<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[Graphic Omitted]
MFS(R) STRATEGIC
INCOME FUND
ANNUAL REPORT o OCTOBER 31, 1999
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MUTUAL FUND GIFT KITS (see page 39)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 20
Notes to Financial Statements ............................................. 27
Independent Auditors' Report .............................................. 36
MFS' Year 2000 Readiness Disclosure ....................................... 38
Trustees and Officers ..................................................... 41
MFS ORIGINAL RESEARCH(R)
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
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
The current investment and economic environment bears little resemblance to
last year's. One year ago, global economies were floundering, and the crisis
in Asia threatened an already weak U.S. economy. Corporate earnings were flat,
and economists used the word "deflation" for the first time in recent memory.
Entering 1999, expectations for corporate earnings growth were lowered
dramatically. In an attempt to foster U.S. growth, the Federal Reserve Board
(the Fed) lowered interest rates.
As a result, this year the U.S. economy is booming and unemployment is low.
Many corporations are focused on improving their profitability, and investors
have been rewarded with positive surprises across a variety of industries. Our
analysts predict that corporate earnings growth for 1999
will average 12% - 15%.
Global economies also are showing signs of strength, and the Asian crisis
has passed. In fact, Japan's economic woes seem to have reached bottom.
Although the process is in its infancy, some Japanese corporations not only
are talking about restructuring and cost cutting, they also are beginning to
take action, looking within to become more competitive and improve returns on
equity. While still lagging the United States, Europe is beginning to
restructure and consolidate. These signs of international growth have
contributed to concerns that the U.S. economy now may be too strong.
In June, and again in August, the Fed raised rates by one-quarter of a
percentage point to help ward off the specter of inflation.
After an unprecedented four years of 20% annual returns in the U.S. equity
market, we fear that many investors have become accustomed to high returns and
have lost sight of the risks they take on to achieve them. In the current
market many investors are taking on additional risk - whether through day
trading or investing in speculative Internet stocks.
Risks are as much a part of the market today as they were one year ago.
We believe the market remains overvalued, with stocks priced 30% above our
analysts' earnings projections. And market narrowness has not abated; the top
25 stocks in the Standard & Poor's 500 Composite Index, a popular, unmanaged
index of common stock total return performance, are still the most overvalued.
Such extreme overvaluation makes the stock market sensitive to interest-rate
news and any negative earnings surprises. The Year 2000 (Y2K) computer problem
is another factor causing investor concern. While we believe corporate America
is well prepared to address any Y2K situations that may arise at year-end, no
one can predict investor behavior. In our opinion, it is investor behavior
that has the greatest potential to create market volatility.
We believe the best way to address Y2K and other market risks is through
our continuing commitment to MFS Original Research(R) and our fundamental
investment tenet of long-term investing. Whether markets are up or down,
MFS analysts focus on analyzing industries and visiting companies to determine
the long-term winners and the prices that will make them attractive
opportunities. Because all companies will not benefit equally from the
improving international environment, bottom-up research remains critical to
identifying those that we believe are successfully restructuring,
consolidating, and gaining market share.
Changes in market and economic conditions can't be predicted but should always
be expected. The changes we have seen over the past year only reinforce our
commitment to long-term planning and investing. We believe volatility helps to
create opportunity for long-term investors to buy solid companies at
attractive prices. For this reason, we are continuing to expand our domestic
and international capabilities to ensure that MFS has primary, in-house
research on companies worldwide. We believe that we have built the right
investment team, backed by MFS Original Research, to take advantage of those
opportunities for our shareholders.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
November 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James T. Swanson]
James T. Swanson
For the 12 months ended October 31, 1999, Class A shares of the Fund returned
9.72%, Class B shares 9.10%, Class C shares 9.12%, and Class I shares 10.25%.
These returns include the reinvestment of any 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 3.53%. The Fund's results also compare to returns over
the same period for the following unmanaged indices: a -0.66% return for the
Lehman Brothers Government/Corporate Bond Index, a -2.46% return for the
Salomon Brothers World Government Index (the Salomon Index), and a 4.45%
return for the Lehman Brothers High Yield Bond Index, an unmanaged index of
noninvestment-grade corporate debt. The Lehman Brothers Government/Corporate
Bond 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.
Q. WHY HAS THE FUND BEEN PERFORMING SO WELL?
A. The Fund's high-yield bonds, which comprise the largest sector, have done
well in the thriving U.S. economy. They rebounded, along with other debt
issues, after the late-1998 credit crisis. Our high-yield bond holdings are
mostly in the telecommunications, entertainment, media, and energy
industries. Good examples of holdings that have performed well are Time
Warner Entertainment and utility Texas & New Mexico Power Co.
Another positive factor was convertible bonds, which are exchangeable for a
set number of common shares at a prestated price. At mid-year, we began
rebuilding our position because we saw that many had fallen to prices that
were less than the stock values. Historically, convertible bonds tend to
provide protection when bonds do poorly and to provide return when stocks do
well. In particular, convertibles issued by Colt Telecom Group provided the
Fund with good performance. Finally, we decided in the second half of the
period to increase our exposure to the euro, the new currency of the
European monetary union, because we believed it was undervalued and would
appreciate.
Q. WHAT IS THE CURRENT BREAKDOWN OF BONDS THE FUND HOLDS?
A. The major allocations are 33.4% to high-yield corporate bonds, 15.5% to U.S.
Treasuries, 13.5% to emerging markets, 12.0% to high-grade corporates, and
10.1% to international government bonds.
Q. HOW HAVE CORPORATE AND CONVERTIBLE BONDS PERFORMED COMPARED TO GOVERNMENT
BONDS?
A. Very favorably, and for that reason we decided to reduce our holdings in
government bonds issued by the United States and developed countries. The
economic growth here and in Europe suggested to us that interest rates were
likely to continue to rise and push bond prices down. By the end of the
period, the domestic and international government-bond portions of the
portfolio were at some of their lowest levels since the Fund was established
in 1987.
Q. WHAT ABOUT BONDS FROM THE EMERGING MARKETS?
A. Emerging markets has been one of the best-performing asset class year to
date in the world bond markets, and we have been able to capture some of
that performance. This is an important asset class because of its growth
prospects, but it also shows significant volatility. We have seen capital
shifting into the Asian emerging markets, with no indications of inflation
so far. We believe, based on recent analysis, that a maximum weighting of
15% of assets in emerging markets bonds is likely to be the most
advantageous exposure for the Fund. However, our exposure will depend on
finding opportunities where the potential value added is appropriate to the
risk involved.
Q. WHAT IS YOUR LONG-TERM OUTLOOK?
A. We see no inflationary signals, but if we do we would likely increase our
holdings of short-maturity bonds. The economy here is very strong, and the
Federal Reserve Board (the Fed) may raise interest rates slightly, which
could help to forestall any price increases. Such a move could essentially
put interest rates back to 5.5%, where they were before the credit crisis of
1998. In any event, we believe our relatively high reserves in cash,
preferred stocks, and convertible equities should help us cope with any
change in interest rates in the near term. Once the usual year-end concerns
about liquidity have ended and the Fed has decided what to do with interest
rates, we will look to Japan and the emerging Asian markets for
opportunities in their bond markets.
/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.
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PORTFOLIO MANAGER'S PROFILE
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JAMES T. SWANSON IS 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) CHARTER INCOME 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 ORIGINAL
RESEARCH(R), 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 consultant, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING IN FIXED-INCOME
SECURITIES. PLUS, THE FUND SEEKS OPPORTUNITIES TO
REALIZE CAPITAL APPRECIATION WHILE MAINTAINING A HIGH
LEVEL OF CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: OCTOBER 29, 1987
CLASS INCEPTION: CLASS A OCTOBER 29, 1987
CLASS B SEPTEMBER 7, 1993
CLASS C SEPTEMBER 1, 1994
CLASS I JANUARY 8, 1997
SIZE: $284.4 MILLION NET ASSETS AS OF OCTOBER 31, 1999
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. Benchmark comparisons are unmanaged and do not reflect any fees or
expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary.) It is not possible to
invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended October 31, 1999)
Credit
Salomon Lehman Lehman Suisse
Brothers Brothers Brothers First
MFS S&P World Government/ High Boston
Strategic 500 Government Corporate Yield High
Income Fund Composite Bond Bond Bond Yield
- Class A Index Index Index Index Index
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10/89 $ 9,525 $10,000 $10,000 $10,000 $10,000 $10,000
10/91 11,600 12,351 12,397 12,171 12,828 13,221
10/93 14,209 15,610 15,813 15,285 17,420 18,160
10/95 15,825 20,501 18,876 16,932 20,462 21,274
10/97 19,291 33,610 20,408 19,418 26,190 26,967
10/99 20,698 51,525 22,404 21,271 26,933 27,752
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH OCTOBER 31, 1999
CLASS A
1 Year 3 Years 5 Years 10 Years
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Cumulative Total Return Excluding Sales
Charge + 9.72% +18.45% +50.41% +164.16%
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Average Annual Total Return Excluding
Sales Charge + 9.72% + 5.81% + 8.51% + 8.07%
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Average Annual Total Return Including
Sales Charge + 4.51% + 4.10% + 7.46% + 7.55%
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CLASS B
1 Year 3 Years 5 Years 10 Years
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Cumulative Total Return Excluding Sales
Charge + 9.10% +16.22% +45.60% +108.31%
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Average Annual Total Return Excluding
Sales Charge + 9.10% + 5.14% + 7.80% + 7.61%
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Average Annual Total Return Including
Sales Charge + 5.12% + 4.33% + 7.52% + 7.61%
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CLASS C
1 Year 3 Years 5 Years 10 Years
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Cumulative Total Return Excluding Sales
Charge + 9.12% +16.29% +45.78% +110.22%
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Average Annual Total Return Excluding
Sales Charge + 9.12% + 5.16% + 7.83% + 7.71%
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Average Annual Total Return Including
Sales Charge + 8.13% + 5.16% + 7.83% + 7.71%
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CLASS I
1 Year 3 Years 5 Years 10 Years
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Cumulative Total Return Excluding Sales
Charge +10.25% +19.43% +51.66% +119.10%
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Average Annual Total Return Excluding
Sales Charge +10.25% + 6.10% + 8.69% + 8.16%
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COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years
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Average multisector income fund* + 3.53% + 4.25% + 7.14% + 8.51%
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Standard & Poor's 500 Composite Index+** +25.67% +26.52% +26.02% + 17.82%
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Credit Suisse First Boston High Yield
Index+# + 5.54% + 5.70% + 8.50% + 10.75%
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Lehman Brothers High Yield Bond Index+ + 4.45% + 5.53% + 8.50% + 10.41%
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Lehman Brothers Government/Corporate Bond
Index+ - 0.66% + 6.03% + 7.85% + 7.84%
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Salomon Brothers World Government Bond
Index+ - 2.46% + 4.05% + 6.46% + 8.40%
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* Source: Lipper Analytical Services, Inc.
+ Source: Standard & Poor's Micropal, Inc.
** Effective October 31, 1999, we no longer use the Standard & Poor's 500
Composite Index as a benchmark because we believe it does not reflect the
Fund's investment policies and objectives.
# Effective October 31, 1999, we no longer use the Credit Suisse First Boston
High Yield Index as a benchmark because we believe the Lehman Brothers High
Yield Bond Index better reflects the Fund's investment policies and
objectives.
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 4.75% sales charge. Class B Share Performance
Including Sales Charge takes into account the deduction of the applicable
contingent deferred sales charge (CDSC), which declines over six years from 4%
to 0%. Class C Share Performance Including Sales Charge takes into account the
deduction of the 1% CDSC applicable to Class C shares redeemed within 12
months. Class I shares have no sales charge and are only available to certain
institutional investors.
Class B, C, and I share performance include the performance of the Fund's
Class A shares for periods prior to their inception (blended performance).
Class B and C blended performance has been adjusted to take into account the
CDSC applicable to Class B and C shares rather than the initial sales charge
(load) applicable to Class A shares. Class I share blended performance has
been adjusted to account for the fact that Class I shares have no sales
charge. These blended performance figures have not been adjusted to take into
account differences in class-specific operating expenses. Because operating
expenses of Class B and C shares are higher than those of Class A, the blended
Class B and C share performance is higher than it would have been had Class B
and C shares been offered for the entire period. Conversely, because operating
expenses of Class I shares are lower than those of Class A, the blended Class
I share performance is lower than it would have been had Class I shares been
offered for the entire period.
All performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details. All
results are historical and assume the reinvestment of 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.
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 1999
QUALITY (U.S. PORTION ONLY)
Source: Standard & Poor's and Moody's
"B" 31.4%
Governments 23.4%
"BB" 20.2%
"BBB" 16.8%
"CCC" 5.7%
"A" 2.5%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS -- October 31, 1999
<TABLE>
<CAPTION>
Bonds - 92.3%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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<S> <C> <C>
U.S. Bonds - 60.1%
Aerospace - 1.4%
Argo Technology Corp., 8.625s, 2007 $ 1,250 $ 1,062,500
BE Aerospace, Inc., 9.875s, 2006 1,000 975,000
K & F Industries, Inc., 9.25s, 2007 1,000 957,500
United Defense Industries, Inc., 8.75s, 2007 950 895,375
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$ 3,890,375
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Banks and Credit Companies - 0.8%
Residential Accredit Loans, Inc., 7.75s, 2027 $ 2,537 $ 2,416,021
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Building Materials - 0.7%
American Standard, Inc., 7.375s, 2008 $ 1,000 $ 880,000
Building Materials Corp., 8s, 2007 900 821,250
Nortek, Inc., 9.875s, 2004 270 264,600
UDC Homes, Inc., 14.5s, 2000 6 3,048
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$ 1,968,898
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Business Machines - 0.8%
Silicon Graphics Inc., 5.25s, 2004 $ 3,000 $ 2,220,000
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Business Services - 1.3%
Anacomp, Inc., 10.875s, 2004 $ 1,200 $ 1,182,000
Iron Mountain, Inc., 10.125s, 2006 670 683,400
Pierce Leahy Corp., 9.125s, 2007 1,000 972,500
Williams Scotsman, Inc., 9.875s, 2007 1,000 957,500
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$ 3,795,400
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Chemicals - 0.9%
Huntsman ICI Chemicals, Inc., 10.125s, 2009## $ 475 $ 472,625
NL Industries, Inc., 11.75s, 2003 1,500 1,545,000
Sterling Chemicals, Inc., 11.25s, 2007 25 15,500
UCAR Global Enterprises, Inc., 12s, 2005 500 521,250
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$ 2,554,375
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Computer Software - Services - 0.3%
Unisystem Corp., 7.875s, 2008 $ 900 $ 861,750
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Consumer Goods and Services - 1.4%
Hayes Wheels International, Inc., 9.125s, 2007 $ 1,000 $ 955,000
Kindercare Learning Centers, Inc., 9.5s, 2009 300 280,500
Revlon Consumer Products Corp., 8.125s, 2006 900 702,000
Samsonite Corp., 10.75s, 2008 1,250 1,037,500
Synthetic Industries, Inc., 9.25s, 2007 1,025 1,025,000
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$ 4,000,000
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Containers - 2.0%
Ball Corp., 8.25s, 2008 $ 2,250 $ 2,193,750
Gaylord Container Corp., 9.75s, 2007 1,225 1,163,750
Riverwood International Corp., 10.25s, 2006 500 502,500
Silgan Holdings, Inc., 9s, 2009 1,000 947,500
U.S. Can Corp., 10.125s, 2006 900 913,500
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$ 5,721,000
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Energy - 1.5%
Cheasapeake Energy Corp., 9.625s, 2005 $ 175 $ 166,250
Clark USA, Inc., 10.875s, 2005 500 428,750
CMS Energy Corp., 6.75s, 2004 1,000 949,020
Giant Industries, Inc., 9s, 2007 400 369,000
P&L Coal Holdings Corp., 9.625s, 2008 1,150 1,098,250
Pool Energy Services Co., 8.625s, 2008 1,235 1,268,962
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$ 4,280,232
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Entertainment - 1.9%
Allbritton Communications Co., 9.75s, 2007 $ 1,000 $ 997,500
AMC Entertainment, Inc., 9.5s, 2009 200 177,000
Cinemark USA, Inc., 9.625s, 2008 625 546,875
Marvel Holdings, Inc., 0s, 1999 (Chapter 11) 445 --
Time Warner Entertainment Co., 8.375s, 2033 3,323 3,558,235
------------
$ 5,279,610
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Federal National Mortgage Association - 1.1% FNMA, 7s, 2029 $ 3,256 $ 3,196,540
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Financial Institutions - 1.6%
Dynex Capital, Inc., 7.875s, 2002 $ 1,450 $ 1,125,562
Natexis Ambs Co. LLC, 8.44s, 2049## 3,800 3,553,000
------------
$ 4,678,562
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Food and Beverage Products - 1.4%
Borden, Inc., 9.25s, 2019 $ 1,750 $ 1,610,647
Borden, Inc., 9.2s, 2021 2,500 2,315,925
------------
$ 3,926,572
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Forest and Paper Products - 0.7%
Buckeye Cellulose Corp., 8.5s, 2005 $ 610 $ 585,600
U.S. Timberlands, 9.625s, 2007 460 418,600
Waterford 3 Funding Corp., 8.09s, 2017 918 898,489
------------
$ 1,902,689
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Government National Mortgage Association - 1.9%
GNMA, 8s, 2026 $ 4,212 $ 4,302,456
GNMA, 6.5s, 2028 174 166,389
GNMA, 6.5s, 2029 964 920,777
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$ 5,389,622
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Industrial - 0.5%
Allied Waste North America Inc., 10s, 2009## $ 1,000 $ 846,250
IMO Industries, Inc., 11.75s, 2006 500 542,500
------------
$ 1,388,750
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Media - 3.4%
American Radio Systems Corp., 9s, 2006 $ 350 $ 364,000
Chancellor Media Corp., 8.125s, 2007 900 873,000
Chancellor Media Corp., 8s, 2008 1,250 1,228,125
Comcast Corp., 10.25s, 2001 1,425 1,517,525
Comcast Corp., 9.375s, 2005 360 379,275
Cumulus Media, Inc., 10.375s, 2008 1,000 1,030,000
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,000 1,015,000
Frontiervision Operating Partnership LP, 11s, 2006 1,150 1,210,375
Hollinger International Publishing, Inc., 9.25s, 2007 1,250 1,225,000
Jones Intercable, Inc., 8.875s, 2007 500 525,000
Outdoor Systems, Inc., 8.875s, 2007 175 177,625
------------
$ 9,544,925
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Medical and Health Products - 0.3%
Polymer Group, Inc., 9s, 2007 $ 900 $ 859,500
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Medical and Health Technology and Services - 0.6%
Tenet Healthcare Corp., 6s, 2005 $ 2,000 $ 1,587,500
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Metals and Minerals - 1.1%
Commonwealth Aluminum Corp., 10.75s, 2006 $ 500 $ 500,000
Haynes International, Inc., 11.625s, 2004 1,000 870,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 297,000
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 750 751,875
Metal Management, Inc., 10s, 2008 1,000 670,000
------------
$ 3,088,875
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Oils - 1.7%
Triton Energy Ltd., 8.75s, 2002 $ 2,000 $ 1,972,740
Triton Energy Ltd., 9.25s, 2005 2,500 2,463,450
Triton PCS, Inc., 0s to 2003, 11s, 2008 625 428,125
------------
$ 4,864,315
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Restaurants and Lodging - 1.0%
Circus Circus Enterprises, Inc., 6.7s, 2096 $ 2,000 $ 1,862,020
Prime Hospitality Corp., 9.75s, 2007 1,000 910,000
Red Roof Inns, Inc., 9.625s, 2003 100 100,875
------------
$ 2,872,895
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Retail - 1.5%
Cole National Group, Inc., 8.625s, 2007 $ 750 $ 585,000
Musicland Group, Inc., 9.875s, 2008 1,500 1,260,000
Rite Aid Corp., 5.25s, 2002 3,750 2,503,125
------------
$ 4,348,125
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Special Products and Services - 0.7%
AAF-McQuay, Inc., 8.875s, 2003 $ 550 $ 438,625
International Knife & Saw, Inc., 11.375s, 2006 850 651,313
Thermadyne Holdings Corp., 0s to 2003, 10.5s, 2008 2,000 880,000
------------
$ 1,969,938
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Steel - 0.7%
Alaska Steel Holdings Corp., 9.125s, 2006 $ 1,000 $ 990,000
WCI Steel, Inc., 10s, 2004 900 879,750
------------
$ 1,869,750
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Supermarkets
Marsh Supermarkets, Inc., 8.875s, 2007 $ 150 $ 144,000
- --------------------------------------------------------------------------------------------------------
Telecommunications - 5.9%
Adelphia Communications Corp., 9.875s, 2007 $ 75 $ 76,500
Century Communications Corp., 9.5s, 2005 450 448,875
Century Communications Corp., 0s, 2008 1,300 555,750
Cox Communications, Inc., 7.75s, 2006 1,500 1,527,855
DTI Holdings, Inc., 0s to 2003, 12.5s, 2008 500 175,000
Frontier, 6.25s, 1999## 2,000 2,001,400
Granite Broadcasting Corp., 8.875s, 2008 280 269,500
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 1,200 918,000
Intermedia Communications, Inc., 0s to 2002, 11.25s, 2007 1,800 1,242,000
ITC Deltacom, Inc., 11s, 2007 1,276 1,333,420
Level 3 Communications, Inc., 9.125s, 2008 1,500 1,395,000
LIN Televison Corp., 8.375s, 2008 700 658,000
Mobile Telecommunication Technologies Corp., 13.5s, 2002 1,200 1,359,000
Nextel Communications, Inc., 0s to 1999, 9.75s, 2004 200 203,750
Nextel Communications, Inc., 0s to 2003, 9.95s, 2008 300 213,000
Nextel International, Inc., 0s to 2003, 12.125s, 2008 1,500 761,250
NTL, Inc., 0s to 2003, 9.75s, 2008 1,250 829,688
NTL, Inc., 0s to 2003, 12.375s, 2008 400 268,000
Pagemart Wireless, Inc., 0s to 2003, 11.25s, 2008 580 179,800
Qwest Communications International, Inc., 10.875s, 2007 289 323,397
Sprint Spectrum, 11s, 2006 550 617,485
United International Holdings, Inc., 0s to 2003, 10.75s, 2008 650 373,750
Western Wireless Corp., 10.5s, 2007 500 541,250
WorldCom, Inc., 8.875s, 2006 590 621,128
------------
$ 16,892,798
- --------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 15.5%
U.S. Treasury Bonds, 9.875s, 2015 $ 2,166 $ 2,887,538
U.S. Treasury Bonds, 0s, 2019 9,000 2,511,720
U.S. Treasury Bonds, 5.25s, 2029 66 57,048
U.S. Treasury Notes, 8s, 2001 18,750 19,350,563
U.S. Treasury Notes, 6s, 2004 8,510 8,529,913
U.S. Treasury Notes, 7.875s, 2004 9,990 10,764,225
------------
$ 44,101,007
- --------------------------------------------------------------------------------------------------------
Utilities - Electric - 7.5%
El Paso Electric Co., 9.4s, 2011 $ 1,000 $ 1,094,330
Esi Tractebel Acquisition Corp., 7.99s, 2011 500 454,375
Midland Cogeneration Venture Corp., 10.33s, 2002 1,233 1,279,315
Midland Funding Corp. II, "A", 11.75s, 2005 4,250 4,674,023
Midland Funding Corp., "B", 13.25s, 2006 3,250 3,898,765
Niagara Mohawk Power Corp., 8.77s, 2018 1,481 1,520,306
Texas & New Mexico Power Co., 10.75s, 2003 8,190 8,397,780
------------
$ 21,318,894
- --------------------------------------------------------------------------------------------------------
Total U.S. Bonds $170,932,918
- --------------------------------------------------------------------------------------------------------
Foreign Bonds - 32.2%
Argentina - 1.7%
Autopistas Del Sol SA, "B", 10.25s, 2009 (Industrial)## $ 1,250 $ 950,000
Compania De Infraes SA, 11.625s, 2004 (Industrial)## 2,500 1,518,750
Industrias Metalurgicas Pescarmona SA, 9.5s, 2002
(Electric Utilities)## 250 152,352
Supercanal Holdings, 11.5s, 2005 (Telecommunications)## 2,000 940,000
Telefonica De Argentina, 9.125s, 2008 (Telecommunications) 1,500 1,303,500
------------
$ 4,864,602
- --------------------------------------------------------------------------------------------------------
Bermuda - 0.1%
Flag Ltd., 8.25s, 2008 (Telecommunications) $ 200 $ 177,000
- --------------------------------------------------------------------------------------------------------
Brazil - 1.5%
Bahia Sul Celulose SA, 10.625s, 2004 (Paper & Related
Products)+ $ 1,000 $ 930,000
Companhia Energetica de Minas, 9.125s, 2004
(Electric Utilities)## 1,000 872,500
Companhia Paranaense, 9.75s, 2005 (Electric Utilities)## 1,250 1,165,625
Espirito Santo Centrais Escelsa, 10s, 2007 (Electric
Utilities) 1,500 1,091,250
Federal Republic of Brazil, 6.938s, 2006 94 76,732
------------
$ 4,136,107
- --------------------------------------------------------------------------------------------------------
Canada - 1.3%
Metronet Communications Corp., 0s to 2003, 9.95s,
2008 (Telecommunications) $ 1,500 $ 1,167,120
PCI Chemicals, Inc., 9.25s, 2007 (Chemicals) 1,250 978,125
Rogers Cantel, Inc., 9.375s, 2008 (Telecommunications) 1,500 1,560,000
------------
$ 3,705,245
- --------------------------------------------------------------------------------------------------------
Cayman Islands - 4.1%
Daiwa Pb Ltd., 6.35s, 2049 (Banks and Credit Companies) $ 6,000 $ 4,920,000
Fuji Finance (Cayman), 6.574s, 2049 (Finance) 3,250 3,068,650
Sakura Capital Funding, 6.446s, 2049 (Finance) 4,000 3,740,000
------------
$ 11,728,650
- --------------------------------------------------------------------------------------------------------
France - 2.8%
Republic of France, 3.5s, 2004 EUR 7,870 $ 7,865,680
- --------------------------------------------------------------------------------------------------------
Germany - 2.7%
Federal Republic of Germany, 4.5s, 2009 EUR 7,788 $ 7,808,293
- --------------------------------------------------------------------------------------------------------
Greece - 4.4%
Fage Dairy Industries SA, 9s, 2007 (Food and
Beverage Products) $ 4,300 $ 3,870,000
Hellenic Republic, 8.9s, 2003 GRD 976,000 3,228,028
Hellenic Republic, 6s, 2006 800,000 2,397,271
Hellenic Republic, 8.6s, 2008 898,000 3,123,204
------------
$ 12,618,503
- --------------------------------------------------------------------------------------------------------
Hong Kong - 1.7%
Bank of Ayudhya, 6.938s, 2005 (Banks and Credit Companies) $ 3,000 $ 2,310,000
Bank of Ayudhya, 5.98s, 2006 (Banks and Credit Companies) 800 608,000
Daewoo Hong Kong Ltd., 5.675s, 2001
(Distribution/Wholesale) (In default) 3,000 1,800,000
------------
$ 4,718,000
- --------------------------------------------------------------------------------------------------------
Indonesia - 1.4%
APP International Finance, 9.961s, 2001 (Financial
Institutions) $ 3,000 $ 2,133,150
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Finance) 2,750 1,766,875
------------
$ 3,900,025
- --------------------------------------------------------------------------------------------------------
Luxembourg - 0.1%
Millicom International Cellular Communications Corp.,
0s to 2001, 13.5s, 2006 (Telecommunications) $ 350 $ 253,750
- --------------------------------------------------------------------------------------------------------
Malaysia - 0.6%
Tenaga Nasional Berhad, 7.5s, 2096 (Electric Utilities)+ $ 2,500 $ 1,754,750
- --------------------------------------------------------------------------------------------------------
Mexico - 3.2%
Alestra SA De RL De CV, 12.625s, 2009 (Telecommunications)## $ 2,000 $ 1,935,000
Banco Nacional de Commerce, 7.25s, 2004 (Banks and
Credit Companies) 500 458,150
Empresas ICA Sociedad SA, 5s, 2004 (Construction) 500 280,000
Groupo Minero Mexico SA, 8.25s, 2008 (Mining) 2,500 1,975,000
Perez Companc SA, 9s, 2006 (Oils)## 3,000 2,673,600
Sanluis Corp. SA, 8.875s, 2008 (Finance)## 1,250 1,084,375
Satelites Mexicanos SA, 10.125s, 2004 (Telecommunications) 500 373,750
TFM SA De CV, 0s to 2002, 11.75s, 2009 (Railroads) 670 402,000
------------
$ 9,181,875
- --------------------------------------------------------------------------------------------------------
Netherlands - 0.8%
Tenet Healthcare Corp., 0s, 2002 (Medical and Health
Technology and Services) $ 1,366 $ 1,051,820
Tjiwi Kimia International Finance, 13.25s, 2001
(Forest and Paper Products) 1,340 1,125,600
------------
$ 2,177,420
- --------------------------------------------------------------------------------------------------------
Panama
Republic of Panama, 8.875s, 2027 $ 3 $ 2,449
- --------------------------------------------------------------------------------------------------------
Russia - 1.4%
CSFB Gazprom Note, 13.5s, 2000 (Finance)+ $ 3,400 $ 2,012,460
Russia Principal Loans, 3.313s, 2020+ 21,000 1,917,300
------------
$ 3,929,760
- --------------------------------------------------------------------------------------------------------
Singapore - 0.3%
Krung Thai Bank, 6.534s, 2006 (Banks and
Credit Companies) $ 1,200 $ 912,000
- --------------------------------------------------------------------------------------------------------
United Kingdom - 3.3%
Colt Telecom Group PLC, 0s to 2001, 12s, 2006
(Telecommunications) $ 1,425 $ 1,197,000
Colt Telecom Group PLC, 8.875s, 2007 (Telecommunications) DEM 500 276,876
Constellation Finance LLC, 9.8s, 2001 (Financial
Institutions) 3,250 3,006,250
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s, 2005 (Telecommunications) 250 226,875
Dolphin Telecommunications PLC, 0s to 2004, 14s, 2009
(Telecommunications)## 200 79,000
Telewest, 9.625s, 2006 (Telecommunications) 1,150 1,161,500
UK Treasury, 6.75s, 2004 GBP 2,101 3,551,400
------------
$ 9,498,901
- --------------------------------------------------------------------------------------------------------
Uruguay - 0.8%
Banco Central De Uruguay, 6.75s, 2021 (Banks and
Credit Companies) $ 1,250 $ 1,087,500
Republic of Uruguay, 7.875s, 2027 1,102 1,131,754
------------
$ 2,219,254
- --------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 91,452,264
- --------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $278,266,123) $262,385,182
- --------------------------------------------------------------------------------------------------------
Stocks
- --------------------------------------------------------------------------------------------------------
SHARES
- --------------------------------------------------------------------------------------------------------
U.S. Stocks
Real Estate
Atlantic Gulf Communities Corp. (Identified Cost, $0)*+ 100 $ 13
- --------------------------------------------------------------------------------------------------------
Preferred Stock - 1.4%
- --------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc.* 807 --
- --------------------------------------------------------------------------------------------------------
Finance - 0.7%
Equitable Iowa Capital Trust 80,000 $ 2,010,000
- --------------------------------------------------------------------------------------------------------
Media - 0.4%
CSC Holdings, Inc.* 9,672 $ 1,034,904
- --------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.3%
Primedia, Inc. 9,000 $ 828,000
- --------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $4,359,893) $ 3,872,904
- --------------------------------------------------------------------------------------------------------
Warrants
- --------------------------------------------------------------------------------------------------------
DTI Holdings, Inc., Expiration Date 3/01/08 * 2,500 $ 25
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 9/19/27 * 2,000 2,000
- --------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $103,371) $ 40,150
- --------------------------------------------------------------------------------------------------------
Call Options Purchased - 0.1%
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
- --------------------------------------------------------------------------------------------------------
Canadian Dollars/September/1.4518 CAD 19,262 $ 238,828
Euro/March/0.991 EUR 13,148 63,177
- --------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Identified Cost, $336,001) $ 302,005
- --------------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.9%
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
- --------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 10/29/99, due 11/01/99, total to
be received $8,371,612 (secured by various U.S.
Treasury and Federal Agency Obligations), at Cost $ 8,368 $ 8,368,000
- --------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $291,433,388) $274,968,254
- --------------------------------------------------------------------------------------------------------
Call Options Written - (0.3)%
- --------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
- --------------------------------------------------------------------------------------------------------
Australian Dollars/April/0.625 AUD 15,115 $ (239,997)
Canadian Dollars/September/1.40 CAD 18,575 (89,957)
Japanese Yen/November/108 JPY 1,418,620 (550,425)
- --------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $414,350) $ (880,379)
- --------------------------------------------------------------------------------------------------------
Put Options Written
- --------------------------------------------------------------------------------------------------------
Canadian Dollars/September/1.55
(Premiums Received, $126,042) CAD 20,565 $ (67,308)
- --------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 3.6% 10,408,957
- --------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $284,429,524
- --------------------------------------------------------------------------------------------------------
* 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 HKD = Hong Kong Dollars
DEM = Deutsche Marks JPY = Japanese Yen
EUR = Euro NZD = New Zealand Dollars
GBP = British Pounds
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -------------------------------------------------------------------------------
OCTOBER 31, 1999
- -------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $291,433,388) $274,968,254
Cash 269,520
Net receivable for forward foreign currency exchange
contracts subject to
master netting agreements 602,890
Net receivable for forward foreign currency exchange
contracts to sell 307,008
Net receivable for forward foreign currency exchange
contracts to purchase 989,158
Receivable for Fund shares sold 682,409
Receivable for investments sold 1,003,116
Receivable from investment adviser 804,785
Interest receivable 6,847,224
Other assets 3,075
------------
Total assets $286,477,439
------------
Liabilities:
Payable for Fund shares reacquired $ 376,465
Payable for investments purchased 526,281
Written options outstanding, at value (premiums
received, $540,392) 947,687
Payable to affiliates -
Management fee 25,987
Administrative fee 350
Shareholder servicing agent fee 2,333
Distribution fee 17,971
Accrued expenses and other liabilities 150,841
------------
Total liabilities $ 2,047,915
------------
Net assets $284,429,524
============
Net assets consist of:
Paid-in capital $316,455,274
Unrealized depreciation on investments and translation of
asset and liabilities in foreign currencies (14,979,726)
Accumulated net realized loss on investments and foreign
currency transactions (19,513,103)
Accumulated undistributed net investment income 2,467,079
------------
Total $284,429,524
============
Shares of beneficial interest outstanding 39,199,689
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $100,469,260 / 13,760,890 shares of
beneficial interest outstanding) $7.30
======
Offering price per share (100 / 95.25) $7.66
======
Class B shares:
Net asset value and offering price per share
(net assets of $144,848,763 / 20,018,671 shares of
beneficial interest outstanding) $7.24
======
Class C shares:
Net asset value and offering price per share
(net assets of $38,807,747 / 5,378,558 shares of
beneficial interest outstanding) $7.22
======
Class I shares:
Net asset value and offering price per share
(net assets of $303,754 / 41,570 shares of beneficial
interest outstanding) $7.31
======
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- -------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999
- -------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 25,927,038
Dividend 197,241
------------
Total investment income $ 26,124,279
------------
Expenses -
Management fee $ 3,264,521
Administrative fee 35,301
Trustees' compensation 43,469
Shareholder servicing agent fee 296,962
Distribution and service fee (Class A) 348,419
Distribution and service fee (Class B) 1,427,641
Distribution and service fee (Class C) 418,966
Custodian fee 139,085
Printing 48,974
Auditing fees 37,295
Postage 43,716
Legal fees 5,149
Miscellaneous 231,947
------------
Total expenses $ 6,341,445
Fees paid indirectly (91,746)
Reduction of expenses by investment adviser (2,657,223)
------------
Net expenses $ 3,592,476
------------
Net investment income $ 22,531,803
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (7,467,647)
Written option transactions 2,293,201
Foreign currency transactions 947,256
Swaps (19,937)
------------
Net realized loss on investments $ (4,247,127)
------------
Change in unrealized appreciation (depreciation) -
Investments $ 7,734,635
Written options (620,384)
Swaps (138,248)
Translation of assets and liabilities in foreign currencies (517,021)
------------
Net unrealized gain on investments $ 6,458,982
------------
Net realized and unrealized gain on investments and
foreign currency $ 2,211,855
------------
Increase in net assets from operations $ 24,743,658
============
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 22,531,803 $ 18,488,073
Net realized loss on investments and foreign currency
transactions (4,247,127) (9,876,338)
Net unrealized gain (loss) on investments and foreign
currency translation 6,458,982 (19,921,895)
------------ ------------
Increase (decrease) in net assets from operations $ 24,743,658 $(11,310,160)
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (9,445,543) $ (6,818,361)
From net investment income (Class B) (12,830,532) (8,080,444)
From net investment income (Class C) (3,777,370) (2,569,063)
From net investment income (Class I) (27,411) (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 $(26,080,856) $(20,615,410)
------------ ------------
Net increase in net assets from Fund share transactions $ 14,151,635 $141,514,568
------------ ------------
Total increase in net assets $ 12,814,437 $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 $2,467,079 and $4,038,807,
respectively) $284,429,524 $271,615,087
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <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
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.62 $ 0.66 $ 0.69 $ 0.62 $ 0.60
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.06 (0.81) 0.13 0.18 0.48
------ ------ ------ ------ ------
Total from investment operations $ 0.68 $(0.15) $ 0.82 $ 0.80 $ 1.08
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.71) $(0.63) $(0.69) $(0.60) $(0.58)
From net realized gain on investments and foreign
currency transactions -- (0.13) (0.08) (0.08) --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.71) $(0.76) $(0.77) $(0.68) $(0.58)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.30 $ 7.33 $ 8.24 $ 8.19 $ 8.07
====== ====== ====== ====== ======
Total return(+) 9.72% (2.21)% 10.40% 10.42% 15.00%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.88% 0.85% 0.79% 1.13% 1.54%
Net investment income 8.42% 8.26% 8.26% 7.63% 7.86%
Portfolio turnover 204% 299% 217% 287% 249%
Net assets at end of period (000 Omitted) $100,469 $95,292 $69,874 $49,432 $41,688
(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 $ 0.55 $ 0.58 $ 0.58 $ 0.54 $ 0.53
Ratios (to average net assets):
Expenses## 1.83% 1.84% 2.01% 2.06% 2.47%
Net investment income 7.47% 7.24% 7.04% 6.70% 6.89%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) 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.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <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
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.57 $ 0.61 $ 0.61 $ 0.56 $ 0.55
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.07 (0.81) 0.15 0.18 0.48
------ ------ ------ ------ ------
Total from investment operations $ 0.64 $(0.20) $ 0.76 $ 0.74 $ 1.03
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.67) $(0.58) $(0.64) $(0.55) $(0.53)
From net realized gain on investments and foreign
currency transactions -- (0.13) (0.08) (0.08) --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.67) $(0.71) $(0.72) $(0.63) $(0.53)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.24 $ 7.27 $ 8.18 $ 8.14 $ 8.03
====== ====== ====== ====== ======
Total return 9.10% (2.84)% 9.64% 9.68% 14.23%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.53% 1.51% 1.44% 1.80% 2.27%
Net investment income 7.77% 7.64% 7.51% 7.02% 7.15%
Portfolio turnover 204% 299% 217% 287% 249%
Net assets at end of period (000 Omitted) $144,849 $133,872 $71,459 $25,361 $8,365
(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 $ 0.50 $ 0.53 $ 0.50 $ 0.49 $ 0.48
Ratios (to average net assets):
Expenses## 2.48% 2.50% 2.66% 2.73% 3.20%
Net investment income 6.82% 6.62% 6.29% 6.09% 6.18%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
CLASS C
- -----------------------------------------------------------------------------------------------------------------------------
<S> <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
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.57 $ 0.61 $ 0.60 $ 0.57 $ 0.54
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.07 (0.81) 0.16 0.18 0.48
------ ------ ------ ------ ------
Total from investment operations $ 0.64 $(0.20) $ 0.76 $ 0.75 $ 1.02
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.67) $(0.58) $(0.64) $(0.55) $(0.55)
From net realized gain on investments and foreign
currency transactions -- (0.13) (0.08) (0.08) --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.67) $(0.71) $(0.72) $(0.63) $(0.55)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.22 $ 7.25 $ 8.16 $ 8.12 $ 8.00
====== ====== ====== ====== ======
Total return 9.12% (2.84)% 9.68% 9.80% 14.17%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.53% 1.51% 1.44% 1.71% 2.20%
Net investment income 7.78% 7.65% 7.44% 7.12% 7.23%
Portfolio turnover 204% 299% 217% 287% 249%
Net assets at end of period (000 Omitted) $38,808 $42,213 $20,464 $5,478 $1,060
(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 $ 0.50 $ 0.53 $ 0.50 $ 0.51 $ 0.46
Ratios (to average net assets):
Expenses## 2.48% 2.50% 2.66% 2.64% 3.13%
Net investment income 6.83% 6.63% 6.21% 6.19% 6.26%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 1999 1998 1997*
- -------------------------------------------------------------------------------------------------------------------------
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) $ 0.65 $ 0.72 $ 0.49
Net realized and unrealized gain (loss) on investments and
foreign currency transactions 0.07 (0.85) 0.15
------ ------ ------
Total from investment operations $ 0.72 $(0.13) $ 0.64
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.74) $(0.66) $(0.54)
From net realized gain on investments and foreign currency
transactions -- (0.13) --
------ ------ ------
Total distributions declared to shareholders $(0.74) $(0.79) $(0.54)
------ ------ ------
Net asset value - end of period $ 7.31 $ 7.33 $ 8.25
====== ====== ======
Total return 10.25% (2.00)% 5.98%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.53% 0.50% 0.44%+
Net investment income 8.77% 8.51% 7.69%+
Portfolio turnover 204% 299% 217%
Net assets at end of period (000 Omitted) $304 $238 $230
(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 rations would have been:
Net investment income $ 0.58 $ 0.63 $ 0.40
Ratios (to average net assets):
Expenses## 1.48% 1.49% 1.66%+
Net investment income 7.82% 7.49% 6.47%+
* 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.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Strategic Income Fund (the Fund) is a nondiversified 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.
The Fund can invest in foreign securities. Investments in foreign securities
are vulnerable to the effects of changes in the relative values of the local
currency and the U.S. dollar and to the effects of changes in each country's
legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, 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. 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 in good faith by 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.
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 be 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. During
the year ended October 31, 1999, $1,977,325 was reclassified from accumulated
net realized loss on investments and foreign currency transactions to
accumulated undistributed net investment income due to differences between book
and tax accounting for mortgage-backed securities and currency. This change had
no effect on the net assets or net asset value per share. At October 31, 1999,
accumulated undistributed net investment income under book accounting were
different from tax accounting due to temporary differences in accounting for
currency transactions.
Realized gain is reported net of any foreign capital gains tax in the Statement
of Operations.
At October 31, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $18,580,519 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, ($11,281,953) and October 31, 2007,
($7,298,566).
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 daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. 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 shown as a reduction of expenses in the Statement
of Operations. The investment adviser has voluntarily agreed to pay the Fund's
operating expenses exclusive of management and distribution fees. This is
reflected as a reduction of expenses in the Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain 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
$13,201 for the year ended October 31, 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
$94,062 for the year ended October 31, 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 $24,642
for the year ended October 31, 1999. Fees incurred under the distribution plan
during the year ended October 31, 1999, were 0.35% of average daily net assets
attributable to Class A shares on an annualized basis.
The Trustees have adopted a distribution plan relating to Class B and Class C
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares. MFD
will pay to securities dealers that enter into a sales agreement with MFD all or
a portion of the service fee attributable to Class B and Class C shares, and
will pay to such securities dealers all of the distribution fee attributable to
Class C shares. The service fee is intended to be consideration for services
rendered by the dealer with respect to Class B and Class C shares. MFD retains
the service fee for accounts not attributable to a securities dealer, which
amounted to $21,179 and $40,276 for Class B and Class C shares, respectively,
for the year ended October 31, 1999. Fees incurred under the distribution plan
during the year ended October 31, 1999, were 1% of average daily net assets
attributable to Class B and Class C shares on an annualized basis.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended October 31,
1999, were $8,263, $444,175, and $22,987 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 annual rate of
0.10%. Prior to April 1, 1999, the fee was calculated as a percentage of the
Fund's average daily net assets at an 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 $149,534,200 $145,802,310
------------ ------------
Investments (non-U.S. government
securities) $400,443,899 $397,226,995
------------ ------------
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 $292,365,972
------------
Gross unrealized depreciation $(22,243,522)
Gross unrealized appreciation 4,845,804
------------
Net unrealized depreciation $(17,397,718)
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED OCTOBER 31, 1999 YEAR ENDED OCTOBER 31, 1998
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 4,360,463 $ 32,110,145 6,720,310 $ 54,058,684
Shares issued to shareholders in
reinvestment of distributions 775,005 5,687,469 578,941 4,624,652
Shares reacquired (4,375,018) (32,241,084) (2,778,946) (21,988,257)
---------- ------------ ---------- ------------
Net increase 760,450 $ 5,556,530 4,520,305 $ 36,695,079
========== ============ ========== ============
<CAPTION>
Class B Shares
YEAR ENDED OCTOBER 31, 1999 YEAR ENDED OCTOBER 31, 1998
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,423,566 $ 46,976,312 12,547,304 $100,304,984
Shares issued to shareholders in
reinvestment of distributions 1,120,537 8,156,487 764,812 6,058,719
Shares reacquired (5,937,074) (43,369,624) (3,634,990) (28,365,326)
---------- ------------ ---------- ------------
Net increase 1,607,029 $ 11,763,175 9,677,126 $ 77,998,377
========== ============ ========== ============
<CAPTION>
Class C Shares
YEAR ENDED OCTOBER 31, 1999 YEAR ENDED OCTOBER 31, 1998
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,932,707 $ 14,084,315 4,320,132 $ 34,534,971
Shares issued to shareholders in
reinvestment of distributions 274,329 1,991,571 201,269 1,589,285
Shares reacquired (2,649,473) (19,311,424) (1,208,045) (9,341,241)
---------- ------------ ---------- ------------
Net increase (decrease) (442,437) $ (3,235,538) 3,313,356 $ 26,783,015
========== ============ ========== ============
<CAPTION>
Class I Shares
YEAR ENDED OCTOBER 31, 1999 YEAR ENDED OCTOBER 31, 1998
----------------------------- -------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 9,730 $ 72,145 24,624 $ 198,617
Shares issued to shareholders in
reinvestment of distributions 3,738 27,444 3,586 28,935
Shares reacquired (4,364) (32,121) (23,593) (189,455)
---------- ------------ ---------- ------------
Net increase 9,104 $ 67,468 4,617 $ 38,097
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $820 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Fund
shares. Interest is charged to each fund, based on its borrowings, at a rate
equal to the bank's base rate. In addition, a commitment fee, based on the
average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated to
the Fund for the year ended October 31, 1999, was $1,984. The Fund had no
borrowings during the year.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange
contracts, swap agreements, and futures contracts. The notional or contractual
amounts of these instruments represent the investment the Fund has in particular
classes of financial instruments and does not necessarily represent the amounts
potentially subject to risk. The measurement of the risks associated with these
instruments is meaningful only when all related and offsetting transactions are
considered.
Written Option Transactions
NUMBER OF
CONTRACTS PREMIUMS
- -------------------------------------------------------------------------------
Outstanding, beginning of period 6 $ 745,788
Options written 40 4,119,252
Options terminated in closing transactions (26) (2,588,911)
Options expired (16) (1,735,737)
-----------
Outstanding, end of period 4 $ 540,392
===========
At October 31, 1999, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 12/01/99 AUD 873,033 $ 570,247 $ 556,482 $ 13,765
12/01/99 EUR 30,000,000 32,073,600 31,608,800 464,800
04/17/00 HKD 211,773,000 27,019,428 27,190,985 (171,557)
------------ ----------- ----------
$ 59,663,275 $59,356,267 $ 307,008
============ =========== ==========
Purchases 12/01/99 EUR 7,624,894 $ 8,134,999 $ 8,033,791 $ (101,208)
04/17/00 HKD 110,868,752 14,161,639 14,234,194 72,555
12/01/99 JPY 2,870,977,923 26,642,334 27,666,094 1,023,760
12/01/99 NZD 220,871 117,868 111,919 (5,949)
------------ ----------- ----------
$ 49,056,840 $50,045,998 $ 989,158
============ =========== ==========
</TABLE>
At October 31, 1999, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $266,945
with First Boston, $242,073 with Merrill Lynch, and $93,872 with Deutsche
Bank.
At October 31, 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 October 31,
1999, the Fund owned the following restricted securities, excluding securities
issued under Rule 144A, constituting 2.3% of net assets which may not be
publicly sold without registration under the Securities Act of 1933. The Fund
does not have the right to demand that such securities be registered. The
value of these securities is determined by valuations furnished by dealers or
by a pricing service, or if not available, in good faith by the Trustees.
<TABLE>
<CAPTION>
SHARE/PAR
DESCRIPTION DATE OF ACQUISITION AMOUNT COST VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/21/89 - 9/25/95 100 $ -- $ 13
CSFB Gazprom Note, 13.5s, 2000 3/10/98 3,400,000 3,400,000 2,012,460
Russia Principal Loans, 3.313s, 2020 2/25/99 - 8/03/99 21,000,000 1,842,187 1,917,300
Bahia Sul Celulos, SA, 10.625s, 2004 9/16/99 1,000,000 922,500 930,000
Tenaga Nasional Berhad, 7.5s, 2096 4/14/99 - 4/27/99 2,500,000 1,947,790 1,754,750
----------
$6,614,523
==========
</TABLE>
<PAGE>
REPORT OF ERNST & YOUNG, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Strategic
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income Fund, including the schedule of portfolio investments, as of
October 31, 1999, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of October 31, 1999, by correspondence with the custodian
and brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MFS Strategic Income Fund at October 31, 1999, the results of its operations
for the year then ended, the changes in its net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG
Boston, Massachusetts
December 9, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 2000, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1999.
FOR THE YEAR ENDED OCTOBER 31, 1999, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS RECEIVED DEDUCTION FOR
CORPORATIONS IS 0.80%.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and
on behalf of the MFS funds, is committed to the effective
use of technology in managing our portfolio investments,
delivering high-quality service to MFS fund shareholders, [Graphic Omitted]
retirement plan participants, and MFS' institutional
clients, and supporting the financial consultants who sell
our products.
MFS can now say that it is ready for the Year 2000. Our testing has demonstrated
that MFS' computer hardware and software will recognize "00" as the Year 2000
and will not confuse those digits with 1900. All of our critical business
applications and processes have been successfully tested, and we have adopted
companywide policies that will help us maintain our readiness through the
remainder of the year. Any new technology that is brought into the company
before the end of the year will be held to the same stringent standards as our
current technology. We have also developed a vendor readiness survey, contacted
over 700 of our vendors, and established an ongoing process to review responses,
as well as to review readiness statements of new vendors and products.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While MFS
is taking significant steps to protect the integrity of its internal systems,
there can be no assurance that these steps will be sufficient to avoid any
adverse impact on MFS fund shareholders, retirement plan participants, or
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program, please
visit our Web site at www.mfs.com, call our toll-free line, 1-800-637-4406, or
write to the MFS Year 2000 Program Management Office by e-mail at [email protected] or
by letter at 500 Boylston Street, Boston, MA 02116-3741.
<PAGE>
MFS(R) STRATEGIC INCOME FUND
<TABLE>
<S> <C>
TRUSTEES ASSISTANT TREASURERS
Richard B. Bailey - Private Investor; Mark E. Bradley*
Former Chairman and Director (until 1991), Ellen Moynihan*
MFS Investment Management(R) James O. Yost*
Marshall N. Cohan(+) - Private Investor SECRETARY
Stephen E. Cavan*
Lawrence H. Cohn, M.D.(+) - Chief of Cardiac
Surgery, Brigham and Women's Hospital; ASSISTANT SECRETARY
Professor of Surgery, Harvard Medical School James R. Bordewick, Jr.*
The Hon. Sir J. David Gibbons, KBE(+) - Chief CUSTODIAN
Executive Officer, Edmund Gibbons Ltd.; State Street Bank and Trust Company
Chairman, Colonial Insurance Company, Ltd.
AUDITORS
Abby M. O'Neill(+) - Private Investor Ernst & Young LLP
Walter E. Robb, III(+) - President and Treasurer, INVESTOR INFORMATION
Benchmark Advisors, Inc. (corporate financial For information on MFS mutual funds, call
consultants); President, Benchmark your financial consultant or, for an information
Consulting Group, Inc. (office services) kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern
Arnold D. Scott* - Senior Executive time (or leave a message anytime).
Vice President, Director, and Secretary,
MFS Investment Management INVESTOR SERVICE
MFS Service Center, Inc.
Jeffrey L. Shames* - Chairman and Chief P.O. Box 2281
Executive Officer, MFS Investment Management Boston, MA 02107-9906
J. Dale Sherratt(+) - President, Insight For general information, call toll free:
Resources, Inc. (acquisition planning specialists) 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
Ward Smith(+) - Former Chairman (until 1994),
NACCO Industries (holding company) For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
INVESTMENT ADVISER day from 9 a.m. to 5 p.m. Eastern time. (To
Massachusetts Financial Services Company use this service, your phone must be equipped
500 Boylston Street with a Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, exchanges,
DISTRIBUTOR or MFS stock and bond market outlook, call
MFS Fund Distributors, Inc. toll free: 1-800-MFS-TALK (1-800-637-8255)
500 Boylston Street anytime from a touch-tone telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
CHAIRMAN AND PRESIDENT www.mfs.com
Jeffrey L. Shames*
PORTFOLIO MANAGER
James T. Swanson*
TREASURER
W. Thomas London*
</TABLE>
+ Independent Trustee
* MFS Investment Management
<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 Investment Management.(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MSI-2 12/99 24.5M 34/234/334/834
