<PAGE>
[Logo]M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[Graphic Omitted]
MFS(R) STRATEGIC
INCOME FUND
SEMIANNUAL REPORT o APRIL 30, 1999
DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 38)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 21
Notes to Financial Statements ............................................. 28
MFS' Year 2000 Readiness Disclosure ....................................... 37
Trustees and Officers ..................................................... 45
MFS(R) ORIGINAL RESEARCH(SM)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
Over 75 years ago, MFS invented the mutual fund, giving Americans greater
access to the investment markets. Since then, we have been guided by a number
of fundamental principles, including diversification and professional
management backed by MFS(R) Original Research(SM), a process by which we seek
long-term investment opportunities.
We have found that these principles have matched those of our shareholders. In a
recent survey for MFS by Roper Starch Worldwide, Inc., a major consumer research
firm, over 60% of mutual fund shareholders said they are investing for long-term
goals such as retirement. The survey also showed that investors realize that the
extraordinary stock market gains of the past few years cannot be sustained.
These views certainly seem to have guided investors during last year's market
correction. Beginning with the collapse of Asian markets at the end of 1997 and
continuing with the volatility in U.S. markets through October of 1998, only 7%
of mutual fund investors took money out of the stock market.
We are even more pleased that MFS investors reacted calmly to last year's
market turmoil, indicating their commitment to diversification. As a result,
throughout the late summer and fall of 1998, daily purchases of MFS stock and
bond funds were well ahead of redemptions.
Over the past year or so, however, diversified investment programs have not
financially rewarded investors. A very narrow band of about 25 stocks
representing the largest U.S. growth companies has, until recently, vastly
outperformed the rest of the market. In 1998, for example, the return on the
Standard & Poor's 500 Composite Index (a popular, unmanaged index of common
stock total return performance) increased 28.58%. However, over half of the
stocks in the index returned less than 10%, including 198 stocks that posted
negative returns.
While 1997 and 1998 were good years for large-company growth stocks, 1996 was
dominated by the mid-sized value category. Prices of value stocks do not fully
reflect the companies' underlying values or future prospects. In 1995, the
best-performing sector was small-company growth stocks. We believe this change
of market leadership shows that while diversification may not provide the best
performance in the short run, it should benefit investors over the long term. In
fact, as 1999 progresses, we are seeing signs of renewed strength from a broader
group of industries, including electric utilities and paper products and
chemical companies. We believe our diversified MFS Family of Funds(R), supported
by Original Research, is well positioned to benefit from a broader market.
Most mutual fund investors refrain from trying to predict short-term trends.
Despite the large stock market gains of the past several years, the Roper
Starch survey shows that people do not see performance as the only
reason to invest. These investors also cite a desire to put investment
decisions in the hands of experts, a belief that mutual funds can be less
risky than other investments, and an appreciation of the convenience of mutual
fund investing.
We appreciate the fact that our fund shareholders and their advisers share our
belief that mutual fund investing is not a way to speculate in the markets but
is a way to use the investment markets to help them work toward their long-
term goals. Our goal at MFS is to offer professionally managed investment
products with the potential to sustain returns over a variety of market
cycles.
We thank you for your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
May 17, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James T. Swanson]
James T. Swanson
For the six months ended April 30, 1999, Class A shares of the Fund provided a
total return of 8.65%, Class B shares 8.23%, Class C shares 8.25%, and Class I
shares 8.84%. These returns include the reinvestment of distributions but
exclude the effects of any sales charges.
During the same period, the average multisector income fund tracked by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance, returned 6.13%. The Fund's results also compare to returns for
the same period for the following unmanaged indices: a -0.11% return for the
Lehman Brothers Government/Corporate Bond Index (the Lehman Index), a -3.35%
return for the Salomon Brothers World Government Index (the Salomon Index),
and an 8.91% return for the Credit Suisse First Boston High Yield Index (the
Credit Suisse Index). The Lehman Index is weighted by market value and
consists of all U.S. Treasury and U.S. government-agency debt and of all
publicly issued fixed-rate, nonconvertible, investment-grade domestic
corporate debt. The Salomon Index is made up of government bonds with
remaining maturities of at least five years, and the Credit Suisse Index is a
portfolio priced by traders to mirror the performance of the high-yield debt
market.
Q. WHY HAS THE FUND BEEN PERFORMING SO WELL?
A. One of the main reasons is good performance from the Fund's emerging market
debt holdings. Toward the end of last year, we began to see signs of
recovery in some emerging markets and selectively bought bonds from these
markets at attractive prices. Since then, bond prices have steadily
increased as countries such as South Korea and Thailand have taken
meaningful steps toward economic reform. Also, the Latin American recession
was not as bad as people feared. There had been concern that Brazil was
going to default on its debt. That didn't happen, primarily because the
Brazilian government undertook important economic reforms while keeping
inflation in check. As a result, a "Latin contagion" that could have spread
from Brazil to the rest of Latin America never materialized.
Q. DO YOU HAVE EXAMPLES OF EMERGING MARKET INVESTMENTS THAT HAVE WORKED
PARTICULARLY WELL?
A. One example is Kookmin Bank in South Korea. We bought Kookmin's bonds last
year at a very low price, about 50 cents on the dollar. That was before the
bank was included in South Korea's national bank rescue plan. Since then,
Goldman Sachs has purchased 2% of Kookmin, and the bank's bond prices have
shot up almost 40% from their lows. At that point, we sold our position in
Kookmin. This is a reflection of the overall improvement in South Korea,
where reforms in the banking system are giving financial institutions
around the world new confidence. That's been a huge help for the Fund. We
also bought Thai bank debt, which has risen in price as investor confidence
about that country has increased.
Q. HOW HAVE THE FUND'S CORPORATE BONDS PERFORMED?
A. They also have helped performance. After last summer's bond default by the
Russian government, investors' concerns about risk increased, leading to an
aggressive sell-off of high-yield and high-grade corporate bonds. One
sector hurt was convertible bonds, which can be exchanged into stock of the
companies that issue them. Because of the sell-off, many convertibles fell
to prices below their stock values as compared to their underlying bond
values. We felt the perception of risk was greater than the reality and
bought some of these convertible bonds at attractive prices, including Colt
Telecom Systems in the United Kingdom, Singapore Telephone, and Silicon
Graphics, a U.S. company that makes systems to produce 3-D computer images.
All of these companies have strong businesses, and their bonds performed
very well after we bought them. We since have sold Singapore
Telecommunications because its price reached a point that we felt reflected
the company's full value.
Q. HAVE THE FUND'S ALLOCATIONS CHANGED SINCE THE LAST REPORT?
A. We have increased the allocation to emerging markets from 17% to 23% of
assets. We also have 12% of assets in U.S. government securities (which
include U.S. Treasury, government-agency, and mortgage-backed securities),
10% in international government-issued debt, 12% in U.S. high-grade
corporate bonds, 32% in high-yield corporate bonds, and the rest in
convertible equities, preferred stocks, and cash.
Q. WHAT'S YOUR OUTLOOK ON THE BOND ENVIRONMENT?
A. Right now, we think the environment is still very favorable for bonds. The
European Central Bank recently lowered short-term interest rates by half a
percentage point. That pressured the rest of the world to lower, or at
least not raise, rates. In the United States, high productivity and steady
economic growth suggest that inflation is well contained. Inflation-
adjusted interest rates in the United States are high compared to other
countries, which means there is still room for U.S. rates to come down. We
think bond prices in the corporate and emerging market sectors could
advance still because they were oversold excessively as the result of last
year's crisis.
Q. ARE YOU CONCERNED THAT RENEWED ECONOMIC GROWTH IN ASIA AND EMERGING
MARKETS COULD LEAD TO HIGHER INFLATION?
A. That is a concern, but not an immediate one. In the past, fast growth has
pressured prices because of increased demand. But we've had almost 10 years
of growth in the United States without a resurgence of inflation, partly
due to more competition and better productivity through technology. This
pattern has been repeated around the world, and companies now have very
little room to raise prices. If we see any signs of inflation, we will
increase our holdings of short-maturity bonds in an effort to make the
portfolio's price less sensitive to rising interest rates.
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current 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.
It is not possible to invest directly in an index.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- --------------------------------------------------------------------------------
JAMES T. SWANSON IS A SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R).
HE IS PORTFOLIO MANAGER OF MFS(R) STRATEGIC INCOME FUND, MFS(R) GLOBAL
GOVERNMENTS FUND, MFS(R) GLOBAL GOVERNMENTS SERIES (PART OF MFS (R) VARIABLE
INSURANCE TRUST(SM)), THE STRATEGIC INCOME SERIES OFFERED THROUGH MFS(R)/SUN
LIFE ANNUITY PRODUCTS, AND TWO CLOSED-END FUNDS, MFS (R) CHARTER INCOME TRUST
AND MFS(R) MULTIMARKET INCOME TRUST.
MR. SWANSON JOINED MFS IN 1985 AS VICE PRESIDENT 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.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS(R) ORIGINAL
RESEARCH(SM), A COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING
SECURITIES.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
- --------------------------------------------------------------------------------
OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING IN FIXED-INCOME
SECURITIES. PLUS, THE FUND SEEKS OPPORTUNITIES TO
REALIZE CAPITAL APPRECIATION WHILE MAINTAINING A HIGH
LEVEL OF CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: OCTOBER 29, 1987
CLASS INCEPTION: CLASS A OCTOBER 29, 1987
CLASS B SEPTEMBER 7, 1993
CLASS C SEPTEMBER 1, 1994
CLASS I JANUARY 8, 1997
SIZE: $283.4 MILLION NET ASSETS AS OF APRIL 30, 1999
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. (See Notes to
Performance Summary for more information).
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH APRIL 30, 1999
CLASS A
10 Years/
6 Months 1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Cumulative Total Return +8.65% +0.35% +24.92% +51.62% +121.15%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +0.35% + 7.70% + 8.68% + 8.26%
- --------------------------------------------------------------------------------
SEC Results -- -4.42% + 5.97% + 7.63% + 7.73%
- --------------------------------------------------------------------------------
CLASS B
10 Years/
6 Months 1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Cumulative Total Return +8.23% -0.42% +22.44% +46.32% +112.32%
- --------------------------------------------------------------------------------
Average Annual Total Return -- -0.42% + 6.98% + 7.91% + 7.82%
- --------------------------------------------------------------------------------
SEC Results -- -4.06% + 6.15% + 7.62% + 7.82%
- --------------------------------------------------------------------------------
CLASS C
10 Years/
6 Months 1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Cumulative Total Return +8.25% -0.42% +22.44% +47.00% +114.30%
- --------------------------------------------------------------------------------
Average Annual Total Return -- -0.42% + 6.98% + 8.01% + 7.92%
- --------------------------------------------------------------------------------
SEC Results -- -1.33% + 6.98% + 8.01% + 7.92%
- --------------------------------------------------------------------------------
CLASS I
10 Years/
6 Months 1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Cumulative Total Return +8.84% +0.58% +25.59% +52.46% +122.17%
- --------------------------------------------------------------------------------
Average Annual Total Return -- +0.58% + 7.89% + 8.80% + 8.31%
- --------------------------------------------------------------------------------
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class C shares
("C") have no initial sales charge but, like B, have higher annual fees and
expenses than A. C SEC results reflect the 1% CDSC applicable to shares
redeemed within 12 months. Class I shares ("I") have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
B and C results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of A for periods prior to the inception of B and C.
Because operating expenses of B and C are higher than those of A, B and C
performance generally would have been lower than A performance. The A
performance included in the B and C SEC performance has been adjusted to
reflect the CDSC generally applicable to B and C rather than the initial sales
charge generally applicable to A.
I results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of I. Because operating expenses
of A are greater than those of I, I performance generally would have been
higher than A performance. The A performance included in the I performance has
been adjusted to reflect the fact that I have no initial sales charge.
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.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS.
<PAGE>
PORTFOLIO CONCENTRATION AS OF APRIL 30, 1999
QUALITY (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"B" 39.0%
"BB" 25.1%
"BBB" 16.7%
Governments 14.3%
"CCC" 2.9%
"A" 1.8%
"CC" 0.2%
The portfolio is actively managed, and holdings are subject to change.
<PAGE>
<TABLE>
<CAPTION>
PORTFOLIO OF INVESTMENTS (Unaudited) - April 30, 1999
Bonds - 97.1%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 56.4%
Aerospace - 1.5%
Argo Technology Corp., 8.625s, 2007 $ 1,250 $ 1,221,875
BE Aerospace, Inc., 9.875s, 2006 1,000 1,055,000
K & F Industries, Inc., 9.25s, 2007 1,000 1,032,500
United Defense Industries, Inc., 8.75s, 2007 950 957,125
------------
$ 4,266,500
- ------------------------------------------------------------------------------------------------------
Building - 0.8%
American Standard, Inc., 7.375s, 2008 $ 1,000 $ 990,000
Building Materials Corp., 8s, 2007 900 886,500
Nortek, Inc., 9.875s, 2004 270 281,475
UDC Homes, Inc., 14.5s, 2000 6 3,048
------------
$ 2,161,023
- ------------------------------------------------------------------------------------------------------
Business Machines - 0.9%
Silicon Graphics, Inc., 5.25s, 2004 $ 3,000 $ 2,493,750
- ------------------------------------------------------------------------------------------------------
Business Services - 1.8%
Anacomp, Inc., 10.875s, 2004 $ 1,200 $ 1,254,000
Interim Services, Inc., 4.5s, 2005 1,250 990,625
Iron Mountain, Inc., 10.125s, 2006 670 725,275
Pierce Leahy Corp., 9.125s, 2007 1,000 1,040,000
Williams Scotsman, Inc., 9.875s, 2007 1,000 1,043,750
------------
$ 5,053,650
- ------------------------------------------------------------------------------------------------------
Chemicals - 0.8%
NL Industries, Inc., 11.75s, 2003 $ 1,500 $ 1,601,250
Sterling Chemicals, Inc., 11.25s, 2007 25 23,500
UCAR Global Enterprises, Inc., 12s, 2005 500 528,125
------------
$ 2,152,875
- ------------------------------------------------------------------------------------------------------
Computer Software - Services - 0.3%
Unisystem Corp., 7.875s, 2008 $ 900 $ 942,750
- ------------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.8%
Bea Systems Inc., 4s, 2005## $ 3,000 $ 2,360,313
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 1.5%
Hayes Wheels International, Inc., 9.125s, 2007 $ 1,000 $ 1,042,500
Kindercare Learning Centers, Inc., 9.5s, 2009 300 318,000
Revlon Consumer Products Corp., 8.125s, 2006 900 891,000
Samsonite Corp., 10.75s, 2008 1,250 931,250
Synthetic Industries, Inc., 9.25s, 2007 1,025 1,066,000
------------
$ 4,248,750
- ------------------------------------------------------------------------------------------------------
Containers - 2.1%
Ball Corp., 8.25s, 2008 $ 2,250 $ 2,345,625
Gaylord Container Corp., 9.75s, 2007 1,225 1,179,062
Riverwood International Corp., 10.25s, 2006 500 520,000
Silgan Holdings, Inc., 9s, 2009 1,000 1,030,000
U.S. Can Corp., 10.125s, 2006 900 949,500
------------
$ 6,024,187
- ------------------------------------------------------------------------------------------------------
Energy - 1.5%
Clark USA, Inc., 10.875s, 2005 $ 500 $ 430,000
CMS Energy Corp., 6.75s, 2004## 1,000 981,390
Giant Industries, Inc., 9s, 2007 400 362,000
P&L Coal Holdings Corp., 9.625s, 2008 1,150 1,196,000
Pool Energy Services Co., 8.625s, 2008 1,235 1,275,138
------------
$ 4,244,528
- ------------------------------------------------------------------------------------------------------
Entertainment - 2.4%
Allbritton Communications Co., 9.75s, 2007 $ 1,000 $ 1,065,000
AMC Entertainment, Inc., 9.5s, 2009 200 197,000
Cinemark USA, Inc., 9.625s, 2008 750 772,500
Marvel Holdings, Inc., "B", 0s, 1999 (Chapter 11) 445 --
Time Warner Entertainment Co., 8.375s, 2033 4,177 4,898,660
------------
$ 6,933,160
- ------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 1.6%
FNMA, 6s, 2013 $ 741 $ 734,057
FNMA, 6s, 2014 3,853 3,816,903
------------
$ 4,550,960
- ------------------------------------------------------------------------------------------------------
Financial Institutions - 1.8%
Dynex Capital, Inc., 7.875s, 2002 $ 1,750 $ 1,255,625
Natexis Ambs Co. LLC, 8.44s, 2049## 3,800 3,819,000
------------
$ 5,074,625
- ------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.4%
Borden, Inc., 9.25s, 2019 $ 1,750 $ 1,688,435
Borden, Inc., 9.2s, 2021 2,500 2,366,525
------------
$ 4,054,960
- ------------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.7%
Buckeye Cellulose Corp., 8.5s, 2005 $ 610 $ 623,725
U.S. Timberlands, 9.625s, 2007 460 469,200
Waterford 3 Funding Corp., 8.09s, 2017 918 964,223
------------
$ 2,057,148
- ------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 1.9%
GNMA, 8s, 2026 $ 5,225 $ 5,443,521
- ------------------------------------------------------------------------------------------------------
Industrial - 0.2%
IMO Industries, Inc., 11.75s, 2006 $ 500 $ 524,375
- ------------------------------------------------------------------------------------------------------
Media - 3.4%
American Radio Systems Corp., 9s, 2006 $ 350 $ 378,000
Chancellor Media Corp., 8.125s, 2007 900 909,000
Chancellor Media Corp., 8s, 2008## 1,250 1,287,500
Comcast Corp., 9.375s, 2005 360 382,860
Cumulus Media, Inc., 10.375s, 2008 1,000 1,082,500
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,000 1,091,250
Frontiervision Operating Partnership LP, 11s, 2006 1,150 1,290,875
Hollinger International Publishing, Inc., 9.25s, 2007 1,250 1,306,250
Intermedia Capital Partners, 11.25s, 2006 75 85,312
Jacor Communications Co., 8s, 2010 900 948,375
Jones Intercable, Inc., 8.875s, 2007 500 546,250
Outdoor Systems, Inc., 8.875s, 2007 175 186,375
------------
$ 9,494,547
- ------------------------------------------------------------------------------------------------------
Medical and Health Products - 0.3%
Polymer Group, Inc., 9s, 2007 $ 900 $ 922,500
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.6%
Tenet Healthcare Corp., 6s, 2005 $ 2,000 $ 1,660,000
- ------------------------------------------------------------------------------------------------------
Metals and Minerals - 1.1%
Commonwealth Aluminum Corp., 10.75s, 2006 $ 500 $ 517,500
Haynes International, Inc., 11.625s, 2004 1,000 860,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 303,000
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 750 768,750
Metal Management, Inc., 10s, 2008 1,000 800,000
------------
$ 3,249,250
- ------------------------------------------------------------------------------------------------------
Oils - 1.8%
Triton Energy Ltd., 8.75s, 2002 $ 2,000 $ 1,942,480
Triton Energy Ltd., 9.25s, 2005 2,500 2,400,125
Triton PCS, Inc., 0s to 2003, 11s, 2008 975 614,250
------------
$ 4,956,855
- ------------------------------------------------------------------------------------------------------
Real Estate - 0.5%
George Town Real Estate Ltd., 4s, 2007+ $ 500 $ 525,000
Mosaic, Ltd., 7.915s, 1999+ 800 808,000
------------
$ 1,333,000
- ------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 1.4%
Circus Circus Enterprises, Inc., 6.7s, 2096 $ 1,000 $ 952,680
Friendly Ice Cream Corp., 10.5s, 2007 975 918,938
Prime Hospitality Corp., 9.75s, 2007 1,000 1,032,500
Red Roof Inns, Inc., 9.625s, 2003 1,100 1,113,750
------------
$ 4,017,868
- ------------------------------------------------------------------------------------------------------
Retail - 0.8%
Cole National Group, Inc., 8.625s, 2007 $ 750 $ 742,500
Musicland Group, Inc., 9.875s, 2008 1,500 1,522,500
------------
$ 2,265,000
- ------------------------------------------------------------------------------------------------------
Special Products and Services - 1.2%
AAF-McQuay, Inc., 8.875s, 2003 $ 550 $ 534,188
International Knife & Saw, Inc., 11.375s, 2006 850 871,250
International Specialty Products Holdings, Inc., 9s, 2003 890 934,500
Thermadyne Holdings Corp., 0s to 2003, 10.5s, 2008 2,000 1,030,000
------------
$ 3,369,938
- ------------------------------------------------------------------------------------------------------
Steel - 0.7%
Alaska Steel Holdings Corp., 9.125s, 2006 $ 1,000 $ 1,060,000
WCI Steel, Inc., 10s, 2004 900 942,750
------------
$ 2,002,750
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
Marsh Supermarkets, Inc., 8.875s, 2007 $ 150 $ 157,875
- ------------------------------------------------------------------------------------------------------
Telecommunications - 5.4%
Adelphia Communications Corp., 9.875s, 2007 $ 75 $ 82,125
Century Communications Corp., 9.5s, 2005 450 484,875
Century Communications Corp., 0s, 2008 1,300 617,500
DTI Holdings, Inc., 0s to 2003, 12.5s, 2008 500 195,000
Granite Broadcasting Corp., 8.875s, 2008 280 279,300
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 1,200 1,008,000
Intermedia Communications, Inc., 0s to 2002, 11.25s, 2007 1,800 1,359,000
ITC Deltacom, Inc., 11s, 2007 1,276 1,413,170
Level 3 Communications, Inc., 9.125s, 2008 1,500 1,533,750
LIN Televison Corp., 8.375s, 2008 1,250 1,246,875
Mobile Telecommunication Technologies Corp., 13.5s, 2002 1,500 1,680,000
Nextel Communications, Inc., 0s to 1999, 9.75s, 2004 500 520,000
Nextel International, Inc., 0s to 2003, 12.125s, 2008 1,500 795,000
NTL, Inc., 0s to 2003, 9.75s, 2008 1,250 876,562
NTL, Inc., 0s to 2003, 12.375s, 2008## 400 282,000
Pagemart Wireless, Inc., 0s to 2003, 11.25s, 2008 855 316,350
Qwest Communications International, Inc., 10.875s, 2007 289 332,518
Sprint Spectrum, 11s, 2006 550 630,999
Telesystem International Wireless, Inc., 0s to 2002, 10.5s, 2007 200 109,750
United International Holdings, Inc., 0s to 2003, 10.75s, 2008 650 445,250
Western Wireless Corp., 10.5s, 2007 500 546,250
WorldCom, Inc., 8.875s, 2006 590 633,801
------------
$ 15,388,075
- ------------------------------------------------------------------------------------------------------
Transportation
Moran Transportation Co., 11.75s, 2004 $ 100 $ 109,125
- ------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 8.6%
U.S. Treasury Bonds, 9.875s, 2015 $ 7,500 $ 10,630,050
U.S. Treasury Bonds, 8.875s, 2017 3,000 3,981,090
U.S. Treasury Bonds, 0s, 2019 9,000 2,690,100
U.S. Treasury Bonds, 6.125s, 2027 158 163,555
U.S. Treasury Bonds, 5.25s, 2029 750 704,063
U.S. Treasury Notes, 5.625s, 2008 6,000 6,090,000
------------
$ 24,258,858
- ------------------------------------------------------------------------------------------------------
Utilities - Electric - 7.8%
Central Maine Power Co., 7.05s, 2008 $ 750 $ 750,150
El Paso Electric Co., 9.4s, 2011 1,000 1,148,650
Esi Tractebel Acquisition Corp., 7.99s, 2011 500 493,125
Midland Cogeneration Venture Corp., 10.33s, 2002 1,371 1,452,312
Midland Funding Corp. I, 10.33s, 2002 805 852,995
Midland Funding Corp. II, "A", 11.75s, 2005 2,750 3,113,990
Midland Funding Corp., "B", 13.25s, 2006 3,250 4,001,887
Niagara Mohawk Power Corp., 8.77s, 2018 1,500 1,592,670
Texas & New Mexico Power Co., 10.75s, 2003 8,190 8,680,827
------------
$ 22,086,606
- ------------------------------------------------------------------------------------------------------
Utilities - Gas - 0.7%
Oryx Energy Co., 10s, 1999 $ 2,000 $ 2,009,000
- ------------------------------------------------------------------------------------------------------
Total U.S. Bonds $159,868,322
- ------------------------------------------------------------------------------------------------------
Foreign Bonds - 40.7%
Argentina - 3.6%
Autopistas Del Sol SA, "B", 10.25s, 2009 (Industrial)## $ 2,250 $ 1,912,500
City of Buenos Aires, 11.25s, 2007 700 682,500
Compania De Infraes SA, 11.625s, 2004 (Industrial)## 4,000 2,570,000
Industrias Metalurgicas Pescarmona SA, 9.5s, 2002
(Electric Utilities)## 250 122,370
Republic of Argentina, 10.75s, 2004## 1,000 993,750
Republic of Argentina, 11s, 2005 500 496,250
Supercanal Holdings, 11.5s, 2005 (Telecommunications)## 4,250 2,040,000
Telefonica De Argentina, 9.125s, 2008 (Telecommunications) 1,000 967,000
YPF Sociedad Anonima, 8s, 2004 (Industrial) 470 465,300
------------
$ 10,249,670
- ------------------------------------------------------------------------------------------------------
Bermuda - 0.1%
Flag Limited, 8.25s, 2008 (Telecommunications) $ 200 $ 198,500
- ------------------------------------------------------------------------------------------------------
Brazil - 3.4%
Banco Nacional De Desenvolvime, 9.375s, 2008
(Banks and Credit Companies) $ 650 $ 573,625
Companhia Energetica de Minas, 9.125s, 2004
(Electric Utilities)## 750 675,000
Companhia Paranaense, 9.75s, 2005 (Electric Utilities)## 3,000 2,675,625
Federal Republic of Brazil, 6.062s, 2001 2,091 1,983,941
Federal Republic of Brazil, 11.625s, 2004 750 731,250
Federal Republic of Brazil, 5.875s, 2006 95 75,649
Federal Republic of Brazil, 5s, 2014 4,183 2,886,601
------------
$ 9,601,691
- ------------------------------------------------------------------------------------------------------
Canada - 1.5%
Metronet Communications Corp., 0s to 2003, 9.95s,
2008 (Telecommunications) $ 1,500 $ 1,162,500
PCI Chemicals, Inc., 9.25s, 2007 (Chemicals) 1,250 1,043,750
Rogers Cantel, Inc., 9.375s, 2008 (Telecommunications) 1,500 1,650,000
Rogers Cablesystems, Inc., 10.125s, 2012 (Telecommunications) 500 556,250
------------
$ 4,412,500
- ------------------------------------------------------------------------------------------------------
Cayman Islands - 3.6%
Daiwa Pb Ltd., 6.05s, 2049 (Banks and Credit Companies) $ 5,000 $ 3,500,000
Fuji Finance (Cayman), 5.801s, 2049 (Finance) 3,250 2,697,500
Sakura Capital Funding, 5.954s, 2049 (Finance) 5,000 4,000,000
------------
$ 10,197,500
- ------------------------------------------------------------------------------------------------------
Colombia - 0.4%
Republic of Colombia, 10.875s, 2004 $ 1,000 $ 1,050,000
Republic of Colombia, 7.625s, 2007 20 17,300
------------
$ 1,067,300
- ------------------------------------------------------------------------------------------------------
Greece - 3.9%
Fage Dairy Industries SA, 9s, 2007
(Food and Beverage Products) $ 4,500 $ 4,140,000
Hellenic Republic, 8.9s, 2003 GRD 976,000 3,420,832
Hellenic Republic, 8.6s, 2008 898,000 3,434,001
------------
$ 10,994,833
- ------------------------------------------------------------------------------------------------------
Hong Kong - 2.0%
Bank Of Ayudhya, 6.04s, 2005 (Banks and Credit Companies) $ 3,000 $ 2,070,000
Bank Of Ayudhya, 5.891s, 2006 (Banks and Credit Companies) 2,500 1,725,000
Guangzhou Shenzhen, 10.25s, 2007 (Construction) 3,750 1,800,000
------------
$ 5,595,000
- ------------------------------------------------------------------------------------------------------
Indonesia - 1.0%
APP International Finance, 12s, 2004 (Financial Institutions) $ 1,400 $ 700,000
APP International Finance, 11.75s, 2005 (Financial
Institutions) 500 390,000
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Finance) 2,750 1,870,000
------------
$ 2,960,000
- ------------------------------------------------------------------------------------------------------
Luxembourg - 0.1%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s, 2006 (Telecommunications) $ 350 $ 269,500
- ------------------------------------------------------------------------------------------------------
Malaysia - 1.9%
Tenaga Nasional Berhad, 7.5s, 2096 (Electric Utilities) $ 7,000 $ 5,301,170
- ------------------------------------------------------------------------------------------------------
Mexico - 4.5%
Empresas ICA Sociedad SA, 11.875s, 2001 (Construction) $ 1,000 $ 1,012,500
Empresas ICA Sociedad SA, 5s, 2004 (Construction) 500 335,000
Groupo Minero Mexico SA, 8.25s, 2008 (Mining) 4,500 3,937,500
Perez Companc SA, 9s, 2006 (Oils) 2,500 2,482,525
Sanluis Corp. SA, 8.875s, 2008 (Finance)## 5,250 4,620,000
Satelites Mexicanos SA, 10.125s, 2004 (Telecommunications) 500 426,250
------------
$ 12,813,775
- ------------------------------------------------------------------------------------------------------
Netherlands - 1.1%
Tjiwi Kimia International Finance, 13.25s, 2001
(Forest and Paper Products) $ 3,750 $ 3,037,500
- ------------------------------------------------------------------------------------------------------
New Zealand - 2.8%
Government of New Zealand, 8s, 2006 NZD 6,245 $ 3,989,201
Government of New Zealand, 7s, 2009 6,590 4,025,194
------------
$ 8,014,395
- ------------------------------------------------------------------------------------------------------
Panama - 0.5%
Republic of Panama, 8.25s, 2008 $ 1,000 $ 945,000
Republic of Panama, 8.875s, 2027 3 2,835
Republic of Panama, 9.375s, 2029 400 412,000
------------
$ 1,359,835
- ------------------------------------------------------------------------------------------------------
Philippines - 1.3%
Bangko Sentral Ng Philipinas, 8.6s, 2027 (Finance) $ 1,000 $ 880,680
National Power Corp., 9.625s, 2028 (Electric Utilities) 750 705,000
Philippine Long Distance Telephone Co., 10.5s, 2009
(Telecommunications) 2,000 2,042,500
------------
$ 3,628,180
- ------------------------------------------------------------------------------------------------------
Poland - 0.4%
Republic of Poland, 4s, 2024 $ 1,500 $ 1,035,000
- ------------------------------------------------------------------------------------------------------
Russia - 0.9%
CSFB Gazprom Note, 13.5s, 2000 (Finance)+ $ 3,400 $ 1,016,940
Russia Principal Loans, 3.313s, 2020+ 9,000 619,200
St. Petersburg Russia, 9.5s, 2002## 750 283,125
Vnesheconombank, 6.625s, 2015 (Banks and Credit Companies) 7,999 599,953
------------
$ 2,519,218
- ------------------------------------------------------------------------------------------------------
Singapore - 0.9%
Fullerton Global Corp., 0s, 2003 (Special Products
and Services) $ 1,000 $ 1,025,000
Krung Thai Bank, 5.814s, 2006 (Banks and Credit Companies) 2,250 1,710,000
------------
$ 2,735,000
- ------------------------------------------------------------------------------------------------------
South Korea - 0.9%
Korea Electric Power Corp., 8s, 2002 (Electric Utilities) $ 500 $ 508,150
Korea First Bank, 5.473s, 1999 (Banks and Credit Companies) 2,000 1,965,000
------------
$ 2,473,150
- ------------------------------------------------------------------------------------------------------
Thailand - 1.1%
Siam City Bank, 7.375s, 2001 (Banks and Credit Companies) $ 3,500 $ 3,080,000
- ------------------------------------------------------------------------------------------------------
United Kingdom - 3.4%
Colt Telecom Group PLC, 0s to 2001, 12s, 2006
(Telecommunications) $ 1,425 $ 1,218,375
Colt Telecom Group PLC, 8.875s, 2007 (Telecommunications) DEM 500 285,323
Constellation Finance LLC, 9.8s, 2001 (Financial
Institutions) $ 3,250 3,120,000
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s, 2005 (Telecommunications) 250 225,625
Telewest, 9.625s, 2006 (Telecommunications) 1,150 1,233,375
UK Treasury, 6.75s, 2004 GBP 2,101 3,699,818
------------
$ 9,782,516
- ------------------------------------------------------------------------------------------------------
Venezuela - 0.6%
Republic of Venezuela, 9.25s, 2027 $ 2,350 $ 1,697,875
- ------------------------------------------------------------------------------------------------------
Uruguay - 0.8%
Banco Central De Uruguay, 6.75s, 2021
(Banks and Credit Companies) $ 2,500 $ 2,175,000
- ------------------------------------------------------------------------------------------------------
Total Foreign Bonds $115,199,108
- ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $284,780,518) $275,067,430
- ------------------------------------------------------------------------------------------------------
Stocks
- ------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------------------------
U.S. Stocks
Real Estate
Atlantic Gulf Communities Corp. (Identified Cost, $0)*+ 100 $ 119
- ------------------------------------------------------------------------------------------------------
Preferred Stock - 1.4%
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc. 807 $ --
- ------------------------------------------------------------------------------------------------------
Finance - 0.7%
Equitable Iowa Capital Trust 80,000 $ 2,080,000
- ------------------------------------------------------------------------------------------------------
Media - 0.4%
CSC Holdings, Inc.* 9,157 $ 1,062,212
- ------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.3%
Primedia, Inc.* 9,000 $ 864,000
- ------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $4,359,893) $ 4,006,212
- ------------------------------------------------------------------------------------------------------
Rights
- ------------------------------------------------------------------------------------------------------
United Mexican States, Expiration Date 6/30/03
(Identified Cost, $0)* 1,000 $ --
- ------------------------------------------------------------------------------------------------------
Warrants
- ------------------------------------------------------------------------------------------------------
DTI Holdings, Inc., Expiration Date 3/01/08* 2,500 $ 125
ICO, Inc., Expiration Date 7/01/02* 62,500 38,125
Renaissance Cosmetics, Inc., Expiration Date 8/31/06* 655 --
Republic of Argentina, Expiration Date 12/03/99 * 2,000 60,000
- ------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $103,371) $ 98,250
- ------------------------------------------------------------------------------------------------------
Call Options Purchased - 0.1%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
- ------------------------------------------------------------------------------------------------------
British Pounds/May/1.6 GBP 14,106 $ 41,809
British Pounds/June/1.645 21,871 66,553
British Pounds/June/1.6725 2,607 11,475
Canadian Dollars/June/1.53 CAD 19,455 73,250
Canadian Dollars/June/1.4475 19,768 57,359
Japanese Yen/June/124 JPY 1,140,434 86,673
- ------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Identified Cost, $633,207) $ 337,119
- ------------------------------------------------------------------------------------------------------
Put Options Purchased - 0.5%
- ------------------------------------------------------------------------------------------------------
British Pounds/June/1.645 GBP 21,871 $ 557,023
British Pounds/June/1.5875 2,475 11,271
German Marks/November/0.997 DEM 496 176,228
German Marks/November/0.997 917 283,567
Japanese Yen/June/115 JPY 1,140,434 85,533
Japanese Yen/July/121.7 2,777,660 258,322
- ------------------------------------------------------------------------------------------------------
Total Put Options Purchased (Identified Cost, $885,368) $ 1,371,944
- ------------------------------------------------------------------------------------------------------
Repurchase Agreement - 0.9%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED)
- ------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 4/30/99, due 5/3/99, total to be
received $2,518,026 (secured by various U.S.
Treasury and Federal Agency Obligations), at cost $ 2,517 $ 2,517,000
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $293,279,357) $283,398,074
- ------------------------------------------------------------------------------------------------------
Call Options Written - (0.1)%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
- ------------------------------------------------------------------------------------------------------
Australian Dollars/May/0.6245 AUD 4,262 $ --
Australian Dollars/April/0.625 15,115 (109,025)
British Pounds/May/1.6 GBP 14,105 (41,809)
British Pounds/July/1.56 7,517 (17,387)
Japanese Yen/July/112.75 JPY 2,573,387 (144,110)
- ------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received $640,411) $ (312,331)
- ------------------------------------------------------------------------------------------------------
Put Options Written - (0.1)%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
Australian Dollars/May/0.66 AUD 15,962 $ (157,221)
Canadian Dollars/June/1.475 CAD 20,144 (32,094)
- ------------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received $116,739) $ (189,315)
Other Assets, Less Liabilities - 0.2% 547,890
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $283,444,318
- ------------------------------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GRD = Greek Drachma
CAD = Canadian Dollars JPY = Japanese Yen
DEM = Deutsche Marks NZD = New Zealand Dollars
GBP = British Pounds
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
APRIL 30, 1999
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $293,279,357) $283,398,074
Cash 228,286
Net receivable for forward foreign currency exchange
contracts subject to master netting agreements 115,504
Receivable for Fund shares sold 802,732
Receivable for investments sold 7,268,947
Receivable for written optoins 32,094
Receivable from investment advisor 443,881
Interest receivable 6,628,533
Other assets 3,078
------------
Total assets $298,921,129
------------
Liabilities:
Payable for Fund shares reacquired $ 897,802
Payable for investments purchased 12,331,444
Net payable for forward foreign currency exchange
contracts sold 1,191,838
Net payable for forward foreign currency exchange
contracts purchased 325,248
Written options outstanding, at value (premiums received,
$757,150) 501,646
Payable to affiliates -
Management fee 9,147
Administrative fee 116
Shareholder servicing agent fee 774
Distribution fee 74,936
Accrued expenses and other liabilities 143,860
------------
Total liabilities $ 15,476,811
------------
Net assets $283,444,318
============
Net assets consist of:
Paid-in capital $306,104,457
Unrealized depreciation on investments and translation of
asset and liabilities in foreign currencies (11,021,354)
Accumulated distributions in excess of net realized gain
on investments and foreign currency transactions (13,059,829)
Accumulated undistributed net investment income 1,421,044
------------
Total $283,444,318
============
Shares of beneficial interest outstanding 37,786,583
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $97,349,413 / 12,900,312 shares of
beneficial interest outstanding) $7.55
=====
Offering price per share (100 / 95.25) $7.93
=====
Class B shares:
Net asset value and offering price per share
(net assets $143,913,651 / 19,233,793 shares of
beneficial interest outstanding) $7.48
=====
Class C shares:
Net asset value and offering price per share
(net assets of $41,898,651 / 5,615,056 shares of
beneficial interest outstanding) $7.46
=====
Class I shares:
Net asset value and offering price per share
(net assets of $282,603 / 37,422 shares of beneficial
interest outstanding) $7.55
=====
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 (Unaudited)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 1999
- --------------------------------------------------------------------------------
Net investment income:
Income -
Interest $13,396,717
Dividend 71,433
-----------
Total investment income $13,468,150
-----------
Expenses -
Management fee $ 1,640,338
Administrative fee 13,821
Trustees' compensation 20,498
Shareholder servicing agent fee 153,762
Distribution and service fee (Class A) 168,629
Distribution and service fee (Class B) 699,426
Distribution and service fee (Class C) 209,800
Custodian fee 66,354
Printing 34,607
Auditing fees 18,500
Postage 28,610
Legal fees 895
Miscellaneous 156,252
-----------
Total expenses $ 3,211,492
Fees paid indirectly (50,403)
Reduction of expenses by investment adviser (1,387,055)
-----------
Net expenses $ 1,774,034
-----------
Net investment income $11,694,116
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(1,660,220)
Written option transactions 1,901,436
Foreign currency transactions 7,543
Swaps (19,937)
-----------
Net realized gain on investments $ 228,822
-----------
Change in unrealized appreciation (depreciation) -
Investments $14,318,486
Written options 42,415
Swaps (138,248)
Translation of assets and liabilities in foreign currencies (3,805,299)
-----------
Net unrealized gain on investments $10,417,354
-----------
Net realized and unrealized gain on investments and
foreign currency $10,646,176
-----------
Increase in net assets from operations $22,340,292
===========
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 1999 OCTOBER 31, 1998
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 11,694,116 $ 18,488,073
Net realized gain (loss) on investments and foreign
currency transactions 228,822 (9,876,338)
Net unrealized gain (loss) on investments and foreign
currency translation 10,417,354 (19,921,895)
------------ ------------
Increase (decrease) in net assets from operations $ 22,340,292 $(11,310,160)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (5,133,352) $ (6,818,361)
From net investment income (Class B) (7,027,147) (8,080,444)
From net investment income (Class C) (2,136,833) (2,569,063)
From net investment income (Class I) (14,547) (24,119)
From net realized gain on investments and foreign
currency transactions (Class A) -- (1,233,756)
From net realized gain on investments and foreign
currency transactions (Class B) -- (1,433,056)
From net realized gain on investments and foreign
currency transactions (Class C) -- (451,827)
From net realized gain on investments and foreign
currency transactions (Class I) -- (4,784)
------------ ------------
Total distributions declared to shareholders $(14,311,879) $(20,615,410)
------------ ------------
Net increase in net assets from Fund share transactions $ 3,800,818 $141,514,568
------------ ------------
Total increase in net assets $ 11,829,231 $109,588,998
Net assets:
At beginning of period 271,615,087 162,026,089
------------ ------------
At end of period (including accumulated undistributed net
investment income of $1,421,044 and $4,038,807,
respectively) $283,444,318 $271,615,087
============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ---------------------------------------------------------------------
APRIL 30, 1999 1998 1997 1996 1995 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 7.33 $ 8.24 $ 8.19 $ 8.07 $ 7.57 $ 8.34
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.33 $ 0.66 $ 0.69 $ 0.62 $ 0.60 $ 0.48
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.28 (0.81) 0.13 0.18 0.48 (0.74)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.61 $(0.15) $ 0.82 $ 0.80 $ 1.08 $(0.26)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.39) $(0.63) $(0.69) $(0.60) $(0.58) $ --
From net realized gain on investments
and foreign currency transactions -- (0.13) (0.08) (0.08) -- --
In excess of net investment income
and foreign currency transactions -- -- -- -- -- (0.06)
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- -- (0.04)
From paid in capital -- -- -- -- -- (0.41)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.39) $(0.76) $(0.77) $(0.68) $(0.58) $(0.51)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.55 $ 7.33 $ 8.24 $ 8.19 $ 8.07 $ 7.57
====== ====== ====== ====== ====== ======
Total return(+) 8.65%++ (2.21)% 10.40% 10.42% 15.00% (3.15)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.89%+ 0.85% 0.79% 1.13% 1.54% 1.71%
Net investment income 8.80%+ 8.26% 8.26% 7.63% 7.86% 6.11%
Portfolio turnover 110% 299% 217% 287% 249% 153%
Net assets at end of period (000
omitted) $97,349 $95,292 $69,874 $49,432 $41,688 $44,032
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.29 $ 0.58 $ 0.58 $ 0.54 $ 0.53 $ 0.44
Ratios (to average net assets):
Expenses## 1.88%+ 1.84% 2.01% 2.06% 2.47% 2.21%
Net investment income 7.81%+ 7.24% 7.04% 6.70% 6.89% 5.62%
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED --------------------------------------------------------------------
APRIL 30, 1999 1998 1997 1996 1995 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 7.27 $ 8.18 $ 8.14 $ 8.03 $ 7.53 $ 8.33
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.30 $ 0.61 $ 0.61 $ 0.56 $ 0.55 $ 0.45
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.28 (0.81) 0.15 0.18 0.48 (0.78)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.58 $(0.20) $ 0.76 $ 0.74 $ 1.03 $(0.33)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.37) $(0.58) $(0.64) $(0.55) $(0.53) $ --
From net realized gain on investments
and foreign currency transactions -- (0.13) (0.08) (0.08) -- --
In excess of net investment income
and foreign currency transactions -- -- -- -- -- (0.05)
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- -- -- (0.03)
From paid in capital -- -- -- -- -- (0.39)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.37) $(0.71) $(0.72) $(0.63) $(0.53) $(0.47)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.48 $ 7.27 $ 8.18 $ 8.14 $ 8.03 $ 7.53
====== ====== ====== ====== ====== ======
Total return 8.23%++ (2.84)% 9.64% 9.68% 14.23% (3.97)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.54%+ 1.51% 1.44% 1.80% 2.27% 2.43%
Net investment income 8.16%+ 7.64% 7.51% 7.02% 7.15% 5.97%
Portfolio turnover 110% 299% 217% 287% 249% 153%
Net assets at end of period (000
omitted) $143,914 $133,872 $71,459 $25,361 $8,365 $5,350
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduces the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.26 $ 0.53 $ 0.50 $ 0.49 $ 0.48 $ 0.41
Ratios (to average net assets):
Expenses## 2.53%+ 2.50% 2.66% 2.73% 3.20% 2.92%
Net investment income 7.17%+ 6.62% 6.29% 6.09% 6.18% 5.48%
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED --------------------------------------------------------------------
APRIL 30, 1999 1998 1997 1996 1995 1994*
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS C
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.25 $ 8.16 $ 8.12 $ 8.00 $ 7.53 $ 7.53
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.30 $ 0.61 $ 0.60 $ 0.57 $ 0.54 $ 0.12
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions 0.28 (0.81) 0.16 0.18 0.48 (0.03)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.58 $(0.20) $ 0.76 $ 0.75 $ 1.02 $ 0.09
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.37) $(0.58) $(0.64) $(0.55) $(0.55) $ --
From net realized gain on investments
and foreign currency transactions -- (0.13) (0.08) (0.08) -- --
From paid in capital -- -- -- -- -- (0.09)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.37) $(0.71) $(0.72) $(0.63) $(0.55) $(0.09)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.46 $ 7.25 $ 8.16 $ 8.12 $ 8.00 $ 7.53
====== ====== ====== ====== ====== ======
Total return 8.25%++ (2.84)% 9.68% 9.80% 14.17% 1.23%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.54%+ 1.51% 1.44% 1.71% 2.20% 2.16%+
Net investment income 8.15%+ 7.65% 7.44% 7.12% 7.23% 8.99%+
Portfolio turnover 110% 299% 217% 287% 249% 153%
Net assets at end of period (000
omitted) $41,899 $42,213 $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.
# Per share data are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund has an expense offset arrangement which reduced the Fund's
custodian fee based upon the amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The
Fund's expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.26 $ 0.53 $ 0.50 $ 0.51 $ 0.46 $ 0.11
Ratios (to average net assets):
Expenses## 2.53%+ 2.50% 2.66% 2.64% 3.13% 2.65%+
Net investment income 7.16%+ 6.63% 6.21% 6.19% 6.26% 8.50%+
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ------------------------------------
APRIL 30, 1999 1998 1997**
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------
CLASS I
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.33 $ 8.25 $ 8.15
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.34 $ 0.72 $ 0.49
Net realized and unrealized gain (loss) on investments
and foreign currency transactions 0.29 (0.85) 0.15
------ ------ ------
Total from investment operations $ 0.63 $(0.13) $ 0.64
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.41) $(0.66) $(0.54)
From net realized gain on investments and foreign
currency transactions -- (0.13) --
------ ------ ------
Total distributions declared to shareholders $(0.41) $(0.79) $(0.54)
------ ------ ------
Net asset value - end of period $ 7.55 $ 7.33 $ 8.25
====== ====== ======
Total return 8.84%++ (2.00)% 5.98%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.54%+ 0.50% 0.44%+
Net investment income 9.17%+ 8.51% 7.69%+
Portfolio turnover 110% 299% 217%
Net assets at end of period (000 omitted) $283 $238 $230
** For the period from the inception of Class I, January 8, 1997, through October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. The Fund's expenses are calculated without
reduction for this expense offset arrangement.
(S) The investment adviser and/or the distributor voluntarily waived a portion of their management and/or other fees and/or
distribution fee, respectively, for certain of the periods indicated. If the fee had been incurred by the Fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.30 $ 0.63 $ 0.40
Ratios (to average net assets):
Expenses## 1.53%+ 1.49% 1.66%+
Net investment income 8.18%+ 7.49% 6.47%+
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Strategic Income Fund (the Fund) is a non-diversified series of MFS Series
Trust VIII (the Trust). The Trust is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as an open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities
and tend to be more sensitive to economic conditions.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including forward contracts, and swap
agreements, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics, and other market data,
without exclusive reliance upon exchange or over-the-counter prices. Short-
term obligations, which mature in 60 days or less, are valued at amortized
cost, which approximates market value. 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. Options
contracts listed on commodities exchanges are reported at market value using
closing settlement prices. Over-the-counter options on securities are valued
by brokers. Over-the-counter currency options are valued through the use of a
pricing model which takes into account foreign currency exchange spot and
forward rates, implied volatility, and short-term repurchase rates. Equity
securities listed on securities exchanges or reported through the NASDAQ
system are reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid prices.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. The Fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the Fund
under each such repurchase agreement. The Fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a
joint trading account for the purpose of entering into one or more repurchase
agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Written Options - The Fund may write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is
subsequently adjusted to the current value of the options contract. When a
written option expires, the Fund realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the Fund. The Fund, as writer of an option,
may have no control over whether the underlying securities may be sold (call)
or purchased (put) and, as a result, bears the market risk of an unfavorable
change in the price of the securities underlying the written option. In
general, written call options may serve as a partial hedge against decreases
in value in the underlying securities to the extent of the premium received.
Written options may also be used as part of an income producing strategy
reflecting the view of the Fund's management on the direction of interest
rates.
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The Fund may enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Fund may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. The Fund may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Fund may
enter into contracts with the intent of changing the relative exposure of the
Fund's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains
or losses on foreign currency transactions.
Swap Agreements - The Fund may enter into swap agreements. A swap is an
exchange of cash payments between the Fund and another party which is based on
a specific financial index. Cash payments are exchanged at specified intervals
and the expected income or expense is recorded on the accrual basis. The value
of the swap is adjusted daily and the change in value is recorded as
unrealized appreciation or depreciation. Risks may arise upon entering into
these agreements from the potential inability of counterparties to meet the
terms of their contract and from unanticipated changes in the value of the
financial index on which the swap agreement is based. The Fund uses swaps for
both hedging and non-hedging purposes. For hedging purposes, the Fund may use
swaps to reduce its exposure to interest and foreign exchange rate
fluctuations. For non-hedging purposes, the Fund may use swaps to take a
position on anticipated changes in the underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date. Some 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 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 distributions from paid-in
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.
At October 31, 1998, the Fund, for federal income tax purposes, had a capital
loss carryforward of $11,281,953 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on October 31, 2006.
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses. Class B shares will convert to Class A
shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.50%
of the Fund's average daily net assets and 7.14% of investment income. The
investment adviser has voluntarily agreed to waive a portion of its fee, which
is reflected as a preliminary reduction of expenses in the Statement of
Operations. No fee is currently being charged on investment income. MFS is
currently paying all expenses of the Fund other than the management fee and
distribution fees.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of $6,419
for the period ended April 30, 1999.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$54,554 for the period ended April 30, 1999, 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 $13,133
for the period ended April 30, 1999. Fees incurred under the distribution plan
during the period ended April 30, 1999, were 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 $9,010 and $17,415 for Class B and Class C shares, respectively, for
the period ended April 30, 1999. Fees incurred under the distribution plan
during the period ended April 30, 1999, were 1% of each class' average daily net
assets attributable to Class B and Class C shares on an annualized basis.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
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,
1999, were $6,644, $233,331, and $14,555 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 0.10%. Prior to April 1, 1999, the fee was calculated as a percentage
of the average Fund's daily net assets at an effective annual rate of 0.1125%.
(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 $ 26,891,759 $ 43,331,504
------------ ------------
Investments (non-U.S. government securities) $281,294,781 $253,693,052
------------ ------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $293,279,357
------------
Gross unrealized depreciation $(17,583,783)
Gross unrealized appreciation 7,702,500
------------
Net unrealized depreciation $ (9,881,283)
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
SIX MONTHS ENDED APRIL 30, 1999 YEAR ENDED OCTOBER 31, 1998
--------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,800,151 $ 13,273,467 6,720,310 $ 54,058,684
Shares issued to shareholders in
reinvestment of distributions 431,301 3,160,757 578,941 4,624,652
Shares reacquired (2,331,580) (17,215,473) (2,778,946) (21,988,257)
---------- ------------ ---------- ------------
Net increase (decrease) (100,128) $ (781,249) 4,520,305 $ 36,695,079
========== ============ ========== ============
<CAPTION>
Class B Shares
SIX MONTHS ENDED APRIL 30, 1999 YEAR ENDED OCTOBER 31, 1998
--------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,796,306 $ 27,831,418 12,547,304 $100,304,984
Shares issued to shareholders in
reinvestment of distributions 621,996 4,521,584 764,812 6,058,719
Shares reacquired (3,596,151) (26,302,928) (3,634,990) (28,365,326)
---------- ------------ ---------- ------------
Net increase 822,151 $ 6,050,074 9,677,126 $ 77,998,377
========== ============ ========== ============
<CAPTION>
Class C Shares
SIX MONTHS ENDED APRIL 30, 1999 YEAR ENDED OCTOBER 31, 1998
--------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,138,747 $ 8,314,605 4,320,132 $ 34,534,971
Shares issued to shareholders in
reinvestment of distributions 155,809 1,129,619 201,269 1,589,285
Shares reacquired (1,500,495) (10,949,276) (1,208,045) (9,341,241)
---------- ------------ ---------- ------------
Net increase (decrease) (205,939) $ (1,505,052) 3,313,356 $ 26,783,015
========== ============ ========== ============
<CAPTION>
Class I Shares
SIX MONTHS ENDED APRIL 30, 1999 YEAR ENDED OCTOBER 31, 1998
--------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,255 $ 54,020 24,624 $ 198,617
Shares issued to shareholders in
reinvestment of distributions 1,984 14,545 3,586 28,935
Shares reacquired (4,283) (31,520) (23,593) (189,455)
---------- ------------ ---------- ------------
Net increase 4,956 $ 37,045 4,617 $ 38,097
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $720 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, 1999, was $1,030. The Fund had no borrowings during the
period.
(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 swap agreements. 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.
<TABLE>
<CAPTION>
Written Option Transactions
1999 CALLS 1999 PUTS
--------------------------------- ---------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD -
Australian Dollars 11,545 $ 217,149 -- $ --
Canadian Dollars 11,153 94,821 -- --
German Marks/British
Pounds 24,248 116,389 25,801 116,389
Japanese Yen 790,863 150,245 -- --
South African Rands -- -- 14,175 50,795
Options written -
Australian Dollars 38,016 351,744 24,971 158,696
British Pounds 34,355 217,074 -- --
Canadian Dollars -- -- 20,144 32,094
Euro -- -- 14,790 94,360
Euro/British Pounds 4,402 50,949 4,234 23,378
German Marks/British
Pounds -- -- 53 19,877
Japanese Yen 9,546,499 988,400 1,732,400 133,480
Swedish Krone/British
Pounds 116,626 169,082 -- --
Options terminated in closing transactions -
Australian Dollars (26,048) (348,728) (9,009) (74,051)
British Pounds (12,733) (94,381) -- --
Euro -- -- (14,790) (94,360)
Euro/British Pounds (4,402) (50,949) (4,234) (23,378)
German Marks/British
Pounds (24,248) (116,389) (53) (19,877)
Japanese Yen (1,972,625) (411,596) -- --
Options expired -
Australian Dollars (4,136) (13,991) -- --
Canadian Dollars (11,153) (94,821) -- --
German Marks/British
Pounds -- -- (25,801) (116,389)
Japanese Yen (5,791,350) (415,505) (1,732,400) (133,480)
South African Rands -- -- (14,175) (50,795)
Swedish Krone/British
Pounds (116,626) (169,082) -- --
---------- ----------
OUTSTANDING, END OF PERIOD $ 640,411 $ 116,739
========== ==========
OPTIONS OUTSTANDING AT END
OF PERIOD CONSIST OF:
Australian Dollars 19,377 $ 206,174 15,962 $ 84,645
British Pounds 21,622 122,693 -- --
Canadian Dollars -- -- 20,144 32,094
Japanese Yen 2,573,387 311,544 -- --
---------- ----------
OUTSTANDING, END OF PERIOD $ 640,411 $ 116,739
========== ==========
At April 30, 1999, the Fund had sufficient cash and/or securities at least equal to the value of the
written options.
Forward Foreign Currency Exchange Contracts
<CAPTION>
NET UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS AT APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 6/16/99 AUD 28,036,658 $17,898,732 $18,547,593 $ (648,861)
6/16/99 CAD 9,622,833 6,358,000 6,603,409 (245,409)
6/16/99 GBP 2,376,208 3,863,715 3,819,705 44,010
4/17/00 HKD 211,773,000 27,019,428 27,084,633 (65,205)
6/16/99 JPY 1,356,885,000 11,500,000 11,431,890 68,110
6/16/99 NZD 14,630,782 7,846,287 8,190,770 (344,483)
----------- ----------- -----------
$74,486,162 $75,678,000 $(1,191,838)
=========== =========== ===========
Purchases 6/16/99 AUD 33,274,229 $21,268,395 $22,012,496 $ 744,101
6/16/99 EUR 27,405,068 29,858,057 29,016,910 (841,147)
6/16/99 GBP 11,757,958 19,036,255 18,900,671 (135,584)
6/16/99 JPY 1,582,227,404 13,423,040 13,330,422 (92,618)
----------- ----------- -----------
$83,585,747 $83,260,499 $ (325,248)
=========== =========== ===========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $406,964 with Deutsche Bank and
a net payable of $167,847 with Merrill Lynch and $123,613 with First Boston at
April 30, 1999.
At April 30, 1999, 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, 1999, the
Fund owned the following restricted securities (constituting 1.0% 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>
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/21/89 - 9/25/95 100 -- $ 119
CSFB Gazprom Note, 13.5s, 2000 3/10/98 3,400,000 3,400,000 1,016,940
George Town Real Estate Ltd., 4s, 2007 12/20/96 500,000 500,000 525,000
Mosaic Ltd., 7.915s, 1999 7/15/98 800,000 800,000 808,000
Russia Principal Loans, 3.313s, 2020 5/29/98 - 3/17/99 9,000,000 1,447,834 619,200
----------
$2,969,259
==========
</TABLE>
<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 State Street Bank and Trust Company
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks, call
The Hon. Sir J. David Gibbons, KBE - Chief toll free: 1-800-637-4458 anytime from a
Executive Officer, Edmund Gibbons Ltd.; touch-tone telephone. For information on MFS
Chairman, Colonial Insurance Company, Ltd. mutual funds, call your financial adviser or,
for an information kit, call toll free:
Abby M. O'Neill - Private Investor 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message
Walter E. Robb, III - President and anytime).
Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, INVESTOR SERVICE
Benchmark Consulting Group, Inc. (office MFS Service Center, Inc.
services) P.O. Box 2281
Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive For general information, call toll free:
Vice President, Director, and Secretary, 1-800-225-2606 any business day from
MFS Investment Management 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - Chairman, Chief For service to speech- or hearing-impaired,
Executive Officer, and Director, call toll free: 1-800-637-6576 any business
MFS Investment Management 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 with a Telecommunications Device for the
Resources, Inc. (acquisition planning Deaf.) For share prices, account balances,
specialists) and exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
Ward Smith - Former Chairman (until 1994), telephone.
NACCO Industries (holding company)
WORLD WIDE WEB
INVESTMENT ADVISER www.mfs.com
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
James T. Swanson*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
MFS(R) STRATEGIC ------------
INCOME FUND BULK RATE
U.S. POSTAGE
[logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
WE INVENTED THE MUTUAL FUND(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MSI-3 6/99 24M 34/234/334/834
