such as Russia's default on its debt, currency
problems in Brazil, and continuing bad economic news from Japan, the
world's second-largest economy, caused capital flight from all of the
higher-yielding asset classes toward high-quality U.S. Treasury securities.
These events had a negative impact on the Fund's performance. We adjusted
the portfolio mid-year to reduce our emerging market exposure to about 15%
of assets, and we reduced our high-yield exposure by 10%. We have since
selectively added to our emerging market position, as some members of this
asset class have begun to show renewed strength. We also increased our U.S.
government exposure and boosted our cash reserves. At the same time, we
meticulously combed the portfolio for securities that might have undue
credit risk. While we didn't find many of these, we replaced the ones we
did find with securities that offered less risk.
Q. HOW ARE THE FUND'S ASSETS CURRENTLY ALLOCATED?
A. The Fund is currently allocated approximately 40% in high-yield corporate
bonds, 21% U.S. government securities (which includes U.S. Treasury, U.S.
agency, and mortgage-backed securities), 11% high-grade corporate bonds,
21% emerging market debt, and 4% cash. Convertible equities and preferred
stocks compose the balance of portfolio assets.
Q. PLEASE DISCUSS A SPECIFIC INVESTMENT THAT PERFORMED WELL FOR THE FUND
DESPITE THE VOLATILITY OF THE PAST 12 MONTHS.
A. One of our strongest performers was Jacor Communications, a broadcast
communications company. Jacor was bought out by Clear Channel
Communications and, as a result, its bonds benefited from a strong credit-
rating upgrade and a subsequent boost in value.
Q. WHAT HAS BEEN THE IMPACT ON THE FUND OF THE FEDERAL RESERVE BOARD'S (THE
FED'S) DECISION TO LOWER INTEREST RATES?
A. The Fed's moves show that it clearly feels that economic risk now lies in
the potential for slow growth, recession, and deflation. No longer is
inflation a serious concern. Each rate reduction by both the Fed and
foreign central banks adds liquidity to the world economy, which is a
positive signal for the U.S. domestic economy. We think there could be
additional rate cuts in the future.
Q. HOW WILL THE RECENT TURMOIL IN GLOBAL MARKETS AND THE VOLATILITY IN U.S.
EQUITIES IMPACT THE WAY YOU MANAGE THE FUND?
A. More turmoil in the equities market would likely produce some good bargains
in the high-yield sector. We believe investors have oversold high-yield
securities recently, though this does not necessarily point to a quick
recovery in that sector. If this scenario plays out, however, we would add
slowly to our holdings in this asset class.
Q. OVERALL, HOW WOULD YOU DESCRIBE THE CURRENT ENVIRONMENT FOR FIXED-
INCOME INVESTING?
A. The overall climate is very good. One of the benefits of owning bonds,
especially in a volatile market, is diversification. In times of economic
stress, bonds tend to behave in a manner opposite that of stocks, so
investors who have diversified their portfolios with bond investments can
benefit when the equity markets get choppy. Also, there is a worldwide
shortage of yield. Interest rates are falling in Europe, Asia, and the
United States, so people are looking for ways to replace savings at
whatever yields they can find, and frequently they turn to bonds for that.
In addition, U.S. government securities Treasury issuance is falling. This
reduction in supply should help that asset class support higher prices.
Also, the aging populations in the United States, Asia, and Europe are
creating added demand for fixed-income investments. Finally, the lack of
inflation worldwide benefits bond holders as interest rates decline and
bond values rise.
Q. MFS WILL CELEBRATE ITS 75TH ANNIVERSARY IN 1999. WHAT DOES THIS LONGEVITY
MEAN TO YOU AS A FUND MANAGER, AND WHAT HAS IT BROUGHT TO THE FIXED INCOME
DEPARTMENT?
A. Our bond funds were created in the latter half of this century and were
built on the same principles that MFS used to build its equity funds:
Original Research(SM), company and fundamental focus, and long-term value.
When you consider that our first equity fund, Massachusetts Investors
Trust, was also the nation's first mutual fund and that it has never missed
a quarterly dividend payment through wars, depressions, recessions, oil
crises, political turmoil, and social upheaval, that gives us a very high
bar of achievement to match. But that's exactly what we're aiming for. We'd
like to see our fixed-income funds continue the strong tradition of
stability and long-term value that has been the hallmark of MFS' track
record.
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- --------------------------------------------------------------------------------
JAMES T. SWANSON IS A SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R). HE IS PORTFOLIO MANAGER OF MFS(R) GLOBAL ASSET ALLOCATION
FUND, MFS(R) STRATEGIC INCOME FUND, MFS(R) GLOBAL GOVERNMENTS FUND,
MFS(R) MERIDIAN(SM) CHARTER INCOME FUND, MFS(R) MERIDIAN(SM) GLOBAL
GOVERNMENTS FUND, MFS(R) AMERICAN(SM) CHARTER INCOME FUND, MFS(R)
INSTITUTIONAL CORE FIXED INCOME FUND, THE WORLD ASSET ALLOCATION(SM)
SERIES AND THE WORLD GOVERNMENTS SERIES OFFERED THROUGH MFS(R)/SUN LIFE
ANNUITY PRODUCTS, AND TWO CLOSED-END FUNDS -- MFS(R) CHARTER INCOME
TRUST AND MFS(R) MULTIMARKET INCOME TRUST.
MR. SWANSON JOINED MFS IN 1985 AS VICE PRESIDENT -- INVESTMENTS AND WAS
NAMED SENIOR VICE PRESIDENT IN 1989.
HE IS A GRADUATE OF COLGATE UNIVERSITY AND THE HARVARD UNIVERSITY
GRADUATE SCHOOL OF BUSINESS ADMINISTRATION. MR. SWANSON IS A CHARTERED
FINANCIAL ANALYST.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
- --------------------------------------------------------------------------------
OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING IN FIXED-INCOME
SECURITIES. PLUS, THE FUND SEEKS OPPORTUNITIES TO
REALIZE CAPITAL APPRECIATION WHILE MAINTAINING A HIGH
LEVEL OF CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: OCTOBER 29, 1987
CLASS INCEPTION: CLASS A OCTOBER 29, 1987
CLASS B SEPTEMBER 7, 1993
CLASS C SEPTEMBER 1, 1994
CLASS I JANUARY 8, 1997
SIZE: $271.6 MILLION NET ASSETS AS OF OCTOBER 31, 1998
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. Benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary for more information.)
It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended October 31, 1998)
Salomon Credit Lehman
Brothers Suisse Brothers
MFS S & P World First Government/ Consumer
Strategic 500 Government Boston Corporate Price
Income Fund Composite Bond High Yield Bond Index
- Class A Index Index Index Index Index - U.S.
- -------------------------------------------------------------------------------
10/93 $ 9,521 $10,000 $10,000 $10,000 $10,000 $10,000
10/94 9,220 10,387 10,360 10,165 9,536 10,261
10/95 10,604 13,133 11,934 11,714 11,077 10,549
10/96 11,709 16,297 12,576 12,941 11,674 10,865
10/97 12,926 21,531 12,905 14,849 12,702 11,091
10/98 12,693 26,265 14,524 14,479 14,011 11,242
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended October 31, 1998)
Salomon Credit Lehman
Brothers Suisse Brothers
MFS S & P World First Government/ Consumer
Strategic 500 Government Boston Corporate Price
Income Fund Composite Bond High Yield Bond Index
- Class A Index Index Index Index Index - U.S.
- -------------------------------------------------------------------------------
10/88 $ 9,524 $10,000 $10,000 $10,000 $10,000 $10,000
10/90 9,918 11,694 11,437 9,248 11,831 11,107
10/92 13,386 17,166 14,499 15,486 15,085 11,797
10/94 14,565 20,494 16,825 18,739 16,346 12,438
10/96 18,496 32,156 20,425 23,857 20,011 13,170
10/98 20,051 51,825 23,588 26,693 24,017 13,627
AVERAGE ANNUAL TOTAL RETURNS THROUGH OCTOBER 31, 1998
CLASS A
1 Year 3 Years 5 Years 10 Years/Life
- -------------------------------------------------------------------------------
Average Annual Total Return -2.21% +6.03% +5.83% +7.68%
- -------------------------------------------------------------------------------
SEC Results -6.86% +4.32% +4.81% +7.16%
- -------------------------------------------------------------------------------
CLASS B
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return -2.84% +5.32% +5.09% +7.29%
- --------------------------------------------------------------------------------
SEC Results -6.40% +4.50% +4.80% +7.29%
- --------------------------------------------------------------------------------
CLASS C
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return -2.84% +5.38% +5.25% +7.38%
- --------------------------------------------------------------------------------
SEC Results -3.73% +5.38% +5.25% +7.38%
- --------------------------------------------------------------------------------
CLASS I
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return -2.00% +6.15% +5.90% +7.72%
- --------------------------------------------------------------------------------
COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average multi-sector income
fund* - 0.96% + 6.45% + 5.47% + 8.57%
- --------------------------------------------------------------------------------
Salomon Brothers World
Government Bond Index+ +12.58% + 6.76% + 7.75% + 8.96%
- --------------------------------------------------------------------------------
Lehman Brothers Government/
Corporate Bond Index+ +10.33% + 8.15% + 6.98% + 9.16%
- --------------------------------------------------------------------------------
Standard & Poor's 500
Composite Index+** +22.06% +25.99% +21.30% +17.88%
- --------------------------------------------------------------------------------
Credit Suisse First Boston
High Yield Index+ - 2.49% + 7.32% + 7.68% +10.32%
- --------------------------------------------------------------------------------
Consumer Price Index+# + 1.37% + 2.14% + 2.37% + 3.14%
- --------------------------------------------------------------------------------
* Source: Lipper Analytical Services, Inc.
+ Source: CDA/Wiesenberger.
** The Standard & Poor's 500 Composite Index (S&P 500) is a popular, unmanaged
index of common stock total return performance. We no longer consider the S&P
500 a relevant benchmark. The S&P 500 is an equity index that does not
reflect the composition or performance objectives of the Fund, which is a
fixed-income investment vehicle.
+ Source: AIM.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
I results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of I. Because operating
expenses of A are greater than those of I, I performance generally would have
been higher than A performance. The A performance included in the
I performance has been adjusted to reflect the fact that I have no initial
sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
All results are historical and assume the reinvestment of dividends and
capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS.
<PAGE>
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1998
QUALITY RATINGS
Source: Standard & Poor's and Moody's
"B" 33.2%
"BB" 28.2%
Governments 22.4%
"BBB" 8.0%
"A" 4.7%
"CCC" 3.0%
"CC" 0.3%
Not Rated 0.2%
Portfolio information is as of October 31, 1998. The portfolio is actively
managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS -- October 31, 1998
<TABLE>
Bonds - 91.3%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 61.9%
Aerospace - 1.5%
Argo Technology Corp., 8.625s, 2007 $ 1,250 $ 1,150,000
BE Aerospace, Inc., 9.875s, 2006 1,000 1,020,000
K & F Industries, Inc., 9.25s, 2007 1,000 950,000
United Defense Industries, Inc., 8.75s, 2007 950 947,625
------------
$ 4,067,625
- --------------------------------------------------------------------------------------------------------
Automotive - 0.1%
Titan Wheel International, Inc., 8.75s, 2007 $ 450 $ 396,000
- --------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 2.3%
Bancorp US Funding LLC, 7.738s, 2049## $ 3,000 $ 2,748,630
Beaver Valley Funding Corp., 9s, 2017 1,500 1,658,325
Chase Manhattan Corp., 6.375s, 2008 1,800 1,830,978
------------
$ 6,237,933
- --------------------------------------------------------------------------------------------------------
Building - 0.8%
American Standard, Inc., 7.375s, 2008 $ 1,000 $ 985,000
Building Materials Corp., 8s, 2007 900 855,000
Nortek, Inc., 9.875s, 2004 270 267,300
UDC Homes, Inc., 14.5s, 2000 6 3,048
------------
$ 2,110,348
- --------------------------------------------------------------------------------------------------------
Business Machines - 0.9%
Silicon Graphics Inc., 5.25s, 2004 $ 3,000 $ 2,418,750
- --------------------------------------------------------------------------------------------------------
Business Services - 1.4%
Anacomp Inc., 10.875s, 2004 $ 1,200 $ 1,188,000
Iron Mountain, Inc., 10.125s, 2006 670 706,850
Pierce Leahy Corp., 9.125s, 2007 1,000 1,020,000
Williams Scotsman, Inc., 9.875s, 2007 1,000 1,000,000
------------
$ 3,914,850
- --------------------------------------------------------------------------------------------------------
Chemicals - 0.8%
NL Industries, Inc., 11.75s, 2003 $ 1,500 $ 1,548,750
Sterling Chemicals, Inc., 11.25s, 2007 25 17,750
UCAR Global Enterprises, Inc., 12s, 2005 500 505,000
------------
$ 2,071,500
- --------------------------------------------------------------------------------------------------------
Computer Software - Services - 0.3%
Unisystem Corp., 7.875s, 2008 $ 900 $ 909,000
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 1.5%
Hayes Wheels International, Inc., 9.125s, 2007 $ 1,000 $ 1,005,000
Kindercare Learning Centers, Inc., 9.5s, 2009 300 286,500
Revlon Consumer Products Corp., 8.125s, 2006 900 868,500
Samsonite Corp., 10.75s, 2008 1,250 875,000
Synthetic Industries, Inc., 9.25s, 2007 1,025 1,025,000
------------
$ 4,060,000
- --------------------------------------------------------------------------------------------------------
Containers - 2.9%
Gaylord Container Corp., 9.75s, 2007 $ 1,225 $ 918,750
Owens Illinois, Inc., 7.8s, 2018 3,000 3,024,210
Silgan Holdings, Inc., 9s, 2009 1,000 950,000
Stone Container Corp., 9.875s, 2001 1,980 1,950,300
U.S. Can Corp., 10.125s, 2006 900 904,500
------------
$ 7,747,760
- --------------------------------------------------------------------------------------------------------
Energy - 1.1%
Clark USA, Inc., 10.875s, 2005 $ 500 $ 470,000
Giant Industries, Inc., 9s, 2007 400 368,000
P & L Coal Holdings Corp., 9.625s, 2008## 1,150 1,147,125
Pool Energy Services Co., 8.625s, 2008 1,250 1,125,000
------------
$ 3,110,125
- --------------------------------------------------------------------------------------------------------
Entertainment - 1.6%
Allbritton Communications Co., 9.75s, 2007 $ 1,000 $ 1,010,000
AMC Entertainment, Inc., 9.5s, 2009 200 192,000
Cinemark USA, Inc., 9.625s, 2008 750 761,250
Loews Corp., 3.125s, 2007 2,000 1,645,000
Marvel Holdings, Inc., "B", 0s, 1999 (Chapter 11) 445 --
Time Warner Entertainment Co., 8.375s, 2033 685 800,895
------------
$ 4,409,145
- --------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 2.6%
FNMA, 6.5s, 2010 $ 6,840 $ 6,940,622
- --------------------------------------------------------------------------------------------------------
Financial Institutions - 1.0%
Dynex Capital, Inc., 7.875s, 2002 $ 1,500 $ 974,055
Lehman Brothers Holdings Inc., 6.25s, 2003 1,750 1,692,618
------------
$ 2,666,673
- --------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.7%
Borden, Inc., 9.2s, 2021 $ 2,500 $ 2,483,350
Borden, Inc., 9.25s, 2019 1,750 1,826,527
Specialty Foods Corp., 10.25s, 2001 500 427,500
------------
$ 4,737,377
- --------------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Buckeye Cellulose Corp., 8.5s, 2005 $ 610 $ 610,000
U.S. Timberlands, 9.625s, 2007 460 431,825
Waterford 3 Funding Corp., 8.09s, 2017 1,000 1,093,960
------------
$ 2,135,785
- --------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 2.5%
GNMA, 8s, 2026 $ 6,505 $ 6,744,441
- --------------------------------------------------------------------------------------------------------
Industrial - 0.2%
IMO Industries, Inc., 11.75s, 2006 $ 500 $ 520,000
- --------------------------------------------------------------------------------------------------------
Machinery - 0.2%
AGCO Corp., 8.5s, 2006 $ 500 $ 445,000
- --------------------------------------------------------------------------------------------------------
Media - 2.8%
American Radio Systems Corp., 9s, 2006 $ 350 $ 374,500
Chancellor Media Corp., 8.125s, 2007 900 859,500
Comcast Corp., 9.375s, 2005 500 537,300
Cumulus Media, Inc., 10.375s, 2008 1,000 1,020,000
EchoStar Communications Corp., 0s to 1999, 12.875s, 2004 100 96,500
EchoStar Satellite Broadcasting Corp., Principal Stripped,
0s to 2000, 13.125s, 2004 750 660,000
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,000 970,000
Frontiervision Operating Partnership LP, 11s, 2006 1,150 1,270,750
Intermedia Capital Partners, 11.25s, 2006 75 82,125
Jacor Communications Co., 8s, 2010 900 918,000
Jones Intercable, Inc., 8.875s, 2007 500 522,500
Outdoor Systems, Inc., 8.875s, 2007 175 179,375
------------
$ 7,490,550
- --------------------------------------------------------------------------------------------------------
Medical and Health Products - 0.3%
Polymer Group, Inc., 9s, 2007 $ 1,000 $ 937,500
- --------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.8%
Beverly Enterprises, Inc., 9s, 2006 $ 460 $ 437,000
Tenet Healthcare Corp., 6s, 2005 2,000 1,735,000
------------
$ 2,172,000
- --------------------------------------------------------------------------------------------------------
Metals and Minerals - 1.2%
Commonwealth Aluminum Corp., 10.75s, 2006 $ 500 $ 460,000
Haynes International, Inc., 11.625s, 2004 1,000 950,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 285,000
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 750 705,000
Metal Management, Inc., 10s, 2008## 1,000 580,000
Metals USA, Inc., 8.625s, 2008 500 413,750
------------
$ 3,393,750
- --------------------------------------------------------------------------------------------------------
Oils - 1.7%
Triton Energy Ltd., 8.75s, 2002 $ 2,000 $ 1,851,200
Triton Energy Ltd., 9.25s, 2005 2,500 2,400,225
Triton PCS, Inc., 0s to 2003, 11s, 2008## 975 370,500
------------
$ 4,621,925
- --------------------------------------------------------------------------------------------------------
Real Estate - 0.5%
George Town Real Estate Ltd., 5.9s, 2007+ $ 500 $ 515,000
Mosaic, Ltd., 7.915s, 1999+ 800 792,000
------------
$ 1,307,000
- --------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 1.3%
Friendly Ice Cream Corp., 10.5s, 2007 $ 1,250 $ 1,128,125
Planet Hollywood, 12s, 2005 800 376,000
Prime Hospitality Corp., 9.75s, 2007 1,000 947,500
Red Roof Inns, Inc., 9.625s, 2003 1,100 1,075,250
------------
$ 3,526,875
- --------------------------------------------------------------------------------------------------------
Retail - 1.1%
Cole National Group, Inc., 8.625s, 2007 $ 750 $ 697,500
K Mart Corp., 8.125s, 2006 900 918,000
Musicland Group, Inc., 9.875s, 2008 1,500 1,425,000
------------
$ 3,040,500
- --------------------------------------------------------------------------------------------------------
Special Products and Services - 1.1%
AAF-McQuay, Inc., 8.875s, 2003 $ 550 $ 507,375
International Knife & Saw, Inc., 11.375s, 2006 850 839,375
International Specialty Products Holdings, Inc., 9s, 2003 890 916,700
Thermadyne Holdings Corp., 0s to 2003, 12.5s, 2008 2,000 780,000
------------
$ 3,043,450
- --------------------------------------------------------------------------------------------------------
Steel - 0.7%
Alaska Steel Holdings Corp., 9.125s, 2006 $ 1,000 $ 1,030,000
WCI Steel, Inc., 10s, 2004 900 837,000
------------
$ 1,867,000
- --------------------------------------------------------------------------------------------------------
Supermarkets - 0.4%
Marsh Supermarkets, Inc., 8.875s, 2007 $ 1,150 $ 1,138,500
- --------------------------------------------------------------------------------------------------------
Telecommunications - 4.6%
Adelphia Communications Corp., 9.875s, 2007 $ 75 $ 79,875
Century Communications Corp., 0s, 2008 1,175 549,312
Century Communications Corp., 9.5s, 2005 450 483,750
DTI Holdings Inc., 0s to 2003, 12.5s, 2008 500 160,000
Granite Broadcasting Corp., 8.875s, 2008 280 240,800
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 1,200 828,000
Intermedia Communications, Inc., 0s to 2002, 11.25s, 2007 1,800 1,201,500
ITC Deltacom, Inc., 11s, 2007 1,276 1,368,510
Level 3 Communications Inc., 9.125s, 2008 500 470,000
Lin Televison Corp., 8.375s, 2008 1,250 1,178,125
Mobile Telecommunication Technologies Corp., 13.5s, 2002 1,500 1,612,500
Nextel Communications, Inc., 0s to 1999, 9.75s, 2004 500 466,250
Nextel International, Inc., 0s to 2003, 12.125s, 2008 1,500 555,000
NTL, Inc., 0s to 2003, 9.75s, 2008## 1,250 679,688
Pagemart Wireless, Inc., 0s to 2003, 11.25s, 2008 855 440,325
Sprint Spectrum, 11s, 2006 550 621,500
Telesystem International Wireless, Inc., 0s to 2002, 10.5s, 2007 200 63,750
Turner Broadcasting Systems, Inc., 8.375s, 2013 90 99,285
United International Holdings, Inc., 0s to 2003, 10.75s, 2008 300 135,000
Western Wireless Corp., 10.5s, 2007 500 516,250
WorldCom, Inc., 8.875s, 2006 590 646,569
------------
$ 12,395,989
- --------------------------------------------------------------------------------------------------------
Transportation
Moran Transportation Co., 11.75s, 2004 $ 100 $ 108,125
- --------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 14.5%
U.S. Treasury Bonds, 0s, 2019 $ 9,000 $ 2,837,430
U.S. Treasury Bonds, 6.125s, 2027 758 852,985
U.S. Treasury Bonds, 6.375s, 2027 9,800 11,292,932
U.S. Treasury Bonds, 8.875s, 2017 6,000 8,479,680
U.S. Treasury Bonds, 9.875s, 2015 10,500 15,910,755
------------
$ 39,373,782
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 6.7%
Central Maine Power Co., 7.05s, 2008 $ 750 $ 771,675
El Paso Electric Co., 9.4s, 2011 1,000 1,169,660
Esi Tractebel Acquisition Corp., 7.99s, 2011 500 467,500
Midland Cogeneration Venture Corp., 10.33s, 2002 1,396 1,514,902
Midland Funding Corp. I, 10.33s, 2002 820 865,847
Midland Funding Corp. II, "A", 11.75s, 2005 2,750 3,378,980
Midland Funding Corp., "B", 13.25s, 2006 2,500 3,192,150
Texas & New Mexico Power Co., 10.75s, 2003 6,190 6,759,604
------------
$ 18,120,318
- --------------------------------------------------------------------------------------------------------
Total U.S. Bonds $168,180,198
- --------------------------------------------------------------------------------------------------------
Foreign Bonds - 29.4%
Argentina - 3.5%
Autopistas Del Sol SA, "B", 10.25s, 2009 (Industrial)## $ 2,250 $ 1,372,500
City of Buenos Aires, 11.25s, 2007 700 595,000
Compania De Infraes SA, 11.625s, 2004 (Industrial)## 2,500 1,815,875
Compania De Transporte Energia, 9.25s, 2008 (Electric Utilities)## 1,500 1,198,125
Hidroelectrica Alicura, 8.375s, 1999 (Electric Utilities)## 1,000 965,000
Industrias Metalurgicas Pescarmona SA, 9.5s, 2002 (Electric Utilities)## 250 159,623
Republic of Argentina, 11.75s, 2007## 1,000 900,000
Supercanal Holdings, 11.5s, 2005 (Telecommunications)## 4,250 2,125,000
YPF Sociedad Anonima, 8s, 2004 (Industrial) 470 428,875
------------
$ 9,559,998
- --------------------------------------------------------------------------------------------------------
Bermuda - 0.1%
Flag Limited, 8.25s, 2008 (Telecommunications) $ 200 $ 183,000
- --------------------------------------------------------------------------------------------------------
Brazil - 3.7%
Banco Nacional De Desenvolvime, 9.375s, 2008##
(Banks and Credit Companies) $ 3,550 $ 2,502,750
Brazil Media Trust, 6.25s, 2007 (Media) 1,515 871,000
Companhia Energetica de Minas, 9.125s, 2004 (Electric Utilities)## 2,750 2,138,125
Companhia Paranaense, 9.75s, 2005 (Electric Utilities)## 1,750 1,339,375
Espirito Santo Centrais Escelsa, 10s, 2007 (Electric Utilities) 3,250 1,917,500
Federal Republic of Brazil, 10.125s, 2027 756 519,750
Leasing Bank Boston/Brazil, 8.375s to 1999, 9s, 2004 (Finance)## 1,000 840,000
------------
$ 10,128,500
- --------------------------------------------------------------------------------------------------------
Bulgaria - 1.1%
National Republic of Bulgaria, 2.5s, 2012 $ 2,000 $ 1,100,000
National Republic of Bulgaria, 6.688s, 2011 2,750 1,850,000
------------
$ 2,950,000
- --------------------------------------------------------------------------------------------------------
Canada - 1.6%
Metronet Communications Corp., 0s to 2003, 9.95s,
2008 (Telecommunications) $ 1,500 $ 810,000
PCI Chemicals, Inc., 9.25s, 2007 (Chemicals) 1,250 962,500
Repap New Brunswick, Inc., 10.625s, 2005 (Forest and Paper Products) 900 585,000
Rogers Cablesystems, Inc., 10.125s, 2012 (Telecommunications) 500 540,000
Rogers Cantel, Inc., 9.375s, 2008 (Telecommunications) 1,500 1,507,500
------------
$ 4,405,000
- --------------------------------------------------------------------------------------------------------
China - 1.2%
Dao Heng Bank Ltd., 7.75s, 2007 (Banks and Credit Companies)## $ 4,500 $ 3,245,940
- --------------------------------------------------------------------------------------------------------
Colombia - 0.7%
Republic of Colombia, 7.625s, 2007 $ 2,420 $ 1,857,350
- --------------------------------------------------------------------------------------------------------
Ecuador - 0.5%
Republic of Ecuador, 3.5s, 2025 $ 1,900 $ 859,750
Republic of Ecuador, 6.625s, 2025 950 486,875
------------
$ 1,346,625
- --------------------------------------------------------------------------------------------------------
Greece - 1.8%
Antenna TV SA, 9s, 2007 (Telecommunications) $ 2,000 $ 1,640,000
Fage Dairy Industries SA, 9s, 2007 (Food and Beverage Products) 4,500 3,375,000
------------
$ 5,015,000
- --------------------------------------------------------------------------------------------------------
Hong Kong - 0.4%
Guangzhou Shenzhen, 10.25s, 2007 (Construction) $ 2,750 $ 1,072,500
- --------------------------------------------------------------------------------------------------------
Indonesia - 0.7%
APP International Finance, 3.5s, 2003 (Financial Institutions) $ 500 $ 279,375
APP International Finance, 3.5s, 2003 (Financial Institutions)## 1,000 558,750
APP International Finance, 11.75s, 2005 (Financial Institutions) 500 355,000
APP International Finance, 12s, 2004 (Financial Institutions) 1,500 720,000
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Finance) 250 130,000
------------
$ 2,043,125
- --------------------------------------------------------------------------------------------------------
Luxembourg - 0.1%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s, 2006 (Telecommunications) $ 350 $ 199,500
- --------------------------------------------------------------------------------------------------------
Mexico - 6.2%
Empresas ICA Sociedad SA, 5s, 2004 (Construction) $ 500 $ 330,000
Empresas ICA Sociedad SA, 11.875s, 2001 (Construction) 1,250 1,231,250
Grupo Industrial Durango SA, 12s, 2001 (Forest Products) 250 187,500
Grupo Industrial Durango SA, 12.625s, 2003 (Forest Products) 1,650 1,237,500
Sanluis Corporation SA, 8.875s, 2008 (Finance)## 3,500 2,537,500
Satelites Mexicanos SA, 10.125s, 2004 (Telecommunications)## 500 326,250
TFM SA De CV, 0s to 2002, 11.75s, 2009 (Railroads) 1,500 733,125
United Mexican States, 6.25s, 2019 8,000 5,970,400
United Mexican States, 11.375s, 2016 3,875 3,745,187
United Mexican States, 11.5s, 2026 500 515,000
------------
$ 16,813,712
- --------------------------------------------------------------------------------------------------------
Panama - 1.0%
Republic of Panama, 8.25s, 2008 $ 1,000 $ 900,000
Republic of Panama, 8.875s, 2027 2,003 1,832,745
------------
$ 2,732,745
- --------------------------------------------------------------------------------------------------------
Philippines - 0.4%
Bangko Sentral Ng Philipinas, 8.6s, 2027 (Finance) $ 1,000 $ 692,500
National Power Corp., 9.625s, 2028 (Electric Utilities) 750 502,500
------------
$ 1,195,000
- --------------------------------------------------------------------------------------------------------
Poland - 0.3%
Republic of Poland, 4s, 2024 $ 1,000 $ 695,000
- --------------------------------------------------------------------------------------------------------
Russia - 0.6%
CSFB Gazprom Note, 13.5s, 2000 (Finance)+ $ 3,400 $ 579,020
Russia Principal Loans, 3.313s, 2020+ 1,750 133,525
St. Petersburg Russia, 9.5s, 2002## 1,250 234,375
Vnesheconombank, 6.625s, 2015 (Banks and Credit Companies) 6,690 635,558
------------
$ 1,582,478
- --------------------------------------------------------------------------------------------------------
Singapore - 0.8%
Bank of Ayudhya, 6.386s, 2005 (Banks and Credit Companies) $ 3,000 $ 1,170,000
Fullerton Global Corp., 0s, 2003 (Special Products and Services) 1,000 940,000
------------
$ 2,110,000
- --------------------------------------------------------------------------------------------------------
South Korea - 0.1%
Republic of Korea, 8.875s, 2008 $ 210 $ 192,112
- --------------------------------------------------------------------------------------------------------
Thailand - 0.5%
Krung Thai Bank Public Co., Ltd, 6.52s, 2006
(Banks and Credit Companies) $ 2,500 $ 1,325,000
- --------------------------------------------------------------------------------------------------------
United Kingdom - 4.1%
Colt Telecom Group PLC, 2s, 2005 (Telecommunications) DEM 1,400 $ 754,301
Colt Telecom Group PLC, 8.875s, 2007 (Telecommunications) 500 295,805
Colt Telecom Group PLC, 0s to 2001, 12s, 2006 (Telecommunications) 1,000 780,000
Constellation Finance LLC, 9.8s, 2001 (Financial Institutions) $ 3,250 3,193,125
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s, 2005 (Telecommunications) 250 185,000
Telewest, 9.625s, 2006 (Telecommunications) 1,150 1,118,375
UK Treasury, 6.5s, 2003 GBP 2,703 4,838,664
------------
$ 11,165,270
- --------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 79,817,855
- --------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $271,499,264) $247,998,053
- --------------------------------------------------------------------------------------------------------
Stocks
- ---------------------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------------
U.S. Stocks
Apparel and Textiles
Ithaca Industries, Inc.* 4,000 $ 8,000
- --------------------------------------------------------------------------------------------------------
Real Estate
Atlantic Gulf Communities Corp.+* 100 $ 94
- --------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $50,000) $ 8,094
- --------------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.3%
- ---------------------------------------------------------------------------------------------------------------
Telecommunications - 0.3%
IXC Communications, Inc. (Identified Cost, $804,375) 27,500 $ 952,187
- --------------------------------------------------------------------------------------------------------
Preferred Stock - 0.6%
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc. 807 $ 807
- --------------------------------------------------------------------------------------------------------
Media - 0.3%
CSC Holdings, Inc. 8,669 $ 944,921
- --------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.3%
Primedia, Inc.* 9,000 $ 810,000
- --------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $2,249,893) $ 1,755,728
- --------------------------------------------------------------------------------------------------------
Rights
- --------------------------------------------------------------------------------------------------------
United Mexican States, Expiration Date 6/30/03
(Identified Cost, $0)* 1,000 $ --
- --------------------------------------------------------------------------------------------------------
Warrants
- --------------------------------------------------------------------------------------------------------
DTI Holdings Inc., Expiration Date 3/01/08* 2,500 $ 2,500
ICO, Inc., Expiration Date 7/01/02* 62,500 38,125
Renaissance Cosmetics, Inc., Expiration Date 8/31/06* 655 6
- --------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $55,371) $ 40,631
- --------------------------------------------------------------------------------------------------------
Contingent Promissory Notes - 0.9%
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------------------------
Cargill, COLT (Commodity Option Linked Trading), due
2002 (Illiquid) (Identified Cost, $2,701,993) $ 2,500 $ 2,492,858
- --------------------------------------------------------------------------------------------------------
Call Options Purchased - 0.1%
- ---------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
- --------------------------------------------------------------------------------------------------------
German Marks/November/1.675 $12,400 $ 31,000
German Marks/British Pounds/January/2.637 24,161 67,942
Japanese Yen/November/105 57,520 60,281
Japanese Yen/November/105 19,173 15,703
- --------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Identified Cost, $262,526) $ 174,926
- --------------------------------------------------------------------------------------------------------
Put Options Purchased - 0.1%
- --------------------------------------------------------------------------------------------------------
German Marks/November/1.62 $12,400 $ 31,000
German Marks/British Pounds/January/2.8065 25,714 161,486
- --------------------------------------------------------------------------------------------------------
Total Put Options Purchased (Identified Cost, $191,310) $ 192,486
- --------------------------------------------------------------------------------------------------------
Repurchase Agreement - 1.5%
- ---------------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 10/30/98, due 11/2/98, total to
be received $3,967,778 (secured by various U.S.
Treasury and Federal Agency obligations, at cost $ 3,966 $ 3,966,000
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $281,780,732) $257,580,963
- --------------------------------------------------------------------------------------------------------
Call Options Written - (0.2)%
- --------------------------------------------------------------------------------------------------------
German Marks/British Pounds/December/2.6465 DEM 24,248 $ (27,861)
Canadian Dollars/December/1.535 CAD 11,153 (102,989)
Australian Dollars/January/0.63 AUD 11,545 (261,175)
Japanese Yen/January/104.75 JPY 790,863 (35,589)
- --------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $578,604) $ (427,614)
- --------------------------------------------------------------------------------------------------------
Put Options Written
- --------------------------------------------------------------------------------------------------------
German Marks/British Pounds/December/2.816 DEM 25,801 $ (94,794)
South African Rands/December/6.0 ZAR 14,175 (10,291)
- --------------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $167,184) $ (105,085)
- --------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 5.4% 14,566,823
- --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $271,615,087
- --------------------------------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in currencies other than
the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars GBP = British Pounds
CAD = Canadian Dollars JPY = Japanese Yen
CHF = Swiss Francs NZD = New Zealand Dollars
DEM = Deutsche Marks ZAR = South African Rands
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
OCTOBER 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $281,780,732) $257,580,963
Cash 18,756
Net receivable for forward foreign currency exchange
contracts subject to master netting agreements 1,149,308
Net receivable for forward foreign currency exchange
contracts to purchase 1,368,110
Receivable for Fund shares sold 1,206,831
Receivable for investments sold 22,451,134
Receivable from investment adviser 730,313
Interest receivable 6,225,029
Receivable for interest rate swaps 32,119
Unrealized appreciation on swap 138,248
Other assets 1,338
------------
Total assets $290,902,149
------------
Liabilities:
Payable for Fund shares reacquired $ 363,198
Payable for investments purchased 18,043,453
Net payable for forward foreign currency exchange
contracts to sell 105,752
Written options outstanding, at value (premiums received,
$745,788) 532,699
Payable to affiliates -
Management fee 18,151
Administrative fee 361
Shareholder servicing agent fee 1,656
Distribution fee 77,799
Accrued expenses and other liabilities 143,993
------------
Total liabilities $ 19,287,062
------------
Net assets $271,615,087
============
Net assets consist of:
Paid-in capital $302,303,639
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (21,438,708)
Accumulated net realized loss on investments and foreign
currency transactions (13,288,651)
Accumulated undistributed net investment income 4,038,807
------------
Total $271,615,087
============
Shares of beneficial interest outstanding 37,265,543
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $95,291,536 / 13,000,440 shares of
beneficial interest outstanding) $7.33
=====
Offering price per share (100 / 95.25) $7.70
=====
Class B shares:
Net asset value and offering price per share
(net assets of $133,872,136 / 18,411,642 shares of
beneficial interest outstanding) $7.27
=====
Class C shares:
Net asset value and offering price per share
(net assets of $42,213,290 / 5,820,995 shares of
beneficial interest outstanding) $7.25
=====
Class I shares:
Net asset value and offering price per share
(net assets of $238,125 / 32,466 shares of beneficial
interest outstanding) $7.33
=====
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
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest 21,227,444
Dividend 159,378
------------
Total investment income 21,386,822
------------
Expenses -
Management fee 2,703,575
Administrative fee 33,830
Trustees' compensation 44,191
Shareholder servicing agent fee 269,845
Distribution and service fee (Class A) 305,910
Distribution and service fee (Class B) 1,120,774
Distribution and service fee (Class C) 356,090
Custodian fee 105,721
Printing 60,445
Auditing fees 52,249
Postage 36,622
Legal fees 5,510
Miscellaneous 195,918
------------
Total expenses 5,290,680
Fees paid indirectly (73,971)
Reduction of expenses by investment adviser (2,317,960)
------------
Net expenses 2,898,749
------------
Net investment income 18,488,073
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(13,244,678)
Written option transactions 696,073
Foreign currency transactions 2,930,831
Futures contracts (258,564)
------------
Net realized loss on investments (9,876,338)
------------
Change in unrealized appreciation (depreciation) -
Investments $(22,546,702)
Written options 213,089
Swaps 138,248
Translation of assets and liabilities in foreign
currencies 2,273,470
------------
Net unrealized loss on investments $(19,921,895)
------------
Net realized and unrealized loss on investments and
foreign currency $(29,798,233)
------------
Decrease in net assets from operations $(11,310,160)
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 18,488,073 $ 8,557,447
Net realized gain (loss) on investments and foreign
currency transactions (9,876,338) 2,630,601
Net unrealized loss on investments and foreign currency
translation (19,921,895) (2,722,332)
------------ ------------
Increase (decrease) in net assets from operations $(11,310,160) $ 8,465,716
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (6,818,361) $ (4,703,670)
From net investment income (Class B) (8,080,444) (3,069,009)
From net investment income (Class C) (2,569,063) (714,530)
From net investment income (Class I) (24,119) (3,175)
From net realized gain on investments and foreign
currency transactions (Class A) (1,233,756) (460,894)
From net realized gain on investments and foreign
currency transactions (Class B) (1,433,056) (246,359)
From net realized gain on investments and foreign
currency transactions (Class C) (451,827) (50,625)
From net realized gain on investments and foreign
currency transactions (Class I) (4,784) --
------------ ------------
Total distributions declared to shareholders $(20,615,410) $ (9,248,262)
------------ ------------
Net increase in net assets from Fund share transactions $141,514,568 $ 82,536,841
------------ ------------
Total increase in net assets $109,588,998 $ 81,754,295
Net assets:
At beginning of year 162,026,089 80,271,794
------------ ------------
At end of year (including accumulated undistributed net
investment income of $4,038,807 and $(109,205),
respectively) $271,615,087 $162,026,089
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.24 $ 8.19 $ 8.07 $ 7.57 $ 8.34
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income(S) $ 0.66 $ 0.69 $ 0.62 $ 0.60 $ 0.48
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.81) 0.13 0.18 0.48 (0.74)
------- ------- ------- ------- -------
Total from investment operations $ (0.15) $ 0.82 $ 0.80 $ 1.08 $ (0.26)
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.63) $ (0.69) $ (0.60) $ (0.58) $ --
From net realized gain on investments and
foreign currency transactions (0.13) (0.08) (0.08) -- --
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)
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.76) $ (0.77) $ (0.68) $ (0.58) $ (0.51)
------- ------- ------- ------- -------
Net asset value - end of period $ 7.33 $ 8.24 $ 8.19 $ 8.07 $ 7.57
======= ======= ======= ======= =======
Total return(+) (2.21)% 10.40% 10.42% 15.00% (3.15)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.85% 0.79% 1.13% 1.54% 1.71%
Net investment income 8.26% 8.26% 7.63% 7.86% 6.11%
Portfolio turnover 299% 217% 287% 249% 153%
Net assets at end of period (000 omitted) $95,292 $69,874 $49,432 $41,688 $44,032
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) 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 and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.58 $ 0.58 $ 0.54 $ 0.53 $ 0.44
Ratios (to average net assets):
Expenses## 1.84% 2.01% 2.06% 2.47% 2.21%
Net investment income 7.24% 7.04% 6.70% 6.89% 5.62%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.18 $ 8.14 $ 8.03 $ 7.53 $ 8.33
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income(S) $ 0.61 $ 0.61 $ 0.56 $ 0.55 $ 0.45
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.81) 0.15 0.18 0.48 (0.78)
------- ------- ------- ------- -------
Total from investment operations $ (0.20) $ 0.76 $ 0.74 $ 1.03 $ (0.33)
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.58) $ (0.64) $ (0.55) $ (0.53) $ --
From net realized gain on investments and
foreign currency transactions (0.13) (0.08) (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)
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.71) $ (0.72) $ (0.63) $ (0.53) $ (0.47)
------- ------- ------- ------- -------
Net asset value - end of period $ 7.27 $ 8.18 $ 8.14 $ 8.03 $ 7.53
======= ======= ======= ======= =======
Total return (2.84)% 9.64% 9.68% 14.23% (3.97)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.51% 1.44% 1.80% 2.27% 2.43%
Net investment income 7.64% 7.51% 7.02% 7.15% 5.97%
Portfolio turnover 299% 217% 287% 249% 153%
Net assets at end of period (000 omitted) $133,872 $71,459 $25,361 $8,365 $5,350
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.53 $ 0.50 $ 0.49 $ 0.48 $ 0.41
Ratios (to average net assets):
Expenses## 2.50% 2.66% 2.73% 3.20% 2.92%
Net investment income 6.62% 6.29% 6.09% 6.18% 5.48%
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 1997 1996 1995 1994*
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.16 $ 8.12 $ 8.00 $ 7.53 $ 7.53
------- ------- ------- ------- -------
Income from investment operations# -
Net investment income(S) $ 0.61 $ 0.60 $ 0.57 $ 0.54 $ 0.12
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.81) 0.16 0.18 0.48 (0.03)
------- ------- ------- ------- -------
Total from investment operations $ (0.20) $ 0.76 $ 0.75 $ 1.02 $ 0.09
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.58) $ (0.64) $ (0.55) $ (0.55) $ --
From net realized gain on investments and
foreign currency transactions (0.13) (0.08) (0.08) -- --
From paid-in capital -- -- -- -- (0.09)
------- ------- ------- ------- -------
Total distributions declared to
shareholders $ (0.71) $ (0.72) $ (0.63) $ (0.55) $ (0.09)
------- ------- ------- ------- -------
Net asset value - end of period $ 7.25 $ 8.16 $ 8.12 $ 8.00 $ 7.53
======= ======= ======= ======= =======
Total return (2.84)% 9.68% 9.80% 14.17% 1.23%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.51% 1.44% 1.71% 2.20% 2.16%+
Net investment income 7.65% 7.44% 7.12% 7.23% 8.99%+
Portfolio turnover 299% 217% 287% 249% 153%
Net assets at end of period (000 omitted) $42,213 $20,464 $ 5,478 $ 1,060 $ 13
* For the period from the inception of Class C shares, September 1, 1994, through October 31, 1994.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.53 $ 0.50 $ 0.51 $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses## 2.50% 2.66% 2.64% 3.13% 2.65%+
Net investment income 6.63% 6.21% 6.19% 6.26% 8.50%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
Financial Highlights - continued
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1998 1997**
- --------------------------------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.25 $ 8.15
------ ------
Income from investment operations# -
Net investment income(S) $ 0.72 $ 0.49
Net realized and unrealized gain (loss) on investments and foreign
currency transactions (0.85) 0.15
------ ------
Total from investment operations $(0.13) $ 0.64
------ ------
Less distributions declared to shareholders -
From net investment income $(0.66) $(0.54)
From net realized gain on investments and foreign currency
transactions (0.13) --
------ ------
Total distributions declared to shareholders $(0.79) $(0.54)
------ ------
Net asset value - end of period $ 7.33 $ 8.25
====== ======
Total return (2.00)% 5.98%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.50% 0.44%+
Net investment income 8.51% 7.69%+
Portfolio turnover 299% 217%
Net assets at end of period (000 omitted) $238 $230
** For the period from the inception of Class I shares, January 8, 1997, through October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or
other fees and/or distribution fee, respectively, for certain of the periods indicated. If the fee
had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.63 $ 0.40
Ratios (to average net assets):
Expenses## 1.49% 1.66%+
Net investment income 7.49% 6.47%+
</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.
The Fund can invest up to 100% 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.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including forward contracts and swap
agreements, 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. Futures contracts and options contracts
listed on commodities exchanges are reported at market value using closing
settlement prices. Over-the-counter options on securities are valued by
brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Equity
securities listed on securities exchanges or reported through the NASDAQ
system are reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using 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 collateral 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 collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the Fund
under each such repurchase agreement. The Fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a
joint trading account for the purpose of entering into one or more repurchase
agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Written Options - The Fund may write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is
subsequently adjusted to the current value of the options contract. When a
written option expires, the Fund realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the Fund. The Fund, as writer of an option,
may have no control over whether the underlying securities may be sold (call)
or purchased (put) and, as a result, bears the market risk of an unfavorable
change in the price of the securities underlying the written option. In
general, written call options may serve as a partial hedge against decreases
in value in the underlying securities to the extent of the premium received.
Written options may also be used as part of an income producing strategy
reflecting the view of the Fund's management on the direction of interest
rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or 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 with the broker 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 contract, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. The Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Should interest 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 may enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund may also use contracts in a manner intended to
protect foreign currency denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
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 discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date. The Fund uses the effective
interest method for reporting interest income on payment-in-kind (PIK) bonds.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax
is provided.
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.
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 classified as
distributions in excess of net investment income or net realized gains. During
the year ended October 31, 1998, $3,151,926 was reclassified from accumulated
net realized loss on investments to accumulated undistributed net investment
income due to differences between book and tax accounting for mortgage-backed
securities and currency transactions. This change had no effect on the net
assets or net asset value per share. At October 31, 1998, accumulated
undistributed net investment income under book accounting were different from
tax accounting due to temporary differences in accounting for currency
transactions.
Capital gains taxes have been provided on unrealized and realized gains from
securities transactions in countries where such a capital gains tax is
applicable. Realized and unrealized gain is reported net of any capital gains
tax in the Statement of Operations.
At October 31, 1998, the Fund, for federal income tax purposes, had a capital
loss carryforward of $11,281,953 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on October 31, 2006.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on 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. Class B shares will convert to Class A
shares approximately eight years after purchase.
(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 the Fund's average daily net assets and 7.14% of investment income. The
investment adviser has voluntarily agreed to waive a portion of its fee, which
is reflected as a reduction of expenses in the Statement of Operations. The
Fund's management fee is currently being charged at a rate of 0.50% of average
daily net assets. Prior to March 1, 1998, the rate was 0.40%. No fee is
currently being charged on investment income. MFS is currently paying all
expenses of the Fund other than the management fee and distribution fees.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$12,102 for the year ended October 31, 1998.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$236,946 for the year ended October 31, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted a
distribution plan for Class A, Class B, and Class C shares pursuant to Rule
12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD 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
paid 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 and 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. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $29,713
for the year ended October 31, 1998. Fees incurred under the distribution plan
during the year ended October 31, 1998, were 0.35% of average daily net assets
attributable to Class A shares on an annualized basis.
The Trustees have adopted a distribution plan relating solely to Class B and
Class C shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 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 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 $12,608 and $6,861 for
Class B and Class C shares, respectively, for the year ended October 31, 1998.
Fees incurred under the distribution plan during the year ended October 31,
1998, were 1% of average daily net assets attributable to Class B and Class C
shares on an annualized basis.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemption's 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,
1998, were $2,013, $227,362, and $23,376 for Class A, Class B, and Class C
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 Fund's average daily net assets at an effective annual
rate of 0.1125%. Prior to January 1, 1998, the fee was calculated as a
percentage of the average Fund's daily net assets at an effective annual rate
of 0.13%.
(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 $237,094,704 $198,008,349
------------ ------------
Investments (non-U.S. government
securities) $554,465,896 $461,256,503
------------ ------------
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 $284,045,313
------------
Gross unrealized appreciation $ 5,039,185
Gross unrealized depreciation (29,238,954)
------------
Net unrealized depreciation $(24,199,769)
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Fund shares were
as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED OCTOBER 31, 1998 YEAR ENDED OCTOBER 31, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,720,310 $ 54,058,684 4,259,003 $ 35,477,819
Shares issued to shareholders in
reinvestment of distributions 578,941 4,624,652 292,804 2,419,833
Shares reacquired (2,778,946) (21,988,257) (2,107,380) (17,447,525)
----------- ------------ ---------- ------------
Net increase 4,520,305 $ 36,695,079 2,444,427 $ 20,450,127
=========== ============ ========== ============
<CAPTION>
Class B Shares
YEAR ENDED OCTOBER 31, 1998 YEAR ENDED OCTOBER 31, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 12,547,304 $100,304,984 7,475,595 $ 61,884,637
Shares issued to shareholders in
reinvestment of distributions 764,812 6,058,719 270,174 2,222,066
Shares reacquired (3,634,990) (28,365,326) (2,127,213) (17,471,789)
----------- ------------ ---------- ------------
Net increase 9,677,126 $ 77,998,377 5,618,556 $ 46,634,914
=========== ============ ========== ============
<CAPTION>
Class C Shares
YEAR ENDED OCTOBER 31, 1998 YEAR ENDED OCTOBER 31, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,320,132 $ 34,534,971 2,305,490 $ 19,083,155
Shares issued to shareholders in
reinvestment of distributions 201,269 1,589,285 60,726 498,246
Shares reacquired (1,208,045) (9,341,241) (533,281) (4,364,476)
----------- ------------ ---------- ------------
Net increase 3,313,356 $ 26,783,015 1,832,935 $ 15,216,925
=========== ============ ========== ============
<CAPTION>
Class I Shares
YEAR ENDED OCTOBER 31, 1998 PERIOD ENDED OCTOBER 31, 1997*
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 24,624 $ 198,617 27,472 $ 231,703
Shares issued to shareholders in
reinvestment of distributions 3,586 28,935 377 3,172
Shares reacquired (23,593) (189,455) -- --
----------- ------------ ---------- ------------
Net increase 4,617 $ 38,097 27,849 $ 234,875
=========== ============ ========== ============
*For the period from the inception of Class I shares, January 8, 1997, through October 31, 1997.
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the year ended October 31, 1998, was $1,812.
(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, swap agreements, 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.
Written Option Transactions
<TABLE>
<CAPTION>
1998 CALLS 1998 PUTS
--------------------------------- ---------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -- $ -- -- $ --
Options written -
Australian Dollars 15,708 271,475 10,165 125,812
British Pounds 7,841 60,280 -- --
Canadian Dollars 45,514 232,901 -- --
German Marks/British
Pounds 24,248 116,389 25,801 116,389
Japanese Yen 10,813,239 821,241 2,533,847 133,850
South African Rands -- -- 38,239 75,328
Options terminated in closing transactions -
Australian Dollars -- -- (10,165) (125,812)
British Pounds (7,841) (60,280) -- --
Canadian Dollars (11,256) (87,725) -- --
Japanese Yen (2,366,973) (131,391) -- --
Options expired -
Canadian Dollars (23,105) (50,355) -- --
Japanese Yen -- -- (2,533,847) (133,850)
South African Rands -- -- (24,064) (24,533)
Options exercised -
Australian Dollars (4,163) (54,326) -- --
Japanese Yen (7,655,403) (539,605) -- --
---------- ----------
Outstanding, end of period $ 578,604 $ 167,184
---------- ----------
Options outstanding at end
of period consist of:
Australian Dollars 11,545 $ 217,149 -- $ --
Canadian Dollars 11,153 94,821 -- --
German Marks/British
Pounds 24,248 116,389 25,801 116,389
Japanese Yen 790,863 150,245 -- --
South African Rands -- -- 14,175 50,795
---------- ----------
Outstanding, end of period $ 578,604 $ 167,184
========== ==========
</TABLE>
At October 31, 1998, 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 12/15/98 DEM 19,964,377 $12,308,006 $12,076,650 $ 231,356
12/15/98 ZAR 24,714,221 4,028,398 4,365,506 (337,108)
----------- ----------- ----------
$16,336,404 $16,442,156 $(105,752)
----------- ----------- ----------
Purchases 12/15/98 AUD 7,612,906 $ 4,528,157 $ 4,766,203 $ 238,046
12/15/98 CHF 577,272 418,043 428,383 10,340
12/15/98 JPY 1,552,589,348 12,350,764 13,433,318 1,082,554
12/15/98 NZD 4,048 2,084 2,144 60
12/15/98 ZAR 10,059,957 1,739,875 1,776,985 37,110
----------- ----------- ----------
$19,038,923 $20,407,033 $1,368,110
=========== =========== ==========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $1,558,070 with Merrill Lynch
and $52,946 with First Boston and a net payable of $461,708 with Deutsche Bank
at October 31, 1998.
At October 31, 1998, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
Swap Agreements
Interest Rate Swaps
NOTIONAL
PRINCIPAL CASH FLOWS CASH FLOWS
AMOUNT PAID BY RECEIVED BY UNREALIZED
EXPIRATION OF CONTRACT THE TRUST THE TRUST APPRECIATION
- --------------------------------------------------------------------------------
3/1/99 7,250,000 Lehman High
Yield Index
1M Total Return Floating 1M Libor $138,248
(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,
1998, the Fund owned the following restricted securities (constituting 1.7% of
net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
<TABLE>
<CAPTION>
SHARE/PAR
DESCRIPTION DATE OF ACQUISITION AMOUNT COST VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/21/89 - 9/25/95 100 $ -- $ 94
Cargill, 2002 8/29/97 2,500,000 2,701,993 2,492,858
CSFB Gazprom Note, 13.5s, 2000 3/10/98 3,400,000 3,400,000 579,020
George Town Real Estate Ltd.,
5.9s, 2007 12/20/96 500,000 500,000 515,000
Mosaic Ltd., 7.915s, 1999 7/15/98 800,000 800,000 792,000
Russia Principal Loans, 3.313s, 2020 5/29/98 1,750,000 1,003,978 133,525
----------
$4,512,497
==========
</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, including the schedule of portfolio investments as of
October 31, 1998, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights. Our procedures included
confirmation of securities owned as of
October 31, 1998 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 the
MFS Strategic Income Fund at October 31, 1998, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 9, 1998
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 1999, SHAREHOLDERS WILL BE MAILED A FORM 1099 REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR
1998.
THE FUND HAS DESIGNATED $3,123,423 AS A CAPITAL GAIN DIVIDEND.
FOR THE YEAR ENDED OCTOBER 31, 1998, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 2.14%.
<PAGE>
MFS(R) STRATEGIC INCOME FUND
<TABLE>
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Former Stephen E. Cavan*
Chairman and Director (until 1991), MFS Investment
Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, State Street Bank and Trust Company
Brigham and Women's Hospital; Professor of
Surgery, Harvard Medical School AUDITORS
Ernst & Young LLP
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; Chairman, INVESTOR INFORMATION
Colonial Insurance Company, Ltd. For MFS stock and bond market outlooks, call toll
free: 1-800-637-4458 anytime from a touch-tone
Abby M. O'Neill - Private Investor telephone.
Walter E. Robb, III - President and Treasurer, For information on MFS mutual funds, call your
Benchmark Advisors, Inc. (corporate financial financial adviser or, for an information kit, call
consultants); President, Benchmark Consulting toll free: 1-800-637-2929 any business day from 9
Group, Inc. (office services) a.m. to 5 p.m. Eastern time (or leave a message
anytime).
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, INVESTOR SERVICE
MFS Investment Management MFS Service Center, Inc.
P.O. Box 2281
Jeffrey L. Shames* - Chairman, Chief Boston, MA 02107-9906
Executive Officer, and Director,
MFS Investment Management For general information, call toll free:
1-800-225-2606 any business day from
J. Dale Sherratt - President, Insight Resources, 8 a.m. to 8 p.m. Eastern time.
Inc. (acquisition planning specialists)
For service to speech- or hearing-impaired, call
Ward Smith - Former Chairman (until 1994), NACCO toll free: 1-800-637-6576 any business day from 9
Industries (holding company) a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a
INVESTMENT ADVISER Telecommunications Device for the Deaf.) For share
Massachusetts Financial Services Company prices, account balances, and exchanges, call toll
500 Boylston Street free: 1-800-MFS-TALK (1-800-637-8255) anytime from
Boston, MA 02116-3741 a touch-tone telephone.
DISTRIBUTOR WORLD WIDE WEB
MFS Fund Distributors, Inc. www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
James T. Swanson*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
----------------
MFS(R) STRATEGIC INCOME FUND Bulk Rate
U.S. Postage
[Logo] M F S(R) Paid
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ----------------
500 Boylston Street
Boston, MA 02116-3741
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MSI-2 12/98 24M 34/234/334/834
