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[Logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Strategic
Income Fund
Semiannual Report o April 30, 1998
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IN MEMORIAM
A. KEITH BRODKIN
1935 - 1998
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS INVESTMENT MANAGEMENT(SM)
- --------------------------- On February 2, 1998, Keith Brodkin, a friend
and leader to everyone at MFS, died
unexpectedly at age 62. His thoughtful
[Photo of A. Keith Brodkin] letters to shareholders on the markets and
economy have been an integral part of
MFS shareholder reports like this one for
many years.
Keith joined MFS in 1970 as the firm's first
- --------------------------- fixed-income manager, managing the
bond portion of MFS(R) Total Return Fund. He went on to manage our first
pure bond fund, MFS(R) Bond Fund, when it was introduced in 1974, and he
was considered a pioneer in the art of active
bond management.
Keith was named President and Chief Investment Officer of MFS
in 1987 and four years later became Chairman and Chief Executive
Officer. During his stewardship, MFS has achieved significant growth in
total assets under management, rising from some $25 billion in 1991 to
the over $80 billion today entrusted to us by three million individual
and institutional investors worldwide. Under Keith's leadership, MFS has
carefully but steadily built its domestic and international investment
capabilities through the introduction of a range of new products and a
still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of
charitable endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
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TABLE OF CONTENTS
Letter from the Chairman .................................................. 2
A Discussion with the Portfolio Manager ................................... 4
Portfolio Manager's Profile ............................................... 7
Fund Facts ................................................................ 8
Performance Summary ....................................................... 8
Portfolio Concentration ................................................... 10
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 20
Notes to Financial Statements ............................................. 28
Report of Ernst & Young LLP, Independent Auditors ......................... 36
Trustees and Officers ..................................................... 37
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HIGHLIGHTS
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o FOR THE SIX MONTHS ENDED APRIL 30, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 5.87%, CLASS B SHARES 5.59%,
CLASS C SHARES 5.61%, AND CLASS I SHARES 6.05%. (SEE PERFORMANCE SUMMARY
FOR MORE INFORMATION.)
o ALTHOUGH THE FUND'S PERFORMANCE WAS HURT SLIGHTLY IN THE FOURTH QUARTER OF
1997 BY THE ASIAN TURMOIL AS YIELDS ROSE IN RELATION TO U.S. TREASURIES, A
FLIGHT TO QUALITY IN THE SAME PERIOD BENEFITED OUR U.S. GOVERNMENT
POSITION AND HELPED OFFSET SOME OF THE ASIAN EFFECT.
o THE FUND'S HEAVIEST WEIGHTING, AT OVER 40% OF ASSETS, REMAINS HIGH-YIELD
CORPORATE BONDS, WHICH CONTINUE TO SHOW GOOD PRICE AND YIELD PERFORMANCE,
BENEFITING FROM A STRONG U.S. ECONOMY AND A WORLDWIDE SHORTAGE OF
INVESTMENTS WITH GOOD YIELDS.
o HOLDINGS IN U.S. GOVERNMENT SECURITIES INCREASED FROM ABOUT 14% OF ASSETS
TO ABOUT 18% BECAUSE WE FELT THAT INTEREST RATES IN THE UNITED STATES
WOULD FALL, AS A RESULT OF THE ASIAN CRISIS, EL NINO, AND HIGH INVENTORIES
IN U.S. BUSINESSES.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of Jeffrey L. Shames]
- ----------------------------
Jeffrey L. Shames
Dear Shareholders:
With the U.S. stock market well into its fourth year of record-breaking
advances, it is necessary to take a cautious outlook. By most commonly
accepted measures, equity valuations appear to have risen to a point at which
the stock market has become more vulnerable to changes in the investment
environment such as rising inflation and interest rates or a slowing economy.
As a result, while we continue to hold a favorable long-term outlook for the
equity markets, we also believe that a market correction is possible in the
near term. In such a correction, equity prices would remain relatively flat or
decline, possibly for an extended period.
Currently, equity investors seem to be primarily focused on interest rates,
which have been relatively stable for several months as inflation has remained
low. In an environment of low interest rates, stocks become more attractive
than most fixed-income investments, while low inflation helps control
companies' costs, such as for raw materials, wages, and benefits. The near-
term outlook for a continuation of this environment appears relatively
favorable. However, this year has seen a marked slowdown in corporate
earnings. This means that as equity prices continue to rise, price-to-earnings
(P/E) ratios, or the amount an investor pays for a stock in relation to the
company's earnings per share, also go up. A year ago, the average P/E ratio
for stocks in the unmanaged Standard & Poor's 500 Composite Index stood at
approximately 21; this spring, the average P/E was 33% higher, at about 28. In
some cases, such as with some of the newer companies associated with the
Internet, P/Es have soared to levels that are unlikely to be sustained.
As long as interest rates remain low and the economy continues to grow, it is
possible that some of these valuations can be supported. We expect corporate
earnings to grow 8% to 10% this year. However, just as no one can predict
market cycles, so too no one can predict economic cycles -- except to say that
these cycles do exist and that an economic slowdown at some point is
inevitable.
Given this reality, we believe it is prudent to remind investors of the need
to take a long-term view and to diversify their investments across a range of
asset classes, including mutual funds that focus on bonds and international
investments as well as on the U.S. stock market. The likelihood of an eventual
market correction also makes it important for us to use original, bottom-up
research to find companies that we think can keep growing or gain market share
in the face of the occasional downturn. To help achieve this, and to provide
the broadest possible coverage of industry sectors and individual companies,
MFS continues to increase its number of full-time research analysts. These
analysts thoroughly investigate each company's earnings potential and position
in its industry as well as the overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation.
Every year, both fixed-income and equity managers meet with thousands of
credit issuers and companies. They also attend many presentations, closely
follow sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to
both the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support 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
May 14, 1998
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JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED
MFS IN 1983. AFTER FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO
MANAGER, HE WAS NAMED CHIEF EQUITY OFFICER IN 1987 AND PRESIDENT AND A
MEMBER OF THE BOARD OF DIRECTORS IN 1993. MR. SHAMES WAS APPOINTED
CHAIRMAN AND CHIEF EXECUTIVE OFFICER IN FEBRUARY 1998.
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<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
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[Photo of James T. Swanson]
- ---------------------------
James T. Swanson
For the six months ended April 30, 1998, Class
A shares of the Fund provided a total return of 5.87%, Class B shares 5.59%,
Class C shares 5.61%, and Class I shares 6.05%. These returns assume the
reinvestment of distributions but exclude the effects of any sales charges.
Q. COULD YOU TALK ABOUT SOME THINGS THAT HAVE AFFECTED THE FUND'S PERFORMANCE
OVER THE PAST SIX MONTHS?
A. Performance was hurt slightly in the fourth quarter of 1997 by the Asian
turmoil, as yields rose in relation to U.S. Treasuries. And even though the
Fund had virtually no exposure to Asia -- less than 1% -- emerging-market
debt, which comprises 25% of assets, did go down in price, which hurt the
Fund somewhat. But the good news was a flight to quality in the fourth
quarter that benefited our U.S. government position and helped offset some
of the Asian effect. In the first quarter of 1998, the Fund has performed
quite well, helped by Treasury securities with a long duration, or
sensitivity to changes in interest rates, and the fact that it held mostly
U.S. dollars, not local currencies; and, later, the comeback of some
emerging markets.
Q. OVERALL, HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT, PARTICULARLY AS
IT AFFECTS THE FUND?
A. It's been a mixed environment, but that's fine because this is a fund with
several types of investments, so when one zigs, the others often zag. It
hasn't been the best market for bonds, and recently there have been
concerns in the United States that interest rates might rise again. Our
heaviest weighting, at over 40% of assets, remains high-yield corporate
bonds, which continue to show good price and yield performance. This sector
is benefiting from a strong U.S. economy, a strong stock market, and a
worldwide shortage of investments with good yields. As a result, people
looking for higher yield have put more money into high-yield investments.
(Lower-rated securities may provide greater returns, but they are also
associated with greater-than-average risk.)
Q. WHAT ARE SOME OF THE OTHER BIG ALLOCATIONS?
A. We have 12% of assets in high-grade corporate bonds, in utilities, a sector
which continues to perform fairly well. The Fund also has 25% of its assets
in emerging market securities.
Q. WHERE ELSE HAVE YOU INCREASED THE U.S. ALLOCATION?
A. Holdings in U.S. government securities have increased from about 14% of
assets to about 18% because we felt that interest rates in the United
States would fall as a result of the Asian crisis, El Nino, and high
inventories in U.S. businesses.
Q. WHAT ABOUT ASIA? HOW HAS THE CRISIS THERE AFFECTED THE PORTFOLIO?
A. As I mentioned, we had less than 1% of assets in Asia when the crisis hit,
but we've since added to our position there, in the Philippines and in some
paper companies in Indonesia. The markets got so beat up there that some
opportunities have been created. We won't put any more money into the
region until we are convinced that Japan has decided to write off its bad
loans in Asia, which are enormous. However, that could cause a withdrawal
of liquidity from those markets, creating even more problems. So while Asia
might become a major opportunity within the next several months, we don't
see it as one yet.
Q. WHAT ABOUT THE EMERGING MARKETS?
A. We like Mexico best. Its economy is doing very well, and it is sticking to
its reform programs. We also like Russia. The current political problems in
Russia are obscuring the long-term economic potential in the country. In
other words, we believe Russian bonds are cheap relative to the country's
long-range potential. We also like the Philippines and Panama, two
countries that we don't think will be hurt by the second leg of the Asian
crisis. (Investing in foreign and emerging markets involves special risks.
These risks may increase share price volatility.)
Q. WHAT ABOUT WESTERN EUROPE?
A. We have very little in Europe because we think it will continue to grow. If
so, bond yields will rise and prices will fall, so that's of no interest to
us now.
Q. HOW MUCH OF THE PORTFOLIO IS IN CROSSOVER BONDS?
A. We have 12% of assets in crossover bonds that have a high "BB" rating but
have the potential to move up to investment-grade status. They're all in
the electric utility sector, in companies such as Long Island Lighting, and
Texas & New Mexico Power. We like this sector because these companies still
haven't been raised to investment grade yet, but we think they will. The
fundamentals and the strong economy are good for this industry, and these
companies provide very good yield.
Q. WHAT DO YOU SEE AS THE BIGGEST RISK GOING FORWARD?
A. The biggest risk is that inflation might pick up again in the United
States. We don't see that happening, but the Federal Reserve Board (the
Fed) could try to anticipate it and raise interest rates before inflation
increases, and that could hurt bond prices. If that happens, there could be
a ripple effect similar to the one in 1994, when all the fixed-income
markets moved together when the Fed raised rates. Bond markets around the
world would feel the impact if that happened again this year.
Q. WHAT'S YOUR OVERALL OUTLOOK FOR THE FIXED-INCOME MARKETS?
A. We think the longer-term outlook is very positive because the baby boomers
are aging and people in countries such as the United States, Germany, and
Japan are looking for fixed-income investments. At the same time, the U.S.
government is now producing surpluses instead of deficits, so the supply of
Treasury bonds is going down while inflation around the world is being
contained. So we have a very good long-term situation for bonds. Near term,
it's dangerous because the Fed appears to be getting ready to raise rates.
But that's going to be good in the long run because it will pre-empt any
sort of pickup in inflation.
/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.
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PORTFOLIO MANAGER'S PROFILE
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JAMES T. SWANSON IS A SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT
(SM). HE IS PORTFOLIO MANAGER OF MFS(R) WORLD ASSET ALLOCATION FUND(SM),
MFS STRATEGIC INCOME FUND, MFS(R) MERIDIAN(SM) CHARTER INCOME FUND,
MFS(R) AMERICAN(SM) CHARTER INCOME FUND, THE WORLD ASSET ALLOCATION
SERIES OFFERED THROUGH MFS/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.
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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>
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FUND FACTS
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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: $247.2 MILLION NET ASSETS AS OF APRIL 30, 1998
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PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Investment results reflect the percentage change
in net asset value, including reinvestment of dividends.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH APRIL 30, 1998
<TABLE>
CLASS A
<CAPTION>
10 Years/
6 Months 1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cumulative Total Return +5.87% +11.03% +39.82% +54.57% +138.04%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +11.03% +11.82% + 9.10% + 9.06%
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SEC Results -- + 5.75% +10.02% + 8.04% + 8.53%
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</TABLE>
<TABLE>
CLASS B
<CAPTION>
10 Years/
6 Months 1 Year 3 Years 5 Years Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +5.59% +10.32% +37.13% +49.60% +130.51%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +10.32% +11.10% + 8.39% + 8.71%
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SEC Results -- + 6.32% +10.28% + 8.08% + 8.71%
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</TABLE>
<TABLE>
CLASS C
<CAPTION>
10 Years/
6 Months 1 Year 3 Years 5 Years Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +5.61% +10.37% +37.32% +50.99% +132.64%
- --------------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +10.37% +11.15% + 8.59% + 8.81%
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SEC Results -- + 9.37% +11.15% + 8.59% + 8.81%
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</TABLE>
<TABLE>
CLASS I
<CAPTION>
10 Years/
6 Months 1 Year 3 Years 5 Years Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +6.05% +11.53% +40.23% +54.99% +138.92%
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Average Annual Total Return -- +11.53% +11.93% + 9.16% + 9.10%
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</TABLE>
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.
Peformance 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.
<PAGE>
PORTFOLIO CONCENTRATION AS OF APRIL 30, 1998
QUALITY RATINGS
U.S. Government and Agency Obligations ......................... 18.9%
"AA" ........................................................... 0.2%
"A" ............................................................ 1.6%
"BBB" .......................................................... 4.6%
"BB" ........................................................... 29.9%
"B" ............................................................ 30.6%
"CCC" .......................................................... 1.3%
Not Rated ...................................................... 12.9%
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- April 30, 1998
Bonds - 94.2%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
U.S. Bonds - 63.3%
Aerospace - 1.4%
Argo Technology Corp., 8.625s, 2007 $ 1,250 $ 1,276,563
BE Aerospace, Inc., 9.875s, 2006 1,000 1,060,000
K & F Industries Inc., 9.25s, 2007 1,000 1,040,000
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$ 3,376,563
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Automotive - 0.9%
Exide Corp., 10s, 2005 $ 750 $ 781,875
Hayes Wheels International, Inc., 9.125s, 2007 1,000 1,050,000
Titan Wheel International, Inc., 8.75s, 2007 450 463,500
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$ 2,295,375
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Banks and Credit Companies - 1.1%
Beaver Valley Funding Corp., 9s, 2017 $ 1,500 $ 1,697,370
Midland Funding Corp., 10.33s, 2002 919 991,808
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$ 2,689,178
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Building - 1.1%
AAF-McQuay, Inc., 8.875s, 2003 $ 550 $ 543,125
American Standard, Inc., 7.375s, 2008 1,000 970,000
Building Materials Corp., 8s, 2007 900 900,000
Nortek, Inc., 9.875s, 2004 250 256,250
UDC Homes, Inc., 14.5s, 2000 6 3,048
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$ 2,672,423
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Business Services - 0.3%
Iron Mountain, Inc., 10.125s, 2006 $ 670 $ 723,600
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Chemicals - 1.2%
Harris Chemical North America, Inc., 10.25s, 2001 $ 1,000 $ 1,040,000
NL Industries, Inc., 11.75s, 2003 250 275,000
Sterling Chemicals, Inc., 11.25s, 2007 25 24,625
Ucar Global Enterprises Inc, 12s, 2005 500 535,000
UCC Investors Holdings, Inc., 0s to 1998, 12s, 2005 1,000 990,000
------------
$ 2,864,625
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Computer Software - Services - 0.4%
Unisys Corp., 7.875s, 2008 $ 900 $ 900,000
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Consumer Goods and Services - 1.4%
Kindercare Learning Centers, Inc., 9.5s, 2009 $ 300 $ 308,250
Philip Morris Cos. Inc., 7.75s, 2027 1,000 1,053,920
Revlon Consumer Products Corp., 8.125s, 2006## 900 900,000
Synthetic Industries, Inc., 9.25s, 2007 1,025 1,066,000
Westpoint Stevens, Inc., 9.375s, 2005 250 263,750
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$ 3,591,920
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Containers - 1.7%
Gaylord Container Corp. "B", 9.75s, 2007 $ 1,225 $ 1,240,312
Stone Container Corp., 9.875s, 2001 2,000 2,055,000
U.S. Can Corp., 10.125s, 2006 900 949,500
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$ 4,244,812
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Defense Electronics - 0.6%
Alliant Techsystem Inc., 11.75s, 2003 $ 400 $ 436,000
United Defense Industries Inc., 8.75s, 2007 950 969,000
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$ 1,405,000
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Electrical Equipment - 0.4%
Williams Scotsman, Inc., 9.875s, 2007 $ 1,000 $ 1,040,000
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Entertainment - 1.4%
AMC Entertainment, Inc., 9.5s, 2009 $ 200 $ 208,000
Cinemark USA, Inc., 9.625s, 2008 750 781,875
Marvel Holdings, Inc. "B", 0s, 1998 (Chapter 11) 445 21,137
Time Warner, Inc., 9.125s, 2013 1,130 1,353,231
Time Warner, Inc., 9.15s, 2023 870 1,066,229
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$ 3,430,472
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Financial Institutions - 1.3%
Constellation Finance, 9.8s, 2001 $ 1,750 $ 1,785,000
Dynex Capital, Inc., 7.875s, 2002 1,500 1,513,770
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$ 3,298,770
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Food and Beverage Products - 3.0%
Borden Inc., 9.2s, 2021 $ 2,500 $ 2,741,550
Borden Inc., 9.25s, 2019 1,750 1,823,990
Friendly Ice Cream Corp., 10.5s, 2007## 1,250 1,334,375
Planet Hollywood International Inc., 12s, 2005## 1,000 982,500
Specialty Foods Corp., 10.25s, 2001 500 490,000
------------
$ 7,372,415
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Forest and Paper Products - 1.1%
Calmar, Inc., 11.5s, 2005 $ 250 $ 268,750
Silgan Holdings, Inc., 9s, 2009 1,000 1,045,000
U.S. Timberlands, 9.625s, 2007 460 473,800
Waterford 3 Funding Corp., 8.09s, 2017 1,000 1,040,950
------------
$ 2,828,500
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Government National Mortgage Association - 3.4%
GNMA, 8s, 2026 $ 8,000 $ 8,300,000
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Information, Paging and Technology - 0.7%
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 $ 1,200 $ 960,000
Millicom International Cellular Communications Corp.,
0s to 2001, 13.25s, 2006 350 274,750
Sprint Spectrum LP, 11s, 2006 550 628,375
------------
$ 1,863,125
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Insurance - 0.4%
Residential Reinsurance Ltd. "A", 8.41s, 1998+ $ 1,000 $ 1,010,000
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Machinery - 0.2%
AGCO Corp., 8.5s, 2006 $ 500 $ 515,000
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Media - 1.5%
American Radio Systems Corp., 9s, 2006 $ 350 $ 374,500
EchoStar Satellite Broadcasting Corp., 0s to 2000,
13.125s, 2004 750 682,500
Falcon Holdings Group, Inc., 11s, 2003(+) 241 257,812
Intermedia Capital Partners, 11.25s, 2006 75 84,000
Intermedia Communications, Inc., 0s to 2002, 11.125s, 2007 1,800 1,323,000
Jones Intercable, Inc., 8.875s, 2007 500 525,000
Marcus Cable Operating Co., 13.5s, 2004 500 477,500
------------
$ 3,724,312
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Medical and Health Technology and Services - 0.2%
Beverly Enterprises, Inc., 9s, 2006 $ 460 $ 477,250
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Metals and Minerals - 1.3%
Haynes International, Inc., 11.625s, 2004 $ 1,000 $ 1,122,500
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 309,750
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 750 813,750
Metals USA, Inc., 8.625s, 2008## 900 882,000
------------
$ 3,128,000
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Oil Services - 0.8%
Clark USA, Inc., 10.875s, 2005 $ 500 $ 545,000
Ferrell Gas LP, 10s, 2001 200 213,500
Pool Energy Services Company, 8.625s, 2008## 1,250 1,250,000
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$ 2,008,500
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Oils - 2.1%
Giant Industries, Inc., 9s, 2007 $ 400 $ 407,500
Triton Energy Ltd., 8.75s, 2002 2,000 2,082,060
Triton Energy Ltd., 9.25s, 2005 2,500 2,701,125
------------
$ 5,190,685
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Real Estate - 0.2%
George Town Real Estate Ltd., 5.9s, 2007+ $ 500 $ 515,000
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Restaurants and Lodging - 0.9%
Prime Hospitality Corp., 9.75s, 2007 $ 1,000 $ 1,077,500
Red Roof Inns, Inc., 9.625s, 2003 1,100 1,141,250
------------
$ 2,218,750
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Retail - 0.7%
Cole National Group, Inc., 8.625s, 2007 $ 750 $ 757,500
K Mart Corp., 8.125s, 2006 900 918,000
------------
$ 1,675,500
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Special Products and Services - 1.9%
Buckeye Cellulose Corp., 8.5s, 2005 $ 610 $ 616,100
IMO Industries, Inc., 11.75s, 2006 500 571,250
International Knife & Saw, Inc., 11.375s, 2006 850 927,562
International Specialty Products Holdings, Inc., 9s, 2003 900 949,500
Polymer Group, Inc., 9s, 2007 1,000 1,032,500
Thermadyne Industries Holdings Corp., 10.75s, 2003 500 520,000
------------
$ 4,616,912
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Steel - 1.6%
Alaska Steel Holdings Corp., 9.125s, 2006 $ 1,000 $ 1,055,000
Armco, Inc., 9s, 2007 1,300 1,345,500
Commonwealth Aluminum Corp., 10.75s, 2006 500 527,500
WCI Steel, Inc., 10s, 2004 900 931,500
------------
$ 3,859,500
- -------------------------------------------------------------------------------------------------------
Supermarkets - 0.2%
Pathmark Stores, Inc., 9.625s, 2003 $ 500 $ 505,000
- -------------------------------------------------------------------------------------------------------
Telecommunications - 5.9%
Adelphia Communications Corp. "B", 9.875s, 2007 $ 75 $ 80,625
Allbritton Communications Co. "B", 9.75s, 2007 1,000 1,050,000
Chancellor Radio Broadcasting, 8.125s, 2007## 900 900,000
Comcast Cellular Holdings, Inc., 9.5s, 2007 1,000 1,040,000
Comcast Corp., 9.375s, 2005 500 532,775
DTI Holdings Inc., 0s to 2003, 12.5s, 2008 500 287,500
EchoStar Communications Corp., 0s to 1999, 12.875s, 2004 100 95,750
Fox/Liberty Networks, Inc., 8.875s, 2007 1,000 1,020,000
Granite Broadcasting Corp., 10.375s, 2005 280 296,800
ITC Deltacom, Inc., 11s, 2007 26 29,510
Jacor Communications Co., 8s, 2010 900 895,500
Level 3 Communications, Inc., 9.125s, 2008## 500 495,000
Lin Television Corp., 8.375s, 2008## 1,250 1,256,250
Mobile Telecommunication Technologies Corp., 13.5s, 2002 1,500 1,758,750
NEXTEL Communications, 0s to 1999, 9.75s, 2004 500 481,250
NEXTEL International, Inc., 0s to 2003, 12.125s, 2008## 1,000 600,000
Outdoor Systems, Inc., 8.875s, 2007 175 180,688
Pagemart Wireless, Inc., 0s to 2003, 11.25s, 2008## 855 530,100
Qwest Communications International, Inc., 0s to 2003,
8.29s, 2008## 1,750 1,203,125
Triton Communications, 0s to 2003, 11s, 2008## 975 577,687
United International Holdings Incorporated, 10.75s, 2008 300 189,750
Western Wireless Corp., 10.5s, 2007 500 541,250
WorldCom, Inc., 8.875s, 2006 590 643,082
------------
$ 14,685,392
- -------------------------------------------------------------------------------------------------------
Transportation
Moran Transportation Co., 11.75s, 2004 $ 100 $ 111,375
- -------------------------------------------------------------------------------------------------------
Utilities - Electric - 9.4%
Central Maine Power Company, 7.05s, 2008 $ 750 $ 732,833
Connecticut Light & Power Company, 5.75s, 2000 1,500 1,464,885
El Paso Electric Co., 9.4s, 2011 1,000 1,125,200
Esi Tractebel, 7.99s, 2011## 500 492,500
First PV Funding Corp., 10.15s, 2016 267 278,855
First PV Funding Corp., 10.3s, 2014 683 714,390
Midland Cogeneration Venture Corp., 10.33s, 2002 1,565 1,688,404
Midland Funding Corp. "B", 13.25s, 2006 2,500 3,202,650
Niagara Mohawk Power Corp., 8.77s, 2018 1,180 1,279,639
Niagara Mohawk Power Corp., 9.75s, 2005 2,500 2,933,500
Northeast Utilities "B", 8.38s, 2005 429 437,143
Pacificorp Holdings, 6.75s, 2001 1,500 1,514,850
Texas & New Mexico Power Co., 10.75s, 2003 4,390 4,730,971
Texas & New Mexico Power Co., 12.5s, 1999 2,000 2,077,500
Washington Public Power Supply, 5.125s, 2017 500 480,740
------------
$ 23,154,060
- -------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 14.6%
U.S. Treasury Bonds, 6.125s, 2027 $ 2,500 $ 2,516,016
U.S. Treasury Bonds, 11.25s, 2015 21,500 33,553,330
------------
$ 36,069,346
- -------------------------------------------------------------------------------------------------------
Total U.S. Bonds $156,361,360
- -------------------------------------------------------------------------------------------------------
Foreign Bonds - 30.9%
Argentina - 3.5%
City of Buenos Aires, 11.25s, 2007 $ 700 $ 748,125
Compania De Infraes SA, 11.625s, 2004 (Industrial)## 2,500 2,550,250
Hidroelectrica Alicura, 8.375s, 1999 (Electric Utilities)## 1,000 995,000
Industrias Metalurgicas Pescarmona SA, 9.5s, 2002
(Electric Utilities)## 250 239,220
Republic of Argentina, 6.625s, 2005 475 435,813
Republic of Argentina, 9.75s, 2027 739 707,592
Republic of Argentina, 11.75s, 2007## 1,000 1,005,000
Telefonica De Argentina SA, 9.125s, 2008 (Telecommunications) 2,000 1,987,500
------------
$ 8,668,500
- -------------------------------------------------------------------------------------------------------
Bermuda - 0.1%
Flag Limited, 8.25s, 2008 (Telecommunications)## $ 200 $ 203,500
- -------------------------------------------------------------------------------------------------------
Brazil - 4.6%
Autopistas Sol SA "B", 10.25s, 2009 (Industrial)## $ 2,250 $ 2,216,250
Cemig, 9.125s, 2004 (Industrial) 1,000 979,000
Companhia Energetica de Minas, 9.125s, 2004 (Electric
Utilities)## 1,500 1,462,500
Companhia Paranaense, 9.75s, 2005 (Electric Utilities)## 1,750 1,755,985
Espirito Santo Centrais Escelsa, 10s, 2007 (Electric
Utilities)## 1,000 955,000
Federal Republic of Brazil, 6.875s, 2001 536 522,808
Federal Republic of Brazil, 10.125s, 2027 756 736,193
Leasing Bank Boston/Brazil, 0s to 1999, 8.375s, 2004
(Finance)## 1,000 1,005,000
Voto Votorantim, 8.5s, 2005 (Finance) 2,000 1,865,000
------------
$ 11,497,736
- -------------------------------------------------------------------------------------------------------
Bulgaria - 0.8%
National Republic of Bulgaria, 2.25s, 2012 $ 2,000 $ 1,342,500
National Republic of Bulgaria, 6.563s, 2024 750 611,250
------------
$ 1,953,750
- -------------------------------------------------------------------------------------------------------
Canada - 1.3%
PCI Chemicals Inc, 9.25s, 2007 (Chemicals) $ 1,250 $ 1,228,125
Repap New Brunswick, Inc., 10.625s, 2005 (Forest and Paper
Products) 900 940,500
Rogers Cablesystems, Inc., 10.125s, 2012 (Telecommunications) 500 542,500
Rogers Cantel, Inc., 9.375s, 2008 (Telecommunications) 500 517,500
Telesystem International Wireless Inc., 0s to 2002, 13.25s,
2007 (Telecommunications) 200 127,500
------------
$ 3,356,125
- -------------------------------------------------------------------------------------------------------
Greece - 1.5%
Fage Dairy Industries SA, 9s, 2007 (Food and Beverage
Products) $ 4,000 $ 3,850,000
- -------------------------------------------------------------------------------------------------------
Hong Kong - 1.7%
Guangdong International, 6.27s, 1998 (Construction) $ 2,000 $ 1,955,000
Guangzhou Shen Superhighway, 10.25s, 2007 (Construction) 2,750 2,255,000
------------
$ 4,210,000
- -------------------------------------------------------------------------------------------------------
Indonesia - 2.0%
APP International Finance, 3.5s, 2003 (Financial
Institutions)## $ 3,000 $ 3,003,750
APP International Finance, 11.75s, 2005 (Financial
Institutions) 500 465,000
APP International Finance, 12s, 2004 (Financial Institutions) 1,500 1,290,000
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Finance) 250 203,750
------------
$ 4,962,500
- -------------------------------------------------------------------------------------------------------
Mexico - 7.6%
Empresas ICA Sociedad SA, 5s, 2004 (Construction) $ 2,000 $ 1,540,000
Empresas ICA Sociedad SA, 11.875s, 2001 (Construction) 2,000 2,180,000
Grupo Industrial Durango SA, 12s, 2001 (Forest Products) 1,250 1,360,938
Grupo Industrial Durango SA, 12.625s, 2003 (Forest Products) 1,650 1,868,625
Sanluis Corporation SA, 8.875s, 2008 (Finance)## 3,000 2,955,000
Satelites Mexicanos SA, 10.125s, 2004 (Telecommunications)## 500 510,625
TFM SA De CV, 0s to 2002, 11.75s, 2009 (Railroads) 1,500 966,540
United Mexican States, 8.625s, 2008 1,500 1,492,500
United Mexican States, 11.375s, 2016 3,000 3,490,500
United Mexican States, 11.5s, 2026 2,000 2,406,000
------------
$ 18,770,728
- -------------------------------------------------------------------------------------------------------
Panama - 1.1%
Republic of Panama, 8.25s, 2008 $ 1,000 $ 987,500
Republic of Panama, 8.875s, 2027 1,703 1,668,940
------------
$ 2,656,440
- -------------------------------------------------------------------------------------------------------
Philippines - 0.4%
Bangko Sentral Ng Philipinas, 8.6s, 2027 (Finance) $ 1,000 $ 906,930
- -------------------------------------------------------------------------------------------------------
Russia - 5.4%
CSFB Gazprom Note, 13.5s, 2000+ $ 3,400 $ 3,394,560
Ministry of Finance, Russia, 10s, 2007 2,500 2,406,250
Russia Principal Loans, 3.359s, 2020+ 10,750 6,799,375
St. Petersburg Russia, 9.5s, 2002## 750 697,005
------------
$ 13,297,190
- -------------------------------------------------------------------------------------------------------
South Korea - 0.3%
Republic of Korea, 8.875s, 2008 $ 710 $ 708,154
- -------------------------------------------------------------------------------------------------------
United Kingdom - 0.6%
Colt Telecom Group PLC, 8.875s, 2007 (Telecommunications) DEM 500 $ 303,706
Diamond Cable Communications Corp. PLC, 0s to 2002,
10.75s, 2007 (Telecommunications) $ 1,250 884,375
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s, 2005 (Telecommunications) 250 198,750
------------
$ 1,386,831
- -------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 76,428,384
- -------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $231,614,533) $232,789,744
- -------------------------------------------------------------------------------------------------------
Stocks
- -------------------------------------------------------------------------------------------------------
SHARES
- -------------------------------------------------------------------------------------------------------
U.S. Stocks
Apparel and Textiles
Ithaca Industries, Inc.* 6,000 $ 20,628
- -------------------------------------------------------------------------------------------------------
Real Estate
Atlantic Gulf Communities Corp.+* 100 313
- -------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $75,000) $ 20,941
- -------------------------------------------------------------------------------------------------------
Preferred Stock - 1.5%
- -------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------------------------------
U.S. Stocks - 1.5%
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14s 779 $ 77,900
- -------------------------------------------------------------------------------------------------------
Entertainment - 0.5%
Time Warner, Inc., 10.25s 1,170 $ 1,304,550
- -------------------------------------------------------------------------------------------------------
Telecommunications - 0.7%
CSC Holdings Incorporated, 11.125s 6,314 $ 724,531
Primedia Incorporated, 8.625s*## 9,000 888,750
------------
$ 1,613,281
- -------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.3%
Long Island Lighting Co., 7.95s 25,000 $ 668,750
- -------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $3,845,063) $ 3,664,481
- -------------------------------------------------------------------------------------------------------
Rights
- -------------------------------------------------------------------------------------------------------
United Mexican States, Expiration Date 6/30/03
(Identified Cost, $0)* 1,000 $ --
- -------------------------------------------------------------------------------------------------------
Warrants
- -------------------------------------------------------------------------------------------------------
Renaissance Cosmetics, Inc., Expiration Date 8/31/06* 655 $ 7
ICO, Inc., Expiration Date 7/01/02* 62,500 37,500
- -------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $51,787) $ 37,507
- -------------------------------------------------------------------------------------------------------
Contingent Promissory Demand Note - 1.0%
- -------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------------------------------
Cargill, COLT (Commodity Option Linked Trading), due 2002
(Illiquid) (Identified Cost, $2,618,556) $ 2,500 $ 2,468,655
- -------------------------------------------------------------------------------------------------------
Short-Term Obligations - 1.2%
- -------------------------------------------------------------------------------------------------------
CSFB Russia Note, due 5/01/98 (Identified Cost $3,000,000) $ 3,000 $ 3,000,000
- -------------------------------------------------------------------------------------------------------
Repurchase Agreement - 3.8%
- -------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 4/30/98, due 5/1/98, total to be received
$9,338,429 (secured by various U.S. Treasury and Federal
Agency obligations), at Cost $ 9,337 $ 9,337,000
- -------------------------------------------------------------------------------------------------------
Call Options Purchased
- -------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) VALUE
- -------------------------------------------------------------------------------------------------------
Russian Principal Callable/May/63.25 (Premiums Paid, $51,000) $ 3,000 $ 39,300
- -------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $250,592,939) $251,357,628
Other Assets, Less Liabilities - (1.7)% (4,142,279)
- -------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $247,215,349
- -------------------------------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
+Restricted security.
(+)Payment in kind.
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.
DEM = Deutsche Marks
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
APRIL 30, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $250,592,939) $251,357,628
Cash 669
Net receivable for forward foreign currency exchange
contracts subject to master netting agreements 1,995
Receivable for Fund shares sold 2,458,477
Receivable for investments sold 23,227,554
Receivable from investment advisor 368,040
Interest receivable 4,555,052
Other assets 846
------------
Total assets $281,970,261
------------
Liabilities:
Payable for Fund shares reacquired $ 304,269
Payable for investments purchased 34,116,541
Payable for daily variation margin on futures contracts
closed 123,310
Payable to affiliates -
Management fee 3,340
Administrative fee 99
Shareholder servicing agent fee 743
Distribution fee 67,369
Accrued expenses and other liabilities 139,241
------------
Total liabilities $ 34,754,912
------------
Net assets $247,215,349
============
Net assets consist of:
Paid-in capital $244,851,951
Unrealized appreciation on investments and translation of
asset and liabilities in foreign currencies 766,757
Accumulated undistributed net realized gain on
investments and foreign currency transactions 908,701
Accumulated undistributed net investment income 687,940
------------
Total $247,215,349
============
Shares of beneficial interest outstanding 29,991,631
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $90,705,107 / 10,946,546 shares of
beneficial interest outstanding) $8.29
=====
Offering price per share (100 / 95.25) $8.70
=====
Class B shares:
Net asset value and offering price per share
(net assets $118,218,575 / 14,376,626 shares of
beneficial interest outstanding) $8.22
=====
Class C shares:
Net asset value and offering price per share
(net assets of $37,933,355 / 4,625,251 shares of
beneficial interest outstanding) $8.20
=====
Class I shares:
Net asset value and offering price per share
(net assets of $358,312 / 43,208 shares of beneficial
interest outstanding) $8.29
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- ------------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 1998
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 8,727,511
Dividend 52,013
-----------
Total investment income $ 8,779,524
-----------
Expenses -
Management fee $ 1,126,561
Administrative fee 13,589
Trustees' compensation 21,883
Shareholder servicing agent fee 119,096
Distribution and service fee (Class A) 138,865
Distribution and service fee (Class B) 468,336
Distribution and service fee (Class C) 147,296
Custodian fee 52,037
Printing 45,165
Auditing fees 25,165
Postage 20,060
Legal fees 2,733
Miscellaneous 105,171
-----------
Total expenses $ 2,285,957
Fees paid indirectly (36,859)
Reduction of expenses by investment adviser (1,048,635)
-----------
Net expenses $ 1,200,463
-----------
Net investment income $ 7,579,061
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 915,493
Foreign currency transactions 154,858
Futures contracts 99,006
-----------
Net realized gain on investments $ 1,169,357
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 2,417,756
Translation of assets and liabilities in foreign currencies (134,186)
-----------
Net unrealized gain on investments $ 2,283,570
-----------
Net realized and unrealized gain on investments and foreign
currency $ 3,452,927
-----------
Increase in net assets from operations $11,031,988
===========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1998 OCTOBER 31, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 7,579,061 $ 8,557,447
Net realized gain on investments and foreign currency
transactions 1,169,357 2,630,601
Net unrealized gain (loss) on investments and foreign
currency translation 2,283,570 (2,722,332)
------------ ------------
Increase in net assets from operations $ 11,031,988 $ 8,465,716
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,829,542) $ (4,703,670)
From net investment income (Class B) (3,003,338) (3,069,009)
From net investment income (Class C) (937,777) (714,530)
From net investment income (Class I) (11,259) (3,175)
Net realized gain on investments and foreign currency
transactions (Class A) (1,233,914) (460,894)
Net realized gain on investments and foreign currency
transactions (Class B) (1,433,172) (246,359)
Net realized gain on investments and foreign currency
transactions (Class C) (451,823) (50,625)
Net realized gain on investments and foreign currency
transactions (Class I) (4,783) --
------------ ------------
Total distributions declared to shareholders $ (9,905,608) $ (9,248,262)
------------ ------------
Net increase in net assets from Fund share transactions $ 84,062,880 $ 82,536,841
------------ ------------
Total increase in net assets $ 85,189,260 $ 81,754,295
Net assets:
At beginning of period 162,026,089 80,271,794
------------ ------------
At end of period (including accumulated undistributed net
investment income and distributions in excess of net
investment income of $687,940 and $(109,205), respectively) $247,215,349 $162,026,089
============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ------------------------------------------------------------------
APRIL 30, 1998 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.24 $ 8.19 $ 8.07 $ 7.57 $ 8.34 $ 8.00
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.32 $ 0.69 $ 0.62 $ 0.60 $ 0.48 $ 0.52
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.16 0.13 0.18 0.48 (0.74) 0.42
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.48 $ 0.82 $ 0.80 $ 1.08 $(0.26) $ 0.94
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.30) $(0.69) $(0.60) $(0.58) $ -- $(0.24)
From net realized gain on investments
and foreign currency transactions (0.13) (0.08) (0.08) -- -- (0.32)
In excess of net investment income -- -- -- -- (0.06) --
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.04) --
From paid in capital -- -- -- -- (0.41) (0.04)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.43) $(0.77) $(0.68) $(0.58) $(0.51) $(0.60)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.29 $ 8.24 $ 8.19 $ 8.07 $ 7.57 $ 8.34
====== ====== ====== ====== ====== ======
Total return(+) 5.87%++ 10.40% 10.42% 15.00% (3.15)% 12.36%
Ratios (to average net assets)/
Supplemental data(S):
Expenses+++ 0.79%+ 0.75% 1.09% 1.50% 1.71% 1.98%
Net investment income 7.89%+ 8.26% 7.63% 7.86% 6.11% 5.92%
Portfolio turnover 153% 217% 287% 249% 153% 275%
Net assets at end of period (000
omitted) $90,705 $69,874 $49,432 $41,688 $44,032 $60,120
+Annualized.
++Not annualized.
+++For fiscal years ending after September 1, 1995, the Fund's expenses calculated without reduction for fees paid indirectly would
have been 1.54%, 1.13%, 0.79%, 0.83% for 1995, 1996, 1997, and 1998, respectively.
#Per share data for the periods subsequent to October 31, 1993, are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated
without reduction for fees paid indirectly.
(+)Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
(S)The investment adviser voluntarily waived a portion of their management fee and certain other expenses 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 $ 0.28 $ 0.58 $ 0.54 $ 0.53 $ 0.44 $ 0.49
Ratios (to average net assets):
Expenses## 1.86%+ 2.01% 2.06% 2.47% 2.21% 2.14%
Net investment income 6.82%+ 7.04% 6.70% 6.89% 5.62% 5.76%
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.12 $ 7.56 $ 8.93 $ 9.60 $ 9.21
------ ------ ------ ------ ------
Income from investment operations -
Net investment income(S) $ 0.63 $ 0.73 $ 0.86 $ 0.94 $ 0.93
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.08 0.95 (1.03) (0.38) 0.56
------ ------ ------ ------ ------
Total from investment operations $ 0.71 $ 1.68 $(0.17) $ 0.56 $ 1.49
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.56) $(0.73) $(0.82) $(1.18) $(0.69)
From net realized gain on investments and
foreign currency transactions -- -- -- -- (0.41)
From paid in capital (0.27) (0.39) (0.38) (0.05) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.83) $(1.12) $(1.20) $(1.23) $(1.10)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.00 $ 8.12 $ 7.56 $ 8.93 $ 9.60
====== ====== ====== ====== ======
Total return(+) 9.02% 23.78% (1.62)% 5.85% 16.60%
Ratios (to average net assets)/Supplemental data(S):
Expenses 2.02% 1.87% 1.47% 1.82% 1.75%
Net investment income 7.47% 9.26% 10.42% 10.05% 9.74%
Portfolio turnover 423% 671% 400% 157% 270%
Net assets at end of period (000 omitted) $77,487 $76,312 $74,555 $87,978 $93,819
(+)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 voluntarily waived a portion of their management fee and certain other expenses 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 $ 0.61 $ 0.71 $ 0.83 $-- $--
Ratios (to average net assets):
Expenses 2.21% 2.16% 1.81% -- --
Net investment income 7.55% 8.97% 10.08% -- --
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED -------------------------------------------------------------------
APRIL 30, 1998 1997 1996 1995 1994 1993*
- ----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <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 $ 8.28
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.29 $ 0.61 $ 0.56 $ 0.55 $ 0.45 $ 0.04
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.16 0.15 0.18 0.48 (0.78) 0.05
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.45 $ 0.76 $ 0.74 $ 1.03 $(0.33) $ 0.09
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.28) $(0.64) $(0.55) $(0.53) $ -- $(0.03)
From net realized gain on investments
and foreign currency transactions (0.13) (0.08) (0.08) -- -- (0.01)
In excess of net investment income -- -- -- -- (0.05) --
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- (0.03) --
From paid in capital -- -- -- -- (0.39) --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.41) $(0.72) $(0.63) $(0.53) $(0.47) $(0.04)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.22 $ 8.18 $ 8.14 $ 8.03 $ 7.53 $ 8.33
====== ====== ====== ====== ====== ======
Total return 5.59%++ 9.64% 9.68% 14.23% (3.97)% 1.15%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses+++ 1.45%+ 1.40% 1.76% 2.23% 2.43% 3.03%+
Net investment income 7.24%+ 7.51% 7.02% 7.15% 5.97% 5.22%+
Portfolio turnover 153% 217% 287% 249% 153% 275%
Net assets at end of period (000
omitted) $118,219 $71,459 $25,361 $8,365 $5,350 $ 265
*For the period from the inception of Class B, September 7, 1993, through October 31, 1993.
+Annualized.
++Not annualized.
+++For fiscal years ending after September 1, 1995, the Fund's expenses calculated without reduction for fees paid indirectly would
have been 2.27%, 1.80%, 1.44%, 1.49% for 1995, 1996, 1997, and 1998, respectively.
#Per share data for the periods subsequent to October 31, 1993, are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The investment adviser voluntarily waived a portion of their management fee and certain other expenses 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 $ 0.25 $ 0.50 $ 0.49 $ 0.48 $ 0.41 $--
Ratios (to average net assets):
Expenses## 2.52%+ 2.66% 2.73% 3.20% 2.92% --
Net investment income 6.17%+ 6.29% 6.09% 6.18% 5.48% --
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------
APRIL 30, 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) $ 0.29 $ 0.60 $ 0.57 $ 0.54 $ 0.12
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.16 0.16 0.18 0.48 (0.03)
------ ------ ------ ------ ------
Total from investment operations $ 0.45 $ 0.76 $ 0.75 $ 1.02 $ 0.09
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.28) $(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 $(0.41) $(0.72) $(0.63) $(0.55) $(0.09)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.20 $ 8.16 $ 8.12 $ 8.00 $ 7.53
====== ====== ====== ====== ======
Total return 5.61%++ 9.68% 9.80% 14.17% 1.23%++
Ratios (to average net assets)/Supplemental data(S):
Expenses+++ 1.45%+ 1.40% 1.67% 2.16% 2.16%+
Net investment income 7.25%+ 7.44% 7.12% 7.23% 8.99%+
Portfolio turnover 153% 217% 287% 249% 153%
Net assets at end of period (000 omitted) $37,933 $20,464 $5,478 $1,060 $ 13
**For the period from the inception of Class C, September 1, 1994, through October 31, 1994.
+Annualized.
++Not annualized.
+++For fiscal years ending after September 1, 1995, the Fund's expenses calculated without reduction for fees paid indirectly would
have been 2.20%, 1.71%, 1.44%, 1.49% for 1995, 1996, 1997, and 1998, respectively.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The investment adviser voluntarily waived a portion of their management fee and certain other expenses 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 $ 0.25 $ 0.50 $ 0.51 $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses## 2.52%+ 2.66% 2.64% 3.13% 2.65%+
Net investment income 6.18%+ 6.21% 6.19% 6.26% 8.50%+
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED PERIOD ENDED
APRIL 30, 1998 OCTOBER 31, 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) $ 0.34 $ 0.49
Net realized and unrealized gain on investments and foreign currency transactions 0.15 0.15
------ ------
Total from investment operations $ 0.49 $ 0.64
------ ------
Less distributions declared to shareholders -
From net investment income $(0.32) $(0.54)
From net realized gain on investments and foreign currency
transactions (0.13) --
------ ------
Total distributions declared to shareholders $(0.45) $(0.54)
------ ------
Net asset value - end of period $ 8.29 $ 8.25
====== ======
Total return 6.05%++ 5.98%++
Ratios (to average net assets)/Supplemental data(S):
Expenses+++ 0.44%+ 0.40%+
Net investment income 8.23%+ 7.69%+
Portfolio turnover 153% 217%
Net assets at end of period (000 omitted) $ 358 $ 230
***For the period from the inception of Class I, January 8, 1997, through October 31, 1997.
+Annualized.
++Not annualized.
+++The Fund's expenses calculated without reduction for fees paid indirectly would have been 0.44% and 0.48% for 1997 and 1998,
respectively.
#Per share data are based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
(S)The investment adviser voluntarily waived a portion of their management fee and certain other expenses 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 $ 0.30 $ 0.40
Ratios (to average net assets):
Expenses## 1.51%+ 1.66%+
Net investment income 7.16%+ 6.47%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Strategic Income Fund (the Fund) is a non-diversified series of MFS Series
Trust VIII (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
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.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including forward contracts, are valued on
the basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Non-U.S. dollar denominated short-term obligations are valued at
amortized cost as calculated in the foreign currency and translated into U.S.
dollars at the closing daily exchange rate. 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.
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 will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
is amortized or 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.
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 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 preliminary 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.
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%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $6,083
for the period ended April 30, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$124,260 for the period ended April 30, 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 $14,653
for the period ended April 30, 1998. Fees incurred under the distribution plan
during the period ended April 30, 1998, were 0.35% of average daily net assets
attributable to Class A shares on an annualized basis.
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 $5,143 and $1,270 for
Class B and Class C shares, respectively, for the period ended April 30, 1998.
Fees incurred under the distribution plan during the period ended April 30,
1998, were 1.00% of average daily net assets attributable to Class B and Class
C shares on an annualized basis.
Certain Class A shares 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 redemptions of Class B shares in the event of a shareholder
redemption within six years of purchase MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the period
ended April 30, 1998, were $583, $50,528, and $9,119 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 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 $122,360,839 $ 94,541,131
------------ ------------
Investments (non-U.S. government
securities) $255,292,956 $202,798,911
------------ ------------
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 $250,592,939
------------
Gross unrealized appreciation $ 4,056,740
Gross unrealized depreciation (3,292,051)
------------
Net unrealized appreciation
(depreciation) $ 764,689
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par
value). Transactions in Fund shares were as follows:
<TABLE>
Class A Shares
<CAPTION>
PERIOD ENDED APRIL 30, 1998 YEAR ENDED OCTOBER 31, 1997
-------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,234,222 $ 26,717,432 4,259,003 $ 35,477,819
Shares issued to shareholders in
reinvestment of distributions 271,095 2,232,789 292,804 2,419,833
Shares reacquired (1,038,906) (8,588,917) (2,107,380) (17,447,525)
---------- ------------ ---------- ------------
Net increase 2,466,411 $ 20,361,304 2,444,427 $ 20,450,127
========== ============ ========== ============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
PERIOD ENDED APRIL 30, 1998 YEAR ENDED OCTOBER 31, 1997
-------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,508,645 $ 53,374,754 7,475,595 $ 61,884,637
Shares issued to shareholders in
reinvestment of distributions 344,928 2,822,080 270,174 2,222,066
Shares reacquired (1,211,463) (9,942,299) (2,127,213) (17,471,789)
---------- ------------ ---------- ------------
Net increase 5,642,110 $ 46,254,535 5,618,556 $ 46,634,914
========== ============ ========== ============
</TABLE>
<TABLE>
Class C Shares
<CAPTION>
PERIOD ENDED APRIL 30, 1998 YEAR ENDED OCTOBER 31, 1997
-------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,359,299 $ 19,300,115 2,305,490 $ 19,083,155
Shares issued to shareholders in
reinvestment of distributions 89,878 733,342 60,726 498,246
Shares reacquired (331,565) (2,713,274) (533,281) (4,364,476)
---------- ------------ ---------- ------------
Net increase 2,117,612 $ 17,320,183 1,832,935 $ 15,216,925
========== ============ ========== ============
</TABLE>
<TABLE>
Class I Shares
<CAPTION>
PERIOD ENDED APRIL 30, 1998 YEAR ENDED OCTOBER 31, 1997*
-------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 13,409 $ 110,783 27,472 $ 231,703
Shares issued to shareholders in
reinvestment of distributions 1,950 16,075 377 3,172
Shares reacquired -- -- -- --
---------- ------------ ---------- ------------
Net increase 15,359 $ 126,858 27,849 $ 234,875
========== ============ ========== ============
</TABLE>
*For the period from the inception of Class I shares, January 8, 1997, through
October 31, 1997.
(6) Line of Credit The Fund and other affiliated funds participate in a $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 period ended April 30, 1998, was
$590.
(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.
Forward Foreign Currency Exchange Contracts
Forward foreign currency purchases and sales under master netting agreements
amounted to a net receivable of $2,087 with Deutsche Bank and a net payable of
$92 with Merrill Lynch at April 30, 1998.
At April 30, 1998, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At April 30, 1998,
the Fund owned the following restricted securities (constituting 5.7% 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>
DESCRIPTION DATE OF ACQUISITION PRINCIPAL AMOUNT COST VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities
Corp. 9/21/89 - 9/25/95 100 $ -- $ 313
Cargill, 2002 8/29/97 2,500,000 2,618,556 2,468,655
CSFB Gazprom Note, 13.5s,
2000 3/10/98 3,400,000 3,400,000 3,394,560
Georgetown Real Estate Ltd.,
5.9s, 2007 12/20/96 500,000 500,000 515,000
Residential Reinsurance
Ltd.,
8.41s, 1998 6/6/97 1,000,000 1,000,000 1,010,000
Russia Principal Loans,
3.359s, 2020 3/20/98 - 4/23/98 10,750,000 6,735,625 6,799,375
-----------
$14,187,903
===========
</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
April 30, 1998, and the related statement of operations for the six month period
ended April 30, 1998, the statement of changes in net assets for the six month
period ended April 30, 1998 and for the year ended October 31, 1997, and the
financial highlights for the six month period ended April 30, 1998, and for each
of the four years in the period ended October 31, 1997. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for the periods prior to the year ended October 31, 1994 indicated
herein, were audited by other auditors whose report dated December 16, 1993
expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of April 30, 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 MFS
Strategic Income Fund at April 30, 1998, the results of its operations for the
six month period ended April 30, 1998, the changes in its net assets for the six
month period ended April 30, 1998 and for the year ended October 31, 1997, and
the financial highlights for the six month period ended April 30, 1998 and for
each of the four years in the period ended October 31, 1997, in conformity with
generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
June 5, 1998
<PAGE>
<TABLE>
MFS(R) STRATEGIC INCOME FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former 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. INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free:
Abby M. O'Neill - Private Investor 1-800-637-4458 anytime from a touch-tone 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, MFS Investment INVESTOR SERVICE
Management MFS Service Center, Inc.
P.O. Box 2281
Jeffrey L. Shames* - Chairman, Chief Executive Boston, MA 02107-9906
Officer, and Director, MFS Investment Management
For general information, call toll free:
J. Dale Sherratt - President, Insight Resources, 1-800-225-2606 any business day from 8 a.m. to 8
Inc. (acquisition planning specialists) Ward Smith p.m. Eastern time.
- - Former Chairman (until 1994), NACCO Industries
(holding company) For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day from 9
INVESTMENT ADVISER a.m. to 5 p.m. Eastern time. (To use this service,
Massachusetts Financial Services Company your phone must be equipped with a
500 Boylston Street Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, and exchanges,
DISTRIBUTOR call toll free: 1-800-MFS-TALK (1-800-637-8255)
MFS Fund Distributors, Inc. anytime from a touch-tone telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
www.mfs.com
PORTFOLIO MANAGER
James T. Swanson* --------------------------------------------------
[Dalbar Logo] For the fourth year in a row,
TREASURER MFS earned a #1 ranking in the
W. Thomas London* DALBAR, Inc. Broker/Dealer
Survey, Main Office Operations
ASSISTANT TREASURERS Service Quality Category. The
Mark E. Bradley* firm achieved a 3.42 overall
Ellen Moynihan* score on a scale of 1 to 4 in
James O. Yost* the 1997 survey. A total of 111 firms responded,
offering input on the quality of service they
received from 29 mutual fund companies nationwide.
The survey contained questions about service
quality in 11 categories, including "knowledge of
operations contact," "keeping you informed," and
"ease of doing business" with the firm.
--------------------------------------------------
*Affiliated with the Investment Adviser
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MFS(R) STRATEGIC Bulk Rate
INCOME FUND U.S. Postage
Paid
MFS
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INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
500 Boylston Street
Boston, MA 02116-3741
[Dalbar Logo]
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MSI-3 27M 34/234/334/834
