<PAGE>
[LOGO] MFS(SM)
INVESTMENT MANAGEMENT
ANNUAL REPORT
FOR YEAR ENDED
OCTOBER 31, 1997
MFS(R) STRATEGIC INCOME FUND
[GRAPHIC OMITTED]
LEARNING FINANCIAL BASICS THE EASY WAY (see page 35)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 2
Portfolio Manager's Profile ............................................... 4
Fund Facts ................................................................ 5
Performance Summary ....................................................... 5
Portfolio Concentration ................................................... 8
Tax Form Summary .......................................................... 8
Portfolio of Investments .................................................. 9
Financial Statements ...................................................... 17
Notes to Financial Statements ............................................. 24
Independent Auditors' Report .............................................. 34
The ABCs of Investing ..................................................... 35
The MFS Family of Funds(R) ................................................ 36
Trustees and Officers ..................................................... 37
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED OCTOBER 31,
1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET
VALUE OF 10.40%, CLASS B SHARES
9.64%, CLASS C SHARES 9.68%, AND
CLASS I SHARES 10.81%. (SEE
PERFORMANCE SUMMARY FOR MORE
INFORMATION.)
o THE FUND HAS BEEN ABLE TO TAKE ADVANTAGE OF
DRAMATIC CHANGES IN THE WORLD'S FIXED-INCOME
MARKETS, INCLUDING AN ASTONISHING SHRINKAGE
IN BOND YIELD LEVELS ACROSS THESE MARKETS.
o ASIA'S WIDESPREAD CURRENCY CRISIS HAS HAD
ALMOST NO EFFECT ON THE FUND, AS ONLY 2% OF
THE FUND'S ASSETS WERE INVESTED THERE WHEN
THE CRISIS BEGAN IN AUGUST, AND THOSE BONDS
WERE IN TWO SOLID EXPORTING COMPANIES IN
INDONESIA.
o THE HIGH-YIELD CORPORATE MARKET
CONTINUES TO CONFOUND SKEPTICS AND POST
IMPRESSIVE RETURNS. SPURRED BY GROWING
MUTUAL FUND INTEREST AND FAVORABLE
TAKEOVERS IN THE TELECOMMUNICATIONS
INDUSTRY, RETURNS AGAIN WERE IN DOUBLE
DIGITS. THE FUND'S CURRENT WEIGHTING IN
THIS MARKET IS APPROXIMATELY 43%.
o ON OCTOBER 29, 1997, THE FUND MARKED ITS
10TH ANNIVERSARY.
<PAGE>
LETTER FROM THE CHAIRMAN
[Graphic Omitted]
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. The rapid pace of growth seen in the first quarter slowed to an annual
rate of 3.3% in the second quarter and 3.5% in the third. We believe economic
momentum will carry well into the first quarter of 1998, as the money supply is
increasing at a rapid rate, and it still appears that Christmas sales could be
quite good. Because economic growth continues to be impressive, markets are
likely to continue to focus on the Federal Reserve Board's (the Fed's)
willingness to raise interest rates.
The U.S. government bond market has benefited from the deflationary events in
Southeast Asia, while the high-yield and emerging-debt markets have come under
severe pressure. Inflation remains under control, and the Fed will most likely
take a wait-and-see attitude toward raising interest rates. As a result, our
near-term outlook for high-grade markets is neutral to moderately positive. At
the same time, high-yield markets, having gone through a substantial correction,
could offer reasonable value but require careful selection. Overall,
fixed-income markets appear to be reasonably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
[Graphic Omitted]
[/s/ A. Keith Brodkin]
A. Keith Brodkin
Chairman and President
November 14, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Graphic Omitted]
[Photo of James T. Swanson]
James T. Swanson
In a dramatic and rapidly changing environment for financial assets around the
world, Class A shares of the Fund provided a total return of 10.40% for the year
ended October 31, 1997, Class B shares 9.64%, Class C shares 9.68%, and Class I
shares 10.81%. These returns assume the reinvestment of distributions but
exclude the effects of any sales charges.
Q. COULD YOU TALK ABOUT SOME OF THE THINGS THAT HAVE CONTRIBUTED TO THE FUND'S
PERFORMANCE THIS YEAR?
A. The Fund has been able to take advantage of some pretty dramatic changes in
the world's fixed-income markets. For example, the past year has seen an
astonishing shrinkage in bond yields across the markets. With these falling
yields, we have also seen a rapid shrinkage in yield premiums, or the
advantages usually inherent in lower-rated bond categories.
Q. WHAT BROUGHT THIS ABOUT?
A. These events are symptomatic of a world financial system awash in excess
funds. Fed by Japan's lethargic economy and its remarkably low government
bond rates, and by continued accommodation in European monetary policy, this
liquidity wave has propelled prices of corporate and emerging market bonds
upward in every category. Furthermore, the U.S. economy has continued to
expand, with no signs of inflation. In this environment, emboldened investors
seeking yield have gone abroad with great confidence.
Q. MEANWHILE, THE ASIAN CURRENCY CRISIS HAS GOTTEN A LOT OF ATTENTION. HOW HAS
THAT AFFECTED THE FUND?
A. It's true that the only major global concerns arose in Asia, which was mired
in a widespread currency crisis. Thailand and Malaysia were hit hardest by
the crisis, but those were two countries in which we owned no bonds. In all,
only 2% of the Fund's assets were in Asia when the crisis began in August,
and those bonds were in two solid exporting companies in Indonesia. The
spillover effect, a flight to quality that occurred in late October, caused
yield spreads in other sectors to widen, which in turn weakened prices.
Q. COULD YOU TALK A LITTLE ABOUT THE FUND'S STRATEGY?
A. The Fund's mandate allows us the flexibility to sort and rearrange assets
with changes as they occur in the markets. We remain committed to trying to
achieve relatively low volatility of both Fund returns and net asset values
by employing many fixed-income asset classes and by changing the mix of
assets in a disciplined manner. We focus primarily on seeking relative value
in a risk-adjusted framework, while relying on careful analysis and research
to select securities for the portfolio.
Q. LET'S LOOK AT THE AREAS IN WHICH THE FUND INVESTS, STARTING WITH THE U.S.
GOVERNMENT SECTOR.
A. Earlier this year, we abandoned our cautious view on U.S. Treasuries and went
to a strategy of trading "the range"; that is, we would sell U.S. government
bonds near yields of 6.25% and buy them back when they approached yields of
6.75%. This reflected our view that no major change in interest-rate levels
was under way. On October 31, 1997, our weighting in U.S. Treasuries,
mortgages, and government agencies was 22% of assets.
Q. HOW ABOUT THE HIGH-YIELD CORPORATE MARKET?
A. Again, this market has confounded skeptics and posted impressive returns.
Spurred by growing mutual fund interest and favorable takeovers in the
telecommunications industry, returns again were in double digits. Thorough
research and diversification remain the keys to success in this sector. The
Fund's current weighting in this market is at approximately 43%.
Q. MOVING OUT OF THE UNITED STATES, WHAT ABOUT THE MAJOR INTERNATIONAL
MARKETS?
A. A year ago, we began shifting assets away from the international sovereign
high-grade sector and are now close to a zero weighting. This sector has been
the worst-performing market year to date of the major world bond markets. The
star performer for the past three quarters of the year, once again, has been
emerging market debt. Large returns have been seen in Brazil, Argentina,
Mexico, and Eastern Europe. We are limited to a 25% exposure in this area but
have been using the maximum allowable to take advantage of cheap bond
valuations. Several upgrades by rating agencies have occurred in this sector
in 1997. These holdings are all in U.S. dollars.
Q. FINALLY, WHAT ABOUT "CROSSOVER BONDS"? WHAT ARE THEY, AND HOW HAVE THEY
BENEFITED THE FUND?
A. These bonds have neither enough yield for the high-yield corporate market nor
enough ratings criteria for the investment-grade market. Often neglected,
crossover bonds can provide value, and even capital gains, if the research
has been thorough and the credits are migrating upward. They have been the
source of considerable capital gains for the Fund this year. Almost
exclusively comprised of utility bonds, one after another has been upgraded
by rating agencies and has improved in price. We are now 13% invested in
crossover credits.
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
PORTFOLIO MANAGER'S PROFILE
JAMES T. SWANSON JOINED MFS IN 1985 AS VICE PRESIDENT - INVESTMENTS AND WAS
NAMED SENIOR VICE PRESIDENT IN 1989. A GRADUATE OF COLGATE UNIVERSITY AND THE
HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, HE HAS MANAGED
MFS(R) STRATEGIC INCOME FUND SINCE 1991.
<PAGE>
FUND FACTS
OBJECTIVE: THE FUND'S INVESTMENT OBJECTIVE IS CAPITAL
APPRECIATION.
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 9, 1997
SIZE: $162.0 MILLION NET ASSETS AS OF OCTOBER 31, 1997
PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Strategic Income Fund -- Class A shares in comparison to
various market indicators. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are unmanaged
and do not reflect any fees or expenses. The performance of other share classes
will be greater than or less than the line shown, based on differences in
charges and fees paid by shareholders investing in different classes. It is not
possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended October 31, 1997)
<TABLE>
<CAPTION>
LEHMAN BROTHERS SALOMON BROTHERS
MFS STRATEGIC INCOME S&P 500 GOVERNMENT/CORPORATE WORLD GOVERNMENT CONSUMER PRICE
FUND - CLASS A COMPOSITE INDEX BOND INDEX BOND INDEX INDEX - U.S.
<S> <C> <C> <C> <C> <C>
10/92 $ 9,500 $10,000 $10,000 $10,000 $10,000
10/93 10,800 11,500 11,400 11,200 10,300
10/94 10,400 11,900 10,800 11,600 10,600
10/95 12,000 15,100 12,600 13,400 10,800
10/96 13,200 18,700 13,300 14,100 11,200
10/97 14,598 24,748 14,434 14,340 11,396
</TABLE>
<PAGE>
[Graphic Omitted]
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended October 31, 1997)
<TABLE>
<CAPTION>
LEHMAN BROTHERS SALOMON BROTHERS
MFS STRATEGIC INCOME S&P 500 GOVERNMENT/CORPORATE WORLD GOVERNMENT CONSUMER PRICE
FUND - CLASS A COMPOSITE INDEX BOND INDEX BOND INDEX INDEX - U.S.
<S> <C> <C> <C> <C> <C>
10/87 $ 9,500 $10,000 $10,000 $10,000 $10,000
10/89 11,800 14,500 12,400 11,500 10,900
10/91 14,300 17,900 15,100 14,300 11,900
10/93 17,500 22,700 19,000 18,200 12,600
10/95 19,500 29,700 21,000 21,700 13,300
10/97 23,810 48,770 24,087 23,303 14,016
</TABLE>
[Graphic Omitted]
AVERAGE ANNUAL TOTAL RETURNS AS OF OCTOBER 31, 1997
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Strategic Income Fund (Class A)
including 4.75% sales charge (SEC results) + 5.13% +10.11% + 7.76% + 8.21%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class A)
at net asset value +10.40% +11.92% + 8.81% + 9.10%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class B) with CDSC
(SEC results) + 5.64% +10.35% + 7.87% + 9.26%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class B)
at net asset value + 9.64% +11.16% + 8.16% + 9.26%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class C) with CDSC
(SEC results) + 8.68% +11.20% + 8.30% + 9.33%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class C)
at net asset value + 9.68% +11.20% + 8.30% + 9.33%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Strategic Income Fund (Class I)
at net asset value +10.81% +12.06% + 8.89% + 9.63%
- -----------------------------------------------------------------------------------------------------------------------------------
Average multi-sector income fund* + 9.83% +10.98% + 9.18% +10.04%
- -----------------------------------------------------------------------------------------------------------------------------------
Salomon Brothers World Government Bond Index**(+++) + 1.80% + 7.31% + 7.48% + 8.83%
- -----------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Goverment/Corporate Bond Index**(++) + 8.81% +10.03% + 7.62% + 9.19%
- -----------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Composite Index**# +32.12% +27.51% +19.87% +17.17%
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index**(+) + 2.09% + 2.63% + 2.65% + 3.43%
- -----------------------------------------------------------------------------------------------------------------------------------
*Source: Lipper Analytical Services, Inc.
**Source: CDA/Wiesenberger.
#The Standard & Poor's 500 Composite Index is a popular, unmanaged
index of common stock total return performance.
(+)The Consumer Price Index is published by the U.S. Bureau of Labor
Statistics and measures the cost of living (inflation).
(++)The Lehman Brothers Government/Corporate Bond Index is an unmanaged,
market-value-weighted index of all debt obligations of the U.S. Treasury
and U.S. government agencies and of all publicly issued fixed-rate,
nonconvertible, investment-grade domestic corporate debt.
(+++)The Salomon Brothers World Government Bond Index is unmanaged and
consists of complete universes of government bonds with remaining
maturities of at least five years.
</TABLE>
<PAGE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class C
shares have no initial sales charge but, along with Class B shares, have higher
annual fees and expenses than Class A shares. Class C share purchases are
subject to a 1% CDSC if redeemed within 12 months of purchase. Class I shares
have no sales charge or Rule 12b-1 fees and are only available to certain
institutional investors.
Class B and Class C share results include the performance and the operating
expenses (e.g., Rule 12b-1 fees) of the Fund's Class A shares for periods prior
to the inception of Class B and Class C shares. Because operating expenses
attributable to Class B and Class C shares are higher than those of Class A
shares, Class B and Class C share performance generally would have been lower
than Class A share performance. The Class A share performance included within
the Class B and Class C share SEC performance has been adjusted to reflect the
CDSC generally applicable to Class B and Class C shares rather than the initial
sales charge generally applicable to Class A shares.
Class I share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the inception
of Class I shares. Because operating expenses attributable to Class A shares are
greater than those of Class I shares, Class I share performance generally would
have been higher than Class A share performance. The Class A share performance
included within the Class I share performance has been adjusted to reflect the
fact that Class I shares have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1997
QUALITY RATINGS
[Graphic Omitted]
"BB" and Below ............................... 70%
"BBB" ........................................ 5%
"A" .......................................... 3%
"AA" ......................................... 1%
Not Rated .................................... 6%
U.S. Government and Agency Obligations ....... 15%
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
DIVIDEND-RECEIVED DEDUCTION
FOR THE YEAR ENDED OCTOBER 31, 1997, THE AMOUNT OF DISTRIBUTIONS FROM
ORDINARY INCOME ELIGIBLE FOR THE 70% DIVIDEND-RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 1.25%.
<PAGE>
PORTFOLIO OF INVESTMENTS - October 31, 1997
Stocks
- -------------------------------------------------------------------------------
ISSUER SHARES VALUE
- -------------------------------------------------------------------------------
Apparel and Textiles
Ithaca Industries, Inc.* 8,000 $ 40,000
- -------------------------------------------------------------------------------
Building
Atlantic Gulf Communities Corp.(+)* 100 $ 481
- -------------------------------------------------------------------------------
Telecommunications
NEXTEL Communications, Inc., "A"* 774 $ 20,318
- -------------------------------------------------------------------------------
Total Stocks (Identified Cost, $112,490) $ 60,799
- -------------------------------------------------------------------------------
Preferred Stock - 1.9%
- -------------------------------------------------------------------------------
Consumer Goods and Services - 0.3%
Renaissance Cosmetics, Inc., 14.00s 752 $ 503,840
- -------------------------------------------------------------------------------
Entertainment - 0.8%
Time-Warner, Inc., "K", 10.25s 1,141 $ 1,300,740
- -------------------------------------------------------------------------------
Media - 0.4%
Cablevision Systems Corp., 11.125s 5,977 $ 657,470
- -------------------------------------------------------------------------------
Utilities - Electric - 0.4%
Long Island Lighting Co., 7.95s 25,000 $ 660,937
- -------------------------------------------------------------------------------
Total Preferred Stock
(Identified Cost, $2,947,313) $ 3,122,987
- -------------------------------------------------------------------------------
Warrants
- -------------------------------------------------------------------------------
Renaissance Cosmetics, Inc.,
Expiration Date 8/31/06* 655 $ 7
ICO, Inc., Expiration Date 7/01/02* 62,500 41,250
- -------------------------------------------------------------------------------
Total Warrants (Identified Cost, $51,787) $ 41,257
- -------------------------------------------------------------------------------
Rights
- -------------------------------------------------------------------------------
United Mexican States Expiration
Date 6/30/03 (Identified Cost, $0)* 1,000 $ 0
- -------------------------------------------------------------------------------
Bonds - 91.9%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- -------------------------------------------------------------------------------
U.S. Bonds - 63.4%
Aerospace - 1.3%
BE Aerospace, Inc., 9.875s, 2006 $1,000 $ 1,060,000
K & F Industries, Inc., 9.25s, 2007## 1,000 1,007,500
------------
$ 2,067,500
- -------------------------------------------------------------------------------
Automotive - 1.4%
Exide Corp., 10s, 2005 $ 750 $ 787,500
Hayes Wheels International, Inc.,
9.125s, 2007## 1,000 1,030,000
Titan Wheel International, Inc.,
8.75s, 2007 450 465,750
------------
$ 2,283,250
- -------------------------------------------------------------------------------
Banks and Credit Companies - 1.0%
Beaver Valley Funding Corp., 9s, 2017 $1,500 $ 1,662,465
- -------------------------------------------------------------------------------
Building - 0.2%
Nortek, Inc., 9.875s, 2004 $ 250 $ 256,250
Nortek, Inc. "B", 9.25s, 2007 60 61,800
UDC Homes, Inc., Trust 14.5s, 2000(+) 6 3,048
------------
$ 321,098
- -------------------------------------------------------------------------------
Chemicals - 2.1%
Harris Chemical North America, Inc.,
10.25s, 2001 $1,000 $ 1,030,000
NL Industries, Inc., 11.75s, 2003 250 275,000
Sterling Chemicals, Inc., 11.25s, 2007 25 27,750
Sterling Chemicals, Inc., 11.75s, 2006 1,000 1,115,000
UCC Investors Holdings, Inc., 0s to 1998,
12s, 2005 1,000 950,000
------------
$ 3,397,750
- -------------------------------------------------------------------------------
Consumer Goods and Services - 3.2%
Chiquita Brands International, Inc.,
9.125s, 2004 $ 500 $ 512,500
E & S Holdings Corp., 10.375s, 2006 1,000 850,000
Iron Mountain, Inc., 10.125s, 2006 670 726,950
Kindercare Learning Centers, Inc. "B",
9.5s, 2009 300 294,000
Philip Morris Cos. Inc., 7.75s, 2027 1,000 1,050,200
Polymer Group, Inc. "B", 9s, 2007 1,000 990,000
Sealy Corp., 10.25s, 2003 500 532,500
Westpoint Stevens, Inc., 9.375s, 2005 250 261,250
------------
$ 5,217,400
- -------------------------------------------------------------------------------
Containers - 1.7%
Gaylord Container Corp. "B", 9.75s, 2007 $1,225 $ 1,234,188
Stone Container Corp., 9.875s, 2001 500 507,500
U.S. Can Corp., 10.125s, 2006 900 945,000
------------
$ 2,686,688
- -------------------------------------------------------------------------------
Defense Electronics - 0.3%
Alliant Techsystem., Inc., 11.75s, 2003 $ 500 $ 545,000
- -------------------------------------------------------------------------------
Electrical Equipment - 0.6%
Williams Scotsman, Inc., 9.875s, 2007## $1,000 $ 1,035,000
- -------------------------------------------------------------------------------
Entertainment - 0.6%
AMC Entertainment, Inc., 9.5s, 2009 $ 200 $ 205,000
Cinemark USA, Inc., 9.625s, 2008 750 765,000
Marvel Holdings, Inc. "B", 0s, 1998 (Chapter 11) 445 63,413
------------
$ 1,033,413
- -------------------------------------------------------------------------------
Financial Institutions - 3.2%
Dynex Capital, Inc., 7.875s, 2002 $1,500 $ 1,522,035
Jefferies Group, Inc., 7.5s, 2007## 2,500 2,543,750
Waterford 3 Funding Corp., 8.09s, 2017 1,000 1,050,090
------------
$ 5,115,875
- -------------------------------------------------------------------------------
Food and Beverage Products - 1.9%
Borden, Inc., 8.375s, 2016 $ 750 $ 766,688
Borden, Inc., 9.25s, 2019 1,750 1,823,027
Specialty Foods Corp., 10.25s, 2001 500 497,500
------------
$ 3,087,215
- -------------------------------------------------------------------------------
Forest and Paper Products - 0.8%
Calmar, Inc., 11.5s, 2005 $ 250 $ 272,500
Silgan Holdings, Inc., 9s, 2009 1,000 1,015,000
------------
$ 1,287,500
- -------------------------------------------------------------------------------
Industrial - 0.6%
United Defense Industries, Inc.,
8.75s, 2007## $1,000 $ 1,000,000
- -------------------------------------------------------------------------------
Information, Paging and Technology - 1.3%
Brooks Fiber Properties, Inc., 0s to 2001,
10.875, 2006 $ 375 $ 305,625
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 1,200 882,000
Millicom International Cellular
Communications Corp., 0s to 2001,
13.5s, 2006 350 262,500
Sprint Spectrum LP, 11s, 2006 550 610,500
------------
$ 2,060,625
- -------------------------------------------------------------------------------
Insurance - 0.6%
Residential Reinsurance Ltd. "A",
8.363s, 2008(+) $1,000 $ 1,013,125
- -------------------------------------------------------------------------------
Machinery - 0.3%
AGCO Corp., 8.5s, 2006 $ 500 $ 517,500
- -------------------------------------------------------------------------------
Media - 1.4%
American Radio Systems Corp., 9s, 2006 $ 350 $ 371,875
EchoStar Satellite Broadcasting Corp.,
0s to 2000, 13.125s, 2004 750 603,750
Falcon Holdings Group, Inc., 11s, 2003 241 252,993
Intermedia Capital Partners IV, LP,
11.25s, 2006 75 82,125
Jones Intercable, Inc., 8.875s, 2007 500 510,000
Marcus Cable Operating Co., 13.5s, 2004 500 452,500
------------
$ 2,273,243
- -------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.3%
Beverly Enterprises, Inc., 9s, 2006 $ 460 $ 478,400
- -------------------------------------------------------------------------------
Metals and Minerals - 2.0%
Haynes International, Inc., 11.625s, 2004 $1,000 $ 1,150,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 309,000
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 750 813,750
WCI Steel, Inc., 10s, 2004 900 936,000
------------
$ 3,208,750
- -------------------------------------------------------------------------------
Oil Services - 0.8%
Clark USA, Inc., 10.875s, 2005 $ 500 $ 542,500
Falcon Drilling, Inc., 8.875s, 2003 500 528,750
Ferrell Gas LP, 10s, 2001 200 213,000
------------
$ 1,284,250
- -------------------------------------------------------------------------------
Oils - 0.7%
Clark Oil Refining Corp., 10.5s, 2001 $ 500 $ 517,500
Enserch Exploration, Inc., 7.54s, 2009## 250 252,350
Giant Inds., Inc., 9s, 2007## 400 398,000
------------
$ 1,167,850
- -------------------------------------------------------------------------------
Real Estate - 0.3%
George Town Real Estate Ltd., 5.9s, 2007(+) $ 500 $ 508,250
- -------------------------------------------------------------------------------
Restaurants and Lodging - 1.4%
Prime Hospitality Corp., 9.75s, 2007 $1,000 $ 1,060,000
Red Roof Inns, Inc., 9.625s, 2003 1,100 1,138,500
------------
$ 2,198,500
- -------------------------------------------------------------------------------
Retail - 0.1%
Revlon, Inc., 10.5s, 2003 $ 200 $ 212,000
- -------------------------------------------------------------------------------
Special Products and Services - 2.6%
AAF-McQuay, Inc., 8.875s, 2003 $ 550 $ 548,625
Buckeye Cellulose Corp., 8.5s, 2005 610 616,100
IMO Industries, Inc., 11.75s, 2006 500 550,000
International Knife and Saw, Inc.,
11.375s, 2006 850 913,750
Synthetic Industries, Inc. "B",
9.25s, 2007 1,025 1,060,875
Thermadyne Industries Holdings Corp.,
10.75s, 2003 500 530,000
------------
$ 4,219,350
- -------------------------------------------------------------------------------
Steel - 1.8%
Alaska Steel Holdings Corp., 9.125s, 2006 $1,000 $ 1,040,000
Armco, Inc., 9s, 2007## 1,000 997,500
Commonwealth Aluminum Corp., 10.75s, 2006 500 537,500
Republic Engineered Steels, Inc., 9.875s, 2001 250 240,000
------------
$ 2,815,000
- -------------------------------------------------------------------------------
Stores - 0.5%
Cole National Group, Inc., 8.625s, 2007## $ 750 $ 735,000
- -------------------------------------------------------------------------------
Supermarkets - 0.6%
Pathmark Stores, Inc., 9.625s, 2003 $ 500 $ 465,000
Ralph's Grocery Co., 10.45s, 2004 500 551,250
------------
$ 1,016,250
- -------------------------------------------------------------------------------
Telecommunications - 5.7%
Adelphia Communications Corp. "B",
9.875s, 2007 $ 75 $ 75,375
Allbritton Communications Co. "B",
9.75s, 2007 1,000 1,007,500
Cablevision Industries Corp., 9.25s, 2008 100 109,352
Comcast Cellular Holdings, Inc., 9.5s, 2007## 1,000 1,035,000
Comcast Corp., 9.375s, 2005 500 525,000
EchoStar Communications Corp., 0s to 1999,
12.875s, 2004 100 89,000
Fox/Liberty Networks LLC, Inc., 8.875s, 2007## 1,000 1,000,000
Granite Broadcasting Corp., 10.375s, 2005 280 282,800
ITC Deltacom, Inc., 11s, 2007## 40 43,000
NEXTEL Communications, Inc., 0s to 1999,
9.75s, 2004 500 420,000
Outdoor Systems, Inc., 8.875s, 2007 175 180,687
PanAmSat Corp., 12.75s, 2005(++) 1,093 1,267,880
PanAmSat LP/Capital Corp., 0s to 1998,
11.375s, 2003 1,250 1,247,025
T/SF Communications Corp., 10.375s, 2007## 150 147,000
Teleport Communications Group, Inc.,
0s to 2001, 11.25s, 2007 800 626,000
Western Wireless Corp., "A", 10.5s, 2007 500 536,250
WorldCom, Inc., 8.875s, 2006 590 643,519
------------
$ 9,235,388
- -------------------------------------------------------------------------------
Transportation - 0.1%
Moran Transportation Co., 11.75s, 2004 $ 100 $ 112,375
- -------------------------------------------------------------------------------
Utilities - Electric - 10.0%
Central Maine Power Company, 7.05s, 2008 $ 750 $ 724,095
El Paso Electric Co., 9.4s, 2011 1,000 1,126,500
First PV Funding Corp., 10.15s, 2016 337 362,154
First PV Funding Corp., 10.3s, 2014 707 773,592
Midland Cogeneration Venture Corp.,
10.33s, 2002 1,099 1,205,919
Midland Funding Corp., "B", 13.25s, 2006 2,500 3,204,300
Niagara Mohawk Power Corp., 8.77s, 2018 980 1,047,258
Niagara Mohawk Power Corp., 9.75s, 2005 2,500 2,843,875
North Atlantic Energy, 9.05s, 2002 500 507,995
Northeast Utilities "B", 8.38s, 2005 494 495,691
Texas & New Mexico Power Co., 10.75s, 2003 1,690 1,842,100
Texas & New Mexico Power Co., 12.5s, 1999 2,000 2,130,340
------------
$ 16,263,819
- -------------------------------------------------------------------------------
U.S. Government Agency Obligations - 8.2%
Government National Mortgage Association
GNMA, 7.5s, 2027 $6,462 $ 6,607,748
GNMA, 8.5s, 2025 6,360 6,668,163
------------
$ 13,275,911
- -------------------------------------------------------------------------------
U.S. Treasury Obligations - 5.8%
U.S. Treasury Bonds, 6.375s, 2027 $6,500 $ 6,699,030
U.S. Treasury Bonds, 6.5s, 2026 488 508,662
U.S. Treasury Notes, 6.25s, 2002 600 611,718
U.S. Treasury Notes, 6.5s, 2006 1,557 1,619,529
------------
$ 9,438,939
- -------------------------------------------------------------------------------
Total U.S. Bonds $102,774,679
- -------------------------------------------------------------------------------
Foreign Bonds - 28.5%
Argentina - 2.9%
Cia Energy Minas Gerais SA, 11.625s, 2004##
(Industrial) $1,000 $ 1,052,500
City of Buenos Aires, 11.25s, 2007 700 686,000
Hidroelectrica Alicura, 8.375s, 1999 (Electric
Utilities)## 1,000 990,000
Industrias Metalurgicas Pescarmona S.A.,
9.5s, 2002 (Electric Utilities)## 250 233,125
Republic of Argentina, 6.75s, 2005 480 409,200
Republic of Argentina, 9.75s, 2027 739 578,637
Republic of Argentina, 11.75s, 2007## 1,000 815,000
------------
$ 4,764,462
- -------------------------------------------------------------------------------
Brazil - 3.3%
CSN Iron SA, 9.125s, 2007
(Metals and Minerals)## $ 500 $ 426,625
Autopistas Sol S.A. "B",
10.25s, 2009## (Industrial) 1,250 1,125,000
Companhia Energetica de Minas, 9.125s, 2004
(Electric Utilities)## 1,500 1,365,000
Espirito Santo Centrais Escelsa, 10s, 2007
(Electric Utilities) 1,000 884,260
Federal Republic of Brazil, 6.813s, 2001 12 10,701
Federal Republic of Brazil, 10.125s, 2027 756 579,285
Leasing Bank Boston/Brazil, S.A.,
8.375s to 1999, 8.625s to 2001, 9s to
2004, 8.375s, 2004 (Finance)## 1,000 1,000,000
------------
$ 5,390,871
- -------------------------------------------------------------------------------
Canada - 1.0%
Gulf Canada, 9.25s, 2004 (Oil and Gas) 500 $ 529,000
Rogers Cablesystems, Inc., 10.125s, 2012
(Telecommunications) 500 525,000
Rogers Cantel, Inc., 9.375s, 2008
(Telecommunications) 500 528,750
------------
$ 1,582,750
- -------------------------------------------------------------------------------
Ecuador - 1.2%
Republic of Ecuador, 11.25s, 2002 2,000 $ 1,950,000
- -------------------------------------------------------------------------------
Foreign Bonds - continued
Greece - 1.5%
Fage Dairy Industries S.A., 9s, 2007
(Food and Beverage Products) 2,500 $ 2,418,750
- -------------------------------------------------------------------------------
Hong Kong - 1.2%
Guangzhou Shen Superhighway Holdings,
10.25s, 2007 (Construction)## 2,000 $ 1,880,000
- -------------------------------------------------------------------------------
Indonesia - 1.1%
APP International Finance Co., 11.75s, 2005
(Financial Institution) 500 $ 502,500
Indah Kiat Finance Mautitius Ltd., 10s, 2007
(Finance)## 250 227,187
PT Polysindo Eka Perkasa, 13s, 2001 (Textiles) 555 588,300
Tjiwi Kimia Finance Mauritius,
10s, 2004 (Finance) 500 452,500
------------
$ 1,770,487
- -------------------------------------------------------------------------------
Mexico - 5.2%
Empresas ICA Sociedad S.A., 5s, 2004
(Construction) $2,000 $ 1,500,000
Empresas ICA Sociedad S.A., 11.875s, 2001
(Construction) 2,000 2,148,800
Grupo Industrial Durango S.A., 12.625s, 2003
(Forest Products) 1,650 1,755,187
TFM SA De CV, 0s, 20090s to 2002, 11.75s, 2009
(Railroad)##* 1,500 946,875
United Mexican States, 11.5s, 2026 2,000 2,080,000
------------
$ 8,430,862
- -------------------------------------------------------------------------------
Netherlands - 0.2%
Polysindo International Finance Co.,
11.375s, 2006 (Finance) $ 250 $ 256,875
- -------------------------------------------------------------------------------
Panama - 2.7%
Republic of Panama, 3.75s, 2014 $3,000 $ 2,100,000
Republic of Panama, 4s, 2016 3,081 2,264,822
------------
$ 4,364,822
- -------------------------------------------------------------------------------
Philippines - 0.5%
Bangko Sentral Philipinas, 8.6s, 2027 $1,000 $ 811,050
- -------------------------------------------------------------------------------
Russia - 5.0%
Ministry of Finance, Russia, 10s, 2007 $1,000 $ 915,000
Russia Interest Note, floating rate, 2049(+)(S) 1,500 1,003,125
Russia Interest Notes, floating rate, 2049(+)(S) 1,000 668,750
Russia Principal Loan, floating rate, 2049(S) 2,000 1,195,000
Russia Principal Loan, 6.625s, 2049(S) 6,000 3,603,750
St. Petersburg Russia, 9.5s, 2002## 750 748,125
------------
$ 8,133,750
- -------------------------------------------------------------------------------
South Korea - 1.7%
City of Taegu, 7.375s, 2007 $1,250 $ 1,171,750
Korea Development Bank, 7.125s, 2001 (Bank) 750 741,210
Korea Development Bank, 7.25s, 2006 (Bank) 1,000 903,600
------------
$ 2,816,560
- -------------------------------------------------------------------------------
United Kingdom - 1.0%
Bell Cablemedia PLC, 0s to 2000,
11.875s, 2005 (Telecommunications) $ 500 $ 432,500
Diamond Cable Communications Corp. PLC,
0s to 2000, 11.75s, 2007
(Telecommunications) 1,250 800,000
Diamond Cable Communications Corp. PLC,
0s to 2000, 11.75, 2005 (Telecommunications) 250 183,750
Central Transportation Rental Finance Corp.,
9.5s, 2003 (Construction Services) 143 152,033
------------
$ 1,568,283
- -------------------------------------------------------------------------------
Total Foreign Bonds $ 46,139,522
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $150,681,551) $148,914,201
- -------------------------------------------------------------------------------
Contingent Promissory Note - 1.6%
- -------------------------------------------------------------------------------
Cargill, interest rate linked to commodity
index, matures in 2002 (Illiquid)(+)
(Identified Cost $2,531,608) $2,500 $ 2,532,438
- -------------------------------------------------------------------------------
Short-Term Obligations - 0.8%
- -------------------------------------------------------------------------------
CSFB Moscow Note, due 12/30/97(+)
at Amortized Cost and Value $1,250 $ 1,227,505
- -------------------------------------------------------------------------------
Repurchase Agreement - 6.0%
- -------------------------------------------------------------------------------
Goldman Sachs, dated 10/31/97, due 11/03/97,
total to be received $9,785,646 (secured
by various U.S. Treasury and federal
agency obligations in a jointly traded
account), at cost $9,781 $ 9,781,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $167,333,254) $165,680,187
Other Assets, Less Liabilities - (2.2)% (3,654,098)
- -------------------------------------------------------------------------------
Net Assets - 100.0% $162,026,089
- -------------------------------------------------------------------------------
*Non-income producing security.
##SEC Rule 144A restriction.
(+)Restricted security.
(++)Payment in kind.
(S)When issued security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
OCTOBER 31, 1997
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $167,333,254) $165,680,187
Cash 2,203
Net receivable for forward foreign currency exchange
contracts closed or subject to master netting agreements 136,254
Receivable for Fund shares sold 1,802,187
Receivable for investments sold 3,991,219
Interest receivable 3,095,826
Other assets 518,181
------------
Total assets $175,226,057
------------
Liabilities:
Payable for Fund shares reacquired $ 65,708
Payable for investments purchased 12,962,853
Payable to affiliates -
Management fee 1,748
Shareholder servicing agent fee 568
Distribution fee 1,607
Accrued expenses and other liabilities 167,484
------------
Total liabilities $ 13,199,968
------------
Net assets $162,026,089
------------
Net assets consist of:
Paid-in capital $160,789,071
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (1,516,813)
Accumulated undistributed net realized gain on investments
and foreign currency transactions 2,863,036
Accumulated distributions in excess of net investment
income (109,205)
------------
Total $162,026,089
============
Shares of beneficial interest outstanding 19,750,139
============
Class A shares:
Net asset value and redemption price per share
(net assets of $69,873,921 / 8,480,135 shares of beneficial
interest outstanding) $8.24
=====
Offering price per share (100 / 95.25) $8.65
=====
Class B shares:
Net asset value and offering price per share
(net assets $71,458,530 / 8,734,516 shares of
beneficial interest outstanding) $8.18
=====
Class C shares:
Net asset value and offering price per share
(net assets of $20,464,021 / 2,507,639 shares of
beneficial interest outstanding) $8.16
=====
Class I shares:
Net asset value and offering price per share
(net assets of $229,617 / 27,849 shares of beneficial
interest outstanding) $8.25
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 9,471,661
Dividend 227,263
-----------
Total investment income $ 9,698,924
-----------
Expenses -
Management fee $ 1,231,230
Administrative fee 11,935
Trustees' compensation 46,467
Shareholder servicing agent fee 122,146
Shareholder servicing agent fee (Class A) 12,726
Shareholder servicing agent fee (Class B) 9,614
Shareholder servicing agent fee (Class C) 1,380
Distribution and service fee (Class A) 196,098
Distribution and service fee (Class B) 405,984
Distribution and service fee (Class C) 90,518
Custodian fee 88,250
Auditing fees 55,991
Printing 44,036
Postage 34,499
Legal fees 6,167
Miscellaneous 139,880
-----------
Total expenses $ 2,496,921
Fees paid indirectly (38,264)
Reduction of expenses by investment adviser (1,317,180)
-----------
Net expenses $ 1,141,477
-----------
Net investment income $ 8,557,447
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 2,837,659
Written option transactions 29,505
Foreign currency transactions (225,492)
Futures contracts (11,071)
-----------
Net realized gain on investments $ 2,630,601
-----------
Change in unrealized appreciation (depreciation) -
Investments $(3,012,128)
Written options (22,603)
Translation of assets and liabilities in foreign currencies 312,399
-----------
Net unrealized loss on investments $(2,722,332)
-----------
Net realized and unrealized loss on investments and
foreign currency $ (91,731)
-----------
Increase in net assets from operations $ 8,465,716
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997 1996
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 8,557,447 $ 5,127,428
Net realized gain on investments and
foreign currency transactions 2,630,601 427,669
Net unrealized gain (loss) on investments
and foreign currency translation (2,722,332) 870,240
------------ ------------
Increase in net assets from operations $ 8,465,716 $ 6,425,337
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) (4,703,670) $ (3,527,319)
From net investment income (Class B) (3,069,009) (1,123,277)
From net investment income (Class C) (714,530) (266,632)
From net investment income (Class I) (3,175) --
Net realized gain on investments and
foreign currency transactions (Class A) (460,894) (400,584)
Net realized gain on investments and
foreign currency transactions (Class B) (246,359) (87,623)
Net realized gain on investments and
foreign currency transactions (Class C) (50,625) (10,865)
------------ ------------
Total distributions declared to shareholders (9,248,262) $ (5,416,300)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $116,677,314 $ 46,730,577
Net asset value of shares issued to
shareholders in reinvestment of
distributions 5,143,317 2,632,478
Cost of shares reacquired (39,283,790) (21,213,968)
------------ ------------
Increase in net assets from Fund
share transactions 82,536,841 $ 28,149,087
------------ ------------
Total increase in net assets 81,754,295 $ 29,158,124
Net assets:
At beginning of year 80,271,794 51,113,670
------------ ------------
Atend of year (including accumulated
distributions in excess of net
investment income and accumulated
undistributed net investment income of
$(109,205) and $61,857, respectively) $162,026,089 $ 80,271,794
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997 1996 1995 1994 1993
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.19 $ 8.07 $ 7.57 $ 8.34 $ 8.00
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.69 $ 0.62 $ 0.60 $ 0.48 $ 0.52
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.13 0.18 0.48 (0.74) 0.42
------ ------ ------ ------ ------
Total from investment operations $ 0.82 $ 0.80 $ 1.08 $(0.26) $ 0.94
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.69) $(0.60) $(0.58) $ -- $(0.24)
From net realized gain on investments and
foreign currency transactions (0.08) (0.08) -- -- (0.32)
In excess of net investment income and foreign
currency transactions -- -- -- (0.06) --
In excess of net realized gain on investments
and foreign currency transactions -- -- -- (0.04) --
From paid in capital -- -- -- (0.41) (0.04)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.77) $(0.68) $(0.58) $(0.51) $(0.60)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.24 $ 8.19 $ 8.07 $ 7.57 $ 8.34
====== ====== ====== ====== ======
Total return(+) 10.40% 10.42% 15.00% (3.15)% 12.36%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.79% 1.13% 1.54% 1.71% 1.98%
Net investment income 8.26% 7.63% 7.86% 6.11% 5.92%
Portfolio turnover 217% 287% 249% 153% 275%
Net assets at end of period (000 omitted) $69,874 $49,432 $41,688 $44,032 $60,120
#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 and/or the distributor voluntarily waived a
portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had
been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment income $ 0.58 $ 0.54 $ 0.53 $ 0.44 $ 0.49
Ratios (to average net assets)
Expenses## 2.01% 2.06% 2.47% 2.21% 2.14%
Net investment income 7.04% 6.70% 6.89% 5.62% 5.76%
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
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 and/or the distributor voluntarily waived a
portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had
been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment income $ 0.61 $ 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>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1997 1996 1995 1994 1993***
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.14 $ 8.03 $ 7.53 $ 8.33 $ 8.28
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.61 $ 0.56 $ 0.55 $ 0.45 $ 0.04
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.15 0.18 0.48 (0.78) 0.05
------ ------ ------ ------ ------
Total from investment operations $ 0.76 $ 0.74 $ 1.03 $(0.33) $ 0.09
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.64) $(0.55) $(0.53) -- $(0.03)
From net realized gain on investments and
foreign currency transactions (0.08) (0.08) -- -- (0.01)
In excess of net investment income and
foreign currency transactions -- -- -- (0.05) --
In excess of net realized gain on investments
and foreign currency transactions -- -- -- (0.03) --
From paid in capital -- -- -- (0.39) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.72) $(0.63) $(0.53) $(0.47) $(0.04)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.18 $ 8.14 $ 8.03 $ 7.53 $ 8.33
====== ====== ====== ====== ======
Total return 9.64% 9.68% 14.23% (3.97)% 1.15%(++)
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.44% 1.80% 2.27% 2.43% 3.03%(+)
Net investment income 7.51% 7.02% 7.15% 5.97% 5.22%(+)
Portfolio turnover 217% 287% 249% 153% 275%
Net assets at end of period (000 omitted) $71,459 $25,361 $8,365 $5,350 $265
(+)Annualized.
(++)Not annualized.
***For the period from the inception of Class B shares, September 7,
1993, through October 31, 1993.
#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 and/or the distributor voluntarily waived a
portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had
been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment income $ 0.50 $ 0.49 $ 0.48 $ 0.41 $ --
Ratios (to average net assets)
Expenses## 2.66% 2.73% 3.20% 2.92% --
Net investment income 6.29% 6.09% 6.18% 5.48% --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
PERIOD
YEAR ENDED OCTOBER 31, ENDED
-------------------------------------------------------- OCTOBER 31,
1997 1996 1995 1994*** 1997****
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS C CLASS I
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.12 $ 8.00 $ 7.53 $ 7.53 $ 8.15
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.60 $ 0.57 $ 0.54 $ 0.12 $ 0.49
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions 0.16 0.18 0.48 (0.03) 0.15
------ ------ ------ ------ ------
Total from investment operations $ 0.76 $ 0.75 $ 1.02 $ 0.09 $ 0.64
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.64) $(0.55) $(0.55) $ -- $(0.54)
From net realized gain on investments and
foreign currency transactions (0.08) (0.08) -- -- --
From paid in capital -- -- -- (0.09) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.72) $(0.63) $(0.55) $(0.09) $(0.54)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.16 $ 8.12 $ 8.00 $ 7.53 $ 8.25
====== ====== ====== ====== ======
Total return 9.68% 9.80% 14.17% 1.23%(++) 5.98%(++)
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.44% 1.71% 2.20% 2.16%(+) 0.44%(+)
Net investment income 7.44% 7.12% 7.23% 8.99%(+) 7.69%(+)
Portfolio turnover 217% 287% 249% 153% 217%
Net assets at end of period (000 omitted) $20,464 $5,478 $1,060 $ 13 $230
(+)Annualized.
(++)Not annualized.
***For the period from the inception of Class B shares, September 7,
1993, through October 31, 1993.
#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 and/or the distributor voluntarily waived a
portion of their management fee and/or distribution fee,
respectively, for certain of the periods indicated. If the fee had
been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment income $ 0.50 $ 0.51 $ 0.46 $ 0.11 $ 0.40
Ratios (to average net assets)
Expenses## 2.66% 2.64% 3.13% 2.65%(+) 1.66%(+)
Net investment income 6.21% 6.19% 6.26% 8.50%(+) 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.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues and forward contracts, are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short- term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the 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 purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement. 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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, the Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying securities may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Investments in equity index contracts, or
contracts on related options, for purposes other than hedging may be made when
the Fund has cash on hand and wishes to participate in anticipated market
appreciation while the cash is being invested. Should interest or exchange rates
or securities prices move unexpectedly, the Fund may not achieve the anticipated
benefits of the futures contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The Fund will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Fund may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. 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 and
original issue discount 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.
Some government securities may be purchased on a "when-issued" or "forward
delivery" basis, which means that the securities will be delivered to the Fund
at a future date, usually beyond customary settlement time.
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.
The Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. Legal fees and other related expenses incurred to
preserve and protect the value of a security owned are added to the cost of the
security; other legal fees are expensed. Capital infusions, which are generally
non-recurring, incurred to protect or enhance the value of high-yield debt
securities, are reported as additions to the cost basis of the security. Costs
that are incurred to negotiate the terms or conditions of capital infusions or
that are expected to result in a plan of reorganization are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are expensed.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which 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 accumulated net realized
gains. During the year ended October 31, 1997, $238,125 was reclassified from
accumulated distributions in excess of net investment income to accumulated net
realized gain on investments due to differences between book and tax accounting
for mortgage-backed securities and currency transactions. This change had no
effect on the net assets or net asset value per share. At October 31, 1997,
accumulated distributions in excess of net investment income under book
accounting were different from tax accounting due to temporary differences in
accounting for currency transactions.
Capital gains taxes have been provided on unrealized and realized gains from
securities transactions in countries where such a capital gains tax is
applicable. Realized and unrealized gain is reported net of any capital gains
tax in the Statement of Operations.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective distribution
and service fees. All shareholders bear the common expenses of the Fund pro rata
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.
(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
reduction of expenses in the Statement of Operations.
Under a temporary expense agreement with MFS, MFS has voluntarily agreed to pay
all of the Fund's operating expenses, exclusive of management, distribution and
service fees.
Administrator - Effective March 1, 1997, 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 up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion:
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 $9,063 for the year ended
October 31, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$119,666 for the year ended October 31, 1997, 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 to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum
(reduced to a maximum of 0.15% per annum for shares sold prior to May 14, 1991)
of the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers, and payments to MFD wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. MFD retains the service fee for accounts not attributable
to a securities dealer which amounted to $23,105 for the year ended October 31,
1997. Fees incurred under the distribution plan during the year ended October
31, 1997, were 0.35% of average daily net assets attributable to Class A shares
on an annualized basis.
The Trustees have adopted a distribution plan relating solely to Class B and C
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares. MFD
will pay to securities dealers that enter into a sales agreement with MFD all or
a portion of the service fee attributable to Class B and Class C shares, and
will pay to such securities dealers all of the distribution fee attributable to
Class C shares. The service fee is intended to be additional consideration for
services rendered by the dealer with respect to Class B and Class C shares. MFD
retains the service fee for accounts not attributable to a securities dealer,
which amounted to $6,853 and $599 for Class B and Class C shares, respectively,
for the year ended October 31, 1997. Fees incurred under the distribution plan
during the year ended October 31, 1997, were 1.00% of average daily net assets
attributable to Class B and Class C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class C shares in
the event of a shareholder redemption within 12 months of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended October 31, 1997, were $5,979, $47,900 and $5,634 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
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15%, up to 0.22%, and up to 0.15% attributable to Class A, Class B, and
Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
PURCHASES SALES
- -------------------------------------------------------------------------------
U.S. government securities $ 50,478,453 $ 30,063,429
------------ ------------
Investments (non-U.S. government securities) $251,155,598 $190,426,258
------------ ------------
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 $167,569,480
------------
Gross unrealized depreciation $ (4,880,831)
Gross unrealized appreciation 2,991,538
------------
Net unrealized depreciation $ (1,889,293)
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
Class A Shares
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, 1997 YEAR ENDED OCTOBER 31, 1996
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Shares sold 4,259,003 $ 35,477,819 2,056,255 $ 16,667,005
Shares issued to shareholders
in reinvestment of
distributions 292,804 2,419,833 200,640 1,607,490
Shares reacquired (2,107,380) (17,447,525) (1,387,485) (11,133,559)
--------- ------------- --------- ------------
Net increase 2,444,427 $ 20,450,127 869,410 $ 7,104,936
========= ============= ========= ============
Class B Shares
<CAPTION>
YEAR ENDED OCTOBER 31, 1997 YEAR ENDED OCTOBER 31, 1996
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Shares sold 7,475,595 $ 61,884,637 2,785,248 $ 22,357,597
Shares issued to shareholders
in reinvestment of
distributions 270,174 2,222,066 98,830 787,774
Shares reacquired (2,127,213) (17,471,789) (809,863) (6,470,174)
--------- ------------- --------- -------------
Net increase 5,618,556 $ 46,634,914 2,074,215 $ 16,675,197
========= ============= ========= =============
Class C Shares
<CAPTION>
YEAR ENDED OCTOBER 31, 1997 YEAR ENDED OCTOBER 31, 1996
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
Shares sold 2,305,490 $ 19,083,155 962,710 $ 7,705,975
Shares issued to shareholders
in reinvestment of
distributions 60,726 498,246 29,851 237,214
Shares reacquired (533,281) (4,364,476) (450,415) (3,610,235)
--------- ------------- --------- ------------
Net increase 1,832,935 $ 15,216,925 542,146 $ 4,332,954
========= ============= ========= ============
</TABLE>
Class I Shares
PERIOD ENDED OCTOBER 31, 1997****
----------------------------------
SHARES AMOUNT
- -------------------------------------------------------------------
Shares sold 27,472 $ 231,703
Shares issued to shareholders
in reinvestment of
distributons 377 3,172
Shares reacquired -- --
--------- ----------
Net increase 27,849 $ 234,875
========= ==========
****For the period from the inception of Class I shares, January 9, 1997,
through October 31, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended October 31, 1997, was $871.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange
contracts, and futures contracts. The notional or contractual amounts of these
instruments represent the investment the Fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Written Option Transactions
<TABLE>
<CAPTION>
1997 CALLS 1997 PUTS
------------------------------------- -------------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
German Marks/British Pounds 2,537 $ 9,873 -- $ --
Japanese Government Bonds -- -- 155,000 12,885
Options terminated in
closing transactions -
Japanese Government Bonds -- -- (155,000) (12,885)
Options expire
German Marks/British Pounds (2,537) (9,873) -- --
----- -------- ------- ------
OUTSTANDING, END OF PERIOD -- $ -- -- $ --
===== ======== ======= ======
</TABLE>
Forward Foreign Currency Exchange Contracts
Forward foreign currency purchases and sales under master netting agreements
amounted to a net receivable of $76,387 with Merrill Lynch, $56,735 with Bankers
Trust, and $3,132 with Swiss Bank at October 31, 1997.
At October 31, 1997, 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 October 31, 1997, the
Fund owned the following restricted securities (constituting 4.3% 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 supplied
by a pricing service of brokers, or if not available, in good faith by or at the
direction of the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARES/
DESCRIPTION ACQUISITION PAR AMOUNT COST VALUE
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
Atlantic Gulf Communities 9/21/89 - 9/25/95 100 $ -- $ 481
Cargill, 2002 8/29/97 2,500,000 2,531,608 2,532,438
CSFB Moscow Note, 0s, 1997 4/25/97 1,250,000 1,184,418 1,227,505
Georgetown Real Estate, 5.9s, 2007 12/20/96 500,000 500,000 508,250
Residential Reinsurance,
8.363s, 2008 6/06/97 1,000,000 1,000,000 1,013,125
Russia Interest Notes,
floating rate, 2049 8/28/97 1,500,000 1,193,437 1,003,125
Russia Interest Notes,
floating rate, 2049 3/18/97 1,000,000 708,750 668,750
----------
$6,953,674
==========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Strategic
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income Fund, including the schedule of portfolio investments as of
October 31, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the four years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits. The financial highlights 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 October 31, 1997, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Strategic Income Fund at October 31, 1997, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the four years in
the period then ended, in conformity with generally accepted accounting
principles.
[Graphic Omitted]
Boston, Massachusetts
December 12, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
<CAPTION>
MFS(R) Strategic Income Fund
<S> <C>
Trustees Secretary
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; Assistant Secretary
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Custodian
Cambridge Trust Company State Street Bank and Trust Company
Marshall N. Cohan - Private Investor Auditors
Ernst & Young LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; Investor Information
Professor of Surgery, Harvard Medical School For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime from a
The Hon. Sir J. David Gibbons, KBE - Chief touch-tone telephone.
Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd. For information on MFS mutual funds, call
your financial adviser or, for an information
Abby M. O'Neill - Private Investor; kit, call toll free: 1-800-637-2929 any
Director, Rockefeller Financial Services, Inc. business day from 9 a.m. to 5 p.m. Eastern
(investment advisers) time (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, Investor Service
Benchmark Advisors, Inc. (corporate financial MFS Service Center, Inc.
consultants); President, Benchmark P.O. Box 2281
Consulting Group, Inc. (office services); Boston, MA 02107-9906
Trustee, Landmark Funds (mutual funds)
For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from
President, Director and Secretary, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company
For service to speech- or hearing-impaired,
Jeffrey L. Shames* - President and Director, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time. (To
use this service, your phone must be equipped
J. Dale Sherratt - President, Insight Resources, with a Telecommunications Device for the Deaf.)
Inc. (acquisition planning specialists)
For share prices, account balances, and
Ward Smith - Former Chairman (until 1994), exchanges, call toll free: 1-800-MFS-TALK
NACCO Industries; Director, Sundstrand (1-800-637-8255) anytime from a touch-tone
Corporation telephone.
Investment Adviser World Wide Web
Massachusetts Financial Services Company www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc. [Dalbar Logo] For the fourth year in a row, MFS earned a
500 Boylston Street #1 ranking in the DALBAR, Inc. Broker/Dealer
Boston, MA 02116-3741 Survey, Main Office Operations Service Quality Category. The
firm achieved a 3.42 overall score on a scale of 1 to 4 in the
Portfolio Manager 1997 survey. A total of 111 firms responded, offering input on
James T. Swanson* the quality of service they received from 29 mutual fund
companies nationwide. The survey contained questions about
Treasurer service quality in 11 categories, including "knowledge of
W. Thomas London* operations contact," "keeping you informed," and "ease of
doing business" with the firm.
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
-------------
MFS(R) STRATEGIC BULK RATE
INCOME FUND U.S. POSTAGE
PAID
500 Boylston Street MFS
Boston, MA 02116-3741 -------------
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MSI-2 12/97 24M 34/234/334/834
