<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, 2000
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 5
Performance Summary ....................................................... 9
Portfolio of Investments .................................................. 13
Financial Statements ...................................................... 22
Notes to Financial Statements ............................................. 29
Independent Auditors' Report .............................................. 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
--------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
--------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
If you've been reading our fund reports for any length of time, you've probably
sensed the pride we have in our research process. More than anything else, we
think MFS Original Research(R) -- and the performance results it has yielded for
shareholders -- makes us unique among investment management companies. We think
that uniqueness stems from three factors: philosophy, process, and people.
PHILOSOPHY
In over 75 years of managing mutual funds, we've developed a number of beliefs
about the best ways to invest over a variety of market conditions. First, we
believe in bottom-up research, which means we use a company-by-company,
one-security-at-a-time approach to building a portfolio. What we look for is the
truth about the fundamentals of a company's business -- things such as the
ability of management to execute its business plan, the ability of that plan to
be scaled up as the company grows, actual demand for the company's products and
services, cash flow, profits, and earnings.
Second, we believe that, over the long term, stock prices follow earnings. In
our view, stock prices are basically a multiple of projected earnings, with the
multiple increasing as the market perceives that a company has something
customers want and will continue to want. One of the major elements of Original
Research(SM) is doing our best to project a company's future earnings and
determine how much the market will pay for those earnings.
Third, we believe there are at least three ways to potentially achieve
competitive long-term performance: be early, uncover second chances, and avoid
mistakes. All of these are based on bottom-up research. In both domestic and
international markets, early discovery has historically been a hallmark of our
investment style. Some of the stocks with which MFS has been most successful are
those in which we've taken large positions before the market discovered or
believed in them. Similarly, some of our best fixed-income investments have
been early positions in companies or governments that our research revealed were
potential candidates for credit upgrades. (A credit upgrade causes the value of
a bond to rise because it indicates the market has increased confidence that
principal and interest on the bond will be repaid.)
"Second-chance" opportunities are companies whose stock prices have stumbled but
that we believe still have the potential to be market leaders. For example, a
quarterly earnings shortfall of a few cents may cause the market to temporarily
lose confidence in a company. If we believe the business remains fundamentally
strong, we may use the price decline as a buying opportunity.
Avoiding mistakes is another way we feel Original Research may help performance.
In fixed-income investing this means, among other things, trying to be better
than our peers at avoiding bond issuers that may default. In equity investing,
avoiding mistakes means we strive to know a company and its industry well enough
to distinguish truth from hype.
PROCESS
We acquire our information firsthand, by researching thousands of companies to
determine which firms may make good investments. Our analysis of an individual
company may include
o face-to-face contact with senior management as well as frontline workers
o analysis of the company's financial statements and balance sheets
o contact with the company's current and potential customers
o contact with the company's competitors
o our own forecasts of the company's future market share, cash flow, and
earnings
Our analysts and portfolio managers disseminate this information in the form of
daily notes e-mailed worldwide to all members of our investment team. This
ensures that our best ideas are shared throughout the company, without barriers
between equity and fixed-income, international and domestic, or value and growth
investment areas. We believe this allows each of our portfolio managers -- and
thus each of our investors -- to potentially benefit from any relevant item of
Original Research.
John Ballen, our President and Chief Investment Officer, has often said that the
thought he hopes managers will have when they read the daily notes is, "I could
never perform as well at any other investment company, because nowhere else
could the quality of the research be this good."
PEOPLE
Our team of research analysts and portfolio managers traces its roots back to
1932, when we created one of the first in-house research departments in the
industry. Today, we believe we have an investment team distinguished for its
unique blend of talent, continuity, and cohesiveness.
MFS' team culture and commitment to quality research have proven to be of
tremendous value in attracting some of the best and brightest talent from
leading business schools and from other investment management companies. Our
company culture was a key factor in our recognition by Fortune magazine in its
January 10, 2000, issue as one of the "100 Best Companies to Work For" in
America. As befits a great team, our people have tended to stick around -- the
average MFS tenure of our portfolio managers is 11 years, with over 16 years in
the investment industry. Contributing to this continuity is our policy that all
equity portfolio managers are promoted from within, after distinguishing
themselves first as research analysts. And because many of us who are now
managing funds or managing the company itself have been working together for
well over a decade, we have a cohesiveness, a shared philosophy of investing,
and a unity of purpose that we believe bodes well for the future of the company.
We also have scale. Our research analyst team is over 55 members strong and
growing. Each analyst is our in-house expert on a specific industry or group of
industries in a specific region of the globe. In pursuing their research, our
analysts and portfolio managers each year will visit more than 2,000 companies
throughout the world, meet with representatives from more than 3,000 companies
at one of our four worldwide offices, attend roughly 5,000 company presentations
sponsored by major Wall Street firms, and consult with over 1,000 analysts from
hundreds of U.S. and foreign brokerage houses.
All of this culminates in our analysts making buy and sell recommendations on a
wide range of potential investments for all of our portfolios. In the end, the
goal of Original Research is to try to give our portfolio managers an advantage
over their peers -- to enable our managers to deliver competitive performance by
finding opportunities before they are generally recognized by the market, and by
avoiding mistakes whenever possible. Original Research does, we believe, make a
difference.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
November 16, 2000
A prospectus containing more complete information on any MFS product, including
charges and expenses, can be obtained from your investment professional. Please
read it carefully before you invest or send money. Investments in mutual funds
will fluctuate and may be worth more or less upon redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James T. Swanson]
James T. Swanson
For the 12 months ended October 31, 2000, Class A shares of the fund had a total
return of -0.03%, Class B shares -0.67%, Class C shares -0.67%, and Class I
shares 0.33%. These returns include the reinvestment of any distributions but
exclude the effects of any sales charges, and compare to the following returns
over the same period for the fund's unmanaged benchmarks: 7.13% for the Lehman
Brothers Government/Corporate Bond Index (the Lehman Index), -5.08% for the
Salomon Brothers World Government Bond Index (the Salomon Index), and -1.61% for
the Lehman Brothers High Yield Bond 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. The Lehman Brothers High Yield Bond Index
includes all fixed-income securities having a maximum quality rating from
Moody's Investors Service of "Ba1" and at least one year to maturity. During the
same period, the average multisector income fund tracked by Lipper Inc., an
independent firm that reports mutual fund performance, returned 0.63%.
Q. TO WHAT DO YOU ATTRIBUTE THE FUND'S UNDERPERFORMANCE OVER THE PERIOD,
RELATIVE TO THE AVERAGE MULTISECTOR INCOME FUND?
A. Performance was hurt by our currency holdings in the euro, which experienced
an ongoing slide in value versus the dollar. We began the period with an
overweighted position in the euro but have since trimmed it back to a very
minor exposure. In our view, the U.S. dollar has now become relatively
overvalued, and we expect that the euro will come back. Until we observe
signs of that beginning to happen, however, we plan to keep our euro
allocation to a minimum.
Q. WHAT SECTORS CONTRIBUTED MOST TO RECENT PERFORMANCE?
A. Interestingly, the top-performing bond sectors in 2000 have been U.S.
Treasuries, one of the safest of all fixed-income sectors in terms of credit
risk, and emerging markets, one of the riskiest. (Principal value and
interest on Treasury securities are guaranteed by the U.S. government if
held to maturity.) We increased our exposure to long-term Treasuries because
long-term interest rates have been falling, causing long-term Treasury
prices to rise. Although the Federal Reserve Board (the Fed) raised
short-term interest rates several times since last fall in an effort to slow
the economy, the effect of those increases has been to lower long-term
rates. We think long-term rates fell because the market has had confidence
that the Fed will succeed in slowing economic growth, which could lead to
lower rates in the future. The shrinking federal deficit is another factor
that has caused long-term bond prices to rise because demand for these bonds
has increased as the government has issued fewer of them.
Our emerging market debt holdings have been strong performers because many
Third World countries are starting to get their political and economic
houses in order, and their economic systems are coming more into line with
the rest of the world. As the market has recognized this situation, bonds
issued by these nations have tended to be upgraded, crossing over from
below-investment grade to investment grade. (When a bond's rating is
upgraded, the bond is considered less risky and therefore its price rises.)
For example, our research was early in identifying Mexico as a country with
credit upgrade potential, and the portfolio benefited when the Mexican bonds
we held crossed over to investment grade this past spring.
Q. WHAT DO YOU THINK WILL BE THE STRONGEST AREAS OF OPPORTUNITY GOING
FORWARD, AND HOW HAVE YOU POSITIONED THE FUND TO PARTICIPATE IN THESE
AREAS?
A. We believe U.S. Treasuries may do better than any other fixed-income sector
over the next few months. As the U.S. economy slows, we feel the Fed could
potentially begin lowering interest rates to provide more liquidity, thus
driving up bond prices. To take advantage of this situation, we have
increased our weighting in U.S. government and mortgage bonds to our highest
allocation in a couple of years.
We see the high-yield sector as another area of potential opportunity.
High-yield bond prices were beaten down in 2000 because, we believe, the
market was pricing in a 10% default rate in anticipation of a recession.
Looking toward the first half of 2001, however, we think the Fed will be
successful in slowing the economy without prompting a recession. We believe
that in the first or second quarter the market will recognize that the
economy has achieved a successful "soft landing," and prices of
credit-sensitive issues including high-yield bonds will begin to rise. At
that point we anticipate increasing our allocation to that sector.
Q. HOW WOULD YOU DESCRIBE YOUR INVESTMENT APPROACH?
A. We try to provide investors with "one-stop shopping" in the bond world by
offering a combination of six sectors that covers most of the bond market:
U.S. government and mortgage bonds, U.S. high-grade corporates, U.S.
high-yield corporates, international developed countries, emerging markets,
and convertible bonds and preferred stocks. We vary the weights of these
sectors within certain limits, depending on where we believe the best values
are at any given time. For example, if one sector gets beaten down in price
but we believe the situation will improve -- as with the high-yield sector
described earlier -- we may reallocate assets from pricier asset sectors to
that cheaper one to try to take advantage of the opportunity. We feel
markets have not always behaved rationally, and a portfolio such as ours may
take advantage of those situations.
Q. HOW DO YOU SEARCH OUT MARKET OPPORTUNITIES?
A. We have a procedure called the Horizon Process that enables us to gather our
analysts' best ideas across all fixed-income sectors and channel them into
the portfolio. Every two weeks, MFS(R) experts in each investment area give
us a three-month horizon outlook for their segments of the market. Using our
unique process, we compile this information into a report that helps us
decide where the best risk-adjusted fixed-income opportunities appear to be
at any given time, so we can adjust sector weightings accordingly.
/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.
<PAGE>
-------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
-------------------------------------------------------------------------------
JAMES T. SWANSON, CFA, IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R). HE IS PORTFOLIO MANAGER OF THE STRATEGIC INCOME
PORTFOLIOS OF OUR MUTUAL FUNDS AND VARIABLE ANNUITY PRODUCTS AND OF THE
GLOBAL GOVERNMENTS PORTFOLIO OF OUR VARIABLE ANNUITY PRODUCTS. HE ALSO
MANAGES TWO CLOSED-END FUNDS, MFS(R) CHARTER INCOME TRUST AND MFS(R)
MULTIMARKET INCOME TRUST.
JAMES 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. JAMES IS
A CHARTERED FINANCIAL ANALYST (CFA).
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL
RESEARCH(R), A GLOBAL, SECURITY-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 charges and expenses, for any MFS product
is available from your investment professional 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 TO PROVIDE
SIGNIFICANT CAPITAL APPRECIATION.
COMMENCEMENT OF
INVESTMENT OPERATIONS: OCTOBER 29, 1987
CLASS INCEPTION: CLASS A OCTOBER 29, 1987
CLASS B SEPTEMBER 7, 1993
CLASS C SEPTEMBER 1, 1994
CLASS I JANUARY 8, 1997
SIZE: $294.3 MILLION NET ASSETS AS OF OCTOBER 31, 2000
-------------------------------------------------------------------------------
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 the 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, 2000)
Lehman Brothers Salomon Brothers
MFS Strategic Lehman Brothers Government/ World
Income Fund High Yield Corporate Government
- Class A Bond Index Bond Index Bond Index
-------------------------------------------------------------------------------
10/90 $ 9,525 $10,000 $10,000 $10,000
10/92 12,856 17,133 12,750 12,674
10/94 13,989 20,448 13,816 14,707
10/96 17,764 26,279 16,915 17,852
10/98 19,177 29,734 20,296 20,617
10/00 21,036 30,527 21,598 19,089
<TABLE>
TOTAL RATES OF RETURN THROUGH OCTOBER 31, 2000
<CAPTION>
CLASS A
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge -0.03% +7.26% +30.76% +120.85%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -0.03% +2.36% + 5.51% + 8.25%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -4.77% +0.72% + 4.49% + 7.72%
-------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales Charge -0.67% +5.29% +26.61% +110.35%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -0.67% +1.73% + 4.83% + 7.72%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -4.32% +0.95% + 4.56% + 7.72%
-------------------------------------------------------------------------------------------------
<CAPTION>
CLASS C
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales Charge -0.67% +5.31% +26.83% +112.28%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge -0.67% +1.74% + 4.87% + 7.82%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge -1.58% +1.74% + 4.87% + 7.82%
-------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------------------------
Cumulative Total Return Excluding Sales Charge +0.33% +8.40% +32.31% +123.47%
-------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +0.33% +2.72% + 5.76% + 8.37%
-------------------------------------------------------------------------------------------------
<CAPTION>
COMPARATIVE INDICES(+)
1 Year 3 Years 5 Years 10 Years
-------------------------------------------------------------------------------------------------
Average multisector income fund* +0.63% +1.03% + 5.12% + 8.83%
-------------------------------------------------------------------------------------------------
Lehman Brothers High Yield Bond Index+ -1.61% +0.71% + 5.23% + 11.81%
-------------------------------------------------------------------------------------------------
Lehman Brothers Government/Corporate Bond Index+ +7.13% +5.48% + 6.12% + 8.00%
-------------------------------------------------------------------------------------------------
Salomon Brothers World Government Bond Index+ -5.08% +1.38% + 2.41% + 6.68%
-------------------------------------------------------------------------------------------------
(+) Average annual rates of return.
* Source: Lipper, Inc.
+ Source: Standard & Poor's Micropal, Inc.
</TABLE>
<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 includes 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 in
effect during the periods shown; without these, the results would have been less
favorable. 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. MORE RECENT RETURNS MAY BE
MORE OR LESS THAN THOSE SHOWN. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
<PAGE>
PORTFOLIO CONCENTRATION AS OF OCTOBER 31, 2000
QUALITY RATINGS
Source: Standard & Poor's and Moody's
Governments 34.2%
"B" 28.9%
"BB" 14.3%
"BBB" 6.9%
"A" 4.8%
"AAA" 4.5%
Other 2.2%
Equity 2.0%
"CCC" 1.2%
Not Rated 0.7%
"AA" 0.3%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- October 31, 2000
Bonds - 92.4%
<CAPTION>
--------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 71.4%
Advertising - 0.7%
Citadel Broadcasting Co., 9.25s, 2008 $ 1,125 $ 1,057,500
Paxson Communications Corp., 11.625s, 2002 1,000 1,021,250
------------
$ 2,078,750
--------------------------------------------------------------------------------------------------------
Aerospace - 1.0%
Argo Tech Corp., 8.625s, 2007 $ 1,250 $ 1,012,500
BE Aerospace, Inc., 9.875s, 2006 1,000 1,000,000
K & F Industries, Inc., 9.25s, 2007 1,000 958,750
------------
$ 2,971,250
--------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.3%
Midland Cogeneration Venture Corp., 10.33s, 2002 $ 865 $ 881,687
--------------------------------------------------------------------------------------------------------
Building - 0.7%
AAF- McQuay, Inc., 8.875s, 2003 $ 550 $ 495,000
American Standard, Inc., 7.375s, 2008 300 274,500
Building Materials Corp., 8s, 2007 900 288,000
Nortek, Inc., 8.875s, 2008 135 117,450
UDC Homes, Inc., 0s, 2000 6 2,632
Williams Scotsman, Inc., 9.875s, 2007 1,000 865,000
------------
$ 2,042,582
--------------------------------------------------------------------------------------------------------
Business Services - 0.8%
Iron Mountain, Inc., 10.125s, 2006 $ 670 $ 690,100
Pierce Leahy Corp., 9.125s, 2007 1,000 970,000
Unisystem Corp., 7.875s, 2008 900 825,750
------------
$ 2,485,850
--------------------------------------------------------------------------------------------------------
Chemicals - 1.1%
Huntsman ICI Holdings, 10.125s, 2009 $ 475 $ 456,000
Lyondell Chemical Co., 9.625s, 2007 1,325 1,285,250
NL Industries, Inc., 11.75s, 2003 1,500 1,518,750
Sterling Chemicals, Inc., 11.25s, 2007 25 13,250
------------
$ 3,273,250
--------------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.1%
Anacomp, Inc., 10.875s, 2004 $ 1,200 $ 174,000
--------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.5%
Kindercare Learning Centers, Inc., 9.5s, 2009 $ 240 $ 219,000
Samsonite Corp., 10.75s, 2008 1,250 959,375
Synthetic Industries, Inc., 14.9s, 2000 370 364,450
------------
$ 1,542,825
--------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 2.4%
Ball Corp., 8.25s, 2008 $ 2,250 $ 2,115,000
Buckeye Cellulose Corp., 8.5s, 2005 610 597,800
Consolidated Container Co., 10.125s, 2009 1,325 1,192,500
Gaylord Container Corp., 9.75s, 2007 1,225 808,500
Riverwood International Corp., 10.25s, 2006 1,000 977,500
Silgan Holdings, Inc., 9s, 2009 1,000 848,750
U.S. Timberlands, 9.625s, 2007 460 412,850
------------
$ 6,952,900
--------------------------------------------------------------------------------------------------------
Corporate Asset Backed - 7.0%
Chase Commercial Mortgage Secs Corp., 6.6s, 2012 $ 3,640 $ 2,853,396
Commercial Mortgage Asset Trust, 0.64s, 2020 (interest only) 52,862 1,779,864
DLJ Commercial Mortgage Corp., 0.91s, 2005 (interest only) 58,000 1,914,847
Morgan Stanley Capital , Inc., 7.771s, 2039 4,000 3,090,791
Morgan Stanley Capital I, Inc., 6.86s, 2010 1,680 1,372,661
Nationslink Funding Corp., 5s, 2009 3,800 2,626,156
Residential Accredit Lns Inc., 7.75s, 2027 2,500 2,313,425
Unicredito Italiano Capital Trust, 9.2s, 2049## 4,750 4,720,360
------------
$ 20,671,500
--------------------------------------------------------------------------------------------------------
Energy - 0.7%
Cheasapeake Energy Corp., 9.625s, 2005 $ 175 $ 175,656
Clark USA, Inc., 10.875s, 2005 30 20,100
Ocean Energy, Inc., 8.875s, 2007 790 799,875
P&L Coal Holdings Corp., 9.625s, 2008 1,150 1,118,375
------------
$ 2,114,006
--------------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 6.4%
FGLMC, 7.5s, 2030 $ 6,786 $ 6,783,895
FHLB, 6.75s, 2002 12,000 12,048,720
------------
$ 18,832,615
--------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 6.2%
FNMA, 7s, 2029 - 2029 $ 6,050 $ 5,928,272
FNMA, 7s, 2030 3,961 3,881,839
FNMA, 7.5s, 2030 8,355 8,344,348
------------
$ 18,154,459
--------------------------------------------------------------------------------------------------------
Financial Institutions - 0.9%
Natexis AMBS Co. LLC,##, 8.44s, 2049 $ 2,750 $ 2,627,529
--------------------------------------------------------------------------------------------------------
Financial Services - 1.1%
Constellation Finance LLC, 9.8s, 2001 $ 3,250 $ 3,120,000
Madison River Capital, 13.25s, 2010## 250 180,000
------------
$ 3,300,000
--------------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.1%
Borden, Inc., 9.25s, 2019 $ 1,750 $ 1,453,900
Borden, Inc., 9.2s, 2021 2,500 1,914,950
------------
$ 3,368,850
--------------------------------------------------------------------------------------------------------
Gaming and Hotels - 1.4%
Aztar Corp., 8.875s, 2007 $ 1,250 $ 1,212,500
HMH Properties, Inc., 8.45s, 2008 1,000 947,500
Prime Hospitality Corp., 9.75s, 2007 1,000 1,006,250
Station Casinos, Inc., 8.875s, 2008 1,000 965,000
------------
$ 4,131,250
--------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 1.3%
GNMA, 8s, 2026 $ 3,724 $ 3,788,699
--------------------------------------------------------------------------------------------------------
Industrial - 1.3%
Allied Waste North America, Inc., 10s, 2009 $ 1,000 $ 845,000
Hayes Wheels International, Inc., 9.125s, 2007 1,000 790,000
Haynes International, Inc., 11.625s, 2004 755 528,500
IMO Industries, Inc., 11.75s, 2006 500 504,375
International Knife & Saw, Inc., 11.375s, 2006 850 422,875
Thermadyne Holdings Corp., 0s to 2003, 12.5s, 2008 2,000 600,000
------------
$ 3,690,750
--------------------------------------------------------------------------------------------------------
Information, Paging and Technology - 0.1%
Qwest Communications International, Inc., 10.875s, 2007 $ 289 $ 316,018
--------------------------------------------------------------------------------------------------------
Internet - 0.4%
Exodus Communications, Inc., 10.75s, 2009 $ 1,250 $ 1,137,500
--------------------------------------------------------------------------------------------------------
Media - 5.7%
Adelphia Communications Corp., 8.375s, 2008 $ 1,000 $ 830,000
Allbritton Communications Co., 9.75s, 2007 1,000 972,500
American Radio Systems Corp., 9s, 2006 350 357,000
Callahan Nordrhein, 14s, 2010## 500 477,500
Century Communications Corp., 9.5s, 2005 450 409,500
Century Communications Corp., 0s, 2008 1,300 494,000
Chancellor Media Corp., 8.125s, 2007 900 906,750
Chancellor Media Corp., 8s, 2008 1,250 1,260,937
Charter Communications Holdings, 0s to 2004, 9.92s, 2011 2,250 1,293,750
Cumulus Media, Inc., 10.375s, 2008 1,030 813,700
Echostar DBS Corp., 9.375s, 2009 1,750 1,721,563
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,000 1,005,000
Frontiervision Operating Partnership LP, 11s, 2006 1,150 1,104,000
Granite Broadcasting Corp., 8.875s, 2008 280 193,200
Hollinger International Publishing, 9.25s, 2007 1,250 1,237,500
Jones Intercable, Inc., 8.875s, 2007 500 521,270
LIN Televison Corp., 8.375s, 2008 700 651,000
Marvel Holdings, Inc., 0s, 1998** 445 0
NTL, Inc., 0s to 2003, 9.75s, 2008## 1,250 700,000
United International Holdings, 0s to 2003, 10.75s, 2008 650 390,000
United Pan Europe, 10.875s, 2009 2,000 1,510,000
------------
$ 16,849,170
--------------------------------------------------------------------------------------------------------
Metals and Minerals - 0.4%
AK Steel Holdings Corp., 9.125s, 2006 $ 220 $ 216,700
Commonwealth Aluminum Corp., 10.75s, 2006 425 388,875
Metal Management, Inc., 10s, 2008 1,000 140,000
WCI Steel, Inc., 10s, 2004 700 563,500
------------
$ 1,309,075
--------------------------------------------------------------------------------------------------------
Metals and Mining - 0.1%
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 $ 300 $ 255,000
--------------------------------------------------------------------------------------------------------
Oil Services - 1.6%
Triton Energy Ltd Corp., 9.25s, 2005 $ 4,500 $ 4,567,500
--------------------------------------------------------------------------------------------------------
Oils - 0.4%
Gothic Production Corp., 11.125s, 2005 $ 1,000 $ 1,048,750
--------------------------------------------------------------------------------------------------------
Retail - 0.2%
Musicland Group, Inc., 9.875s, 2008 $ 725 $ 598,125
--------------------------------------------------------------------------------------------------------
Telecommunications - 4.5%
Adelphia Communications Corp., 9.875s, 2007 $ 75 $ 67,875
Centennial Cellular Operating Co., 10.75s, 2008 1,000 950,000
DTI Holdings, Inc., 0s to 2003, 12.5s, 2008 220 74,800
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 1,100 165,000
Intermedia Communications, Inc., 0s to 2002, 11.25s, 2007 1,800 1,485,000
ITC Deltacom, Inc., 11s, 2007 1,276 1,084,600
Level 3 Communications, Inc., 9.125s, 2008 1,500 1,215,000
Manpower Communications Inc., 13s, 2010 1,125 646,875
Nextel Communications, Inc., 0s to 2003, 9.95s, 2008 1,550 1,158,625
Nextel International, Inc., 0s to 2003, 12.125s, 2008 1,500 915,000
Nextlink Communications, Inc., 10.75s, 2009 750 660,000
NTL Communications Corp., 0s to 2003, 12.375s, 2008 400 224,000
PSINET, Inc., 11s, 2009 750 363,750
Spectrasite Holdings, Inc., 10.75s, 2010 1,500 1,380,000
Time Warner Telecommunications LLC, 9.75s, 2008 1,250 1,106,250
Triton PCS, Inc., 0s to 2003, 11s, 2008 625 471,875
Western Wireless Corp., 10.5s, 2007 500 518,750
WorldCom, Inc., 8.875s, 2006 590 608,821
------------
$ 13,096,221
--------------------------------------------------------------------------------------------------------
Telecom - Wire Less - 0.4%
Crown Castle International Corp., 10.75s, 2011 $ 1,250 $ 1,275,000
--------------------------------------------------------------------------------------------------------
Telecom - Wire Line - 1.3%
Focal Communications Corp., 0s to 2003, 12.125s, 2008 $ 150 $ 72,000
Liberty Media Corp., 8.25s, 2030 4,150 3,742,665
------------
$ 3,814,665
--------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 19.7%
U.S. Treasury Bonds, 9.875s, 2015 $ 2,166 $ 2,988,734
U.S. Treasury Bonds, 6.125s, 2029 6,316 6,540,976
U.S. Treasury Bonds, 6.25s, 2030 9,000 9,585,000
U.S. Treasury Notes, 8s, 2001 12,750 12,855,570
U.S. Treasury Notes, 6.75s, 2005 9,000 9,330,480
U.S. Treasury Notes, 4.25s, 2010 3,593 3,701,502
U.S. Treasury Notes, 5.75s, 2010 8,355 8,347,146
U.S. Treasury Notes, 6.5s, 2010 4,493 4,702,913
------------
$ 58,052,321
--------------------------------------------------------------------------------------------------------
Utilities - Electric - 1.6%
Niagara Mohawk Power Corp., 8.77s, 2018 $ 3,860 $ 4,004,905
Waterford 3 Funding Entergy Corp., 8.09s, 2017 851 831,952
------------
$ 4,836,857
--------------------------------------------------------------------------------------------------------
Total U.S. Bonds $210,238,954
--------------------------------------------------------------------------------------------------------
Foreign Bonds - 21.0%
Argentina - 0.6%
Autopistas Del Sol S.A., 10.25s, 2009 (Industrial)## $ 1,000 $ 785,000
Industrias Metalurgicas Pescarm, 9.5s, 2002 (Industrial)## 250 151,250
Mastellone Hermanos S.A., 11.75s, 2008 (Food and
Beverage Products) 1,000 640,000
Supercanal Holdings S.A., 11.5s, 2005 (Telecommunications)##** 1,000 330,000
------------
$ 1,906,250
--------------------------------------------------------------------------------------------------------
Bermuda - 0.6%
Flag Ltd., 8.25s, 2008 (Conglomerate) $ 200 $ 168,000
Global Crossing Holdings Ltd., 9.625s, 2008 (Telecommunications) 1,750 1,671,250
------------
$ 1,839,250
--------------------------------------------------------------------------------------------------------
Brazil - 0.6%
Federal Republic of Brazil, 12.25s, 2030 $ 1,750 $ 1,522,500
Federal Republic of Brazil, 11s, 2040 139 105,865
------------
$ 1,628,365
--------------------------------------------------------------------------------------------------------
Bulgaria - 0.2%
National Republic of Bulgaria, 7.75s, 2011 $ 750 $ 559,687
--------------------------------------------------------------------------------------------------------
Canada - 1.0%
AT&T Canada, Inc., 0s to 2003, 9.95s, 2008
(Telecommunications) $ 1,500 $ 1,200,255
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 490 196,000
Rogers Cantel, Inc., 9.375s, 2008 (Telecommunications) 1,500 1,515,000
------------
$ 2,911,255
--------------------------------------------------------------------------------------------------------
Denmark - 0.3%
Unikredit Realkredit, 7s, 2032 (Financial Institutions) DKK 6,740 $ 752,374
--------------------------------------------------------------------------------------------------------
France - 1.3%
Republic of France, 3.5s, 2004 EUR 4,695 $ 3,781,221
--------------------------------------------------------------------------------------------------------
Germany - 1.3%
Federal Republic of Germany, 4.5s, 2009 EUR 4,688 $ 3,779,859
--------------------------------------------------------------------------------------------------------
Grand Cayman Islands - 0.8%
APP Finance IX Ltd., 10.75s, 2001 (Forest and
Paper Products) $ 3,500 $ 2,345,000
--------------------------------------------------------------------------------------------------------
Greece - 2.7%
Fage Dairy Industries S.A., 9s, 2007 (Food and
Beverage Products) $ 4,300 $ 3,225,000
Hellenic Republic, 6.6s, 2004 GRD 603,800 1,547,184
Hellenic Republic, 6s, 2006 639,500 1,611,500
Hellenic Republic, 8.6s, 2008 558,900 1,613,811
------------
$ 7,997,495
--------------------------------------------------------------------------------------------------------
Indonesia - 0.2%
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Forest
and Paper Products) $ 1,750 $ 665,000
--------------------------------------------------------------------------------------------------------
Luxembourg - 0.1%
Millicom International Cellular, 0s to 2001, 13.5s,
2006 (Telecommunications) $ 255 $ 215,475
PTC International Finance II S.A., 11.25s, 2009
(Telecommunications) 185 166,500
------------
$ 381,975
--------------------------------------------------------------------------------------------------------
Mexico - 2.1%
Bepensa S.A., 9.75s, 2004## $ 925 $ 846,375
Cydsa S.A., 9.375s, 2002 (Chemicals) 3,000 1,290,000
Grupo Minero Mexico S.A. de CV, 8.25s, 2008
(Diversified Minerals) 1,500 1,290,000
Maxcom Telecomunicacione S.A., 13.75s, 2007
(Telecommunications) 1,400 630,000
Satelites Mexicanos S.A. de CV, 10.125s, 2004
(Telecommunications) 500 315,000
Tfm S.A. De CV, 0s to 2002, 11.75s, 2009 (Transportation) 2,667 1,946,910
------------
$ 6,318,285
--------------------------------------------------------------------------------------------------------
Netherlands - 1.4%
PT Alatief Freeport Finance, 9.75s, 2001 (Finance) $ 885 $ 792,075
Tenet Healthcare, 0s, 2002 (Medical and Health
Techcology and Services) 2,402 1,921,600
Tjiwi Kimia Intl BV, 13.25s, 2001 (Paper & Related Products) 1,500 1,260,000
------------
$ 3,973,675
--------------------------------------------------------------------------------------------------------
Russia - 3.6%
Russian Federation, 2.5s, 2030## $ 28,809 $ 10,731,352
--------------------------------------------------------------------------------------------------------
South Korea - 0.1%
Chohung Bank, 11.5s, 2010 (Banks and Credit Cos.)## $ 250 $ 239,063
--------------------------------------------------------------------------------------------------------
United Kingdom - 3.7%
Colt Telecom Group PLC, 8.875s, 2007 (Telecommunications) DEM 500 $ 208,782
Colt Telecom Group PLC, 0s to 2001, 12s, 2006
(Telecommunications) 1,425 1,298,531
Daiwa PB Ltd., 7.71s, 2049 (Banks and Credit Cos.) 6,000 4,980,000
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s, 2005 (Telecommunications) 250 237,500
Dolphin Telecom PLC, 0s to 2004, 14s, 2009 (Telecommunications) 2,800 451,500
OTE PLC, 6.125s, 2007 (Industrial)## EUR 1,210 1,006,357
Telewest Communications PLC, 9.625s, 2006 (Cable
Television)## $ 1,050 871,500
United Kingdom Treasury, 6.75s, 2004 GBP 1,204 1,819,985
------------
$ 10,874,155
--------------------------------------------------------------------------------------------------------
Uruguay - 0.4%
Banco Central Del Uruguay, 6.75s, 2021 $ 1,250 $ 1,100,000
--------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 61,784,261
--------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $297,071,214) $272,023,215
--------------------------------------------------------------------------------------------------------
Convertible Bond - 2.8%
--------------------------------------------------------------------------------------------------------
Colt Telecom Group PLC, 2s, 2006 (Telecommuncations) $ 3,575 $ 2,703,508
Rite Aid Corp., 5.25s, 2002 (Retail) 2,250 568,125
Silicon Graphics Inc., 5.25s, 2004 (Computer Systems) 3,000 1,882,500
Telewest Finance, 6s, 2005 (Finance) 2,000 1,387,500
Tenet Healthcare Corp., 6s, 2005 (Medical and Health
Technology Services) 2,000 1,660,000
--------------------------------------------------------------------------------------------------------
Total Convertible Bond (Identified Cost, $10,668,926) $ 8,201,633
--------------------------------------------------------------------------------------------------------
Preferred Stock - 0.6%
--------------------------------------------------------------------------------------------------------
SHARES
--------------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14s** 809 $ 0
--------------------------------------------------------------------------------------------------------
Media - 0.6%
CSC Holdings, Inc., 11.125s (Media) 10,792 $ 1,149,348
Primedia, Inc., 8.625s 9,000 756,000
------------
$ 1,905,348
--------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $2,249,893) $ 1,905,348
--------------------------------------------------------------------------------------------------------
Stocks
--------------------------------------------------------------------------------------------------------
U.S. Stocks
Building
Atlantic Gulf Communities Corp.+* (Identified Cost, $0) 100 $ 6
--------------------------------------------------------------------------------------------------------
Warrants
--------------------------------------------------------------------------------------------------------
DTI Holdings, Inc. (Telecommunications)* 2,100 $ 21
ICO, Inc. (Energy)* 62,500 38,125
Maxcom Telecomunicatione##* 1,400 175
Renaissance Cosmetics, Inc.* (Consumer Goods and Services)** 655 0
--------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $54,797) $ 38,321
--------------------------------------------------------------------------------------------------------
Call Options Purchased
--------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
--------------------------------------------------------------------------------------------------------
Australian Dollar/November/0.605 $ 6,047 $ 0
Euro/November/0.9 18,361 0
Japanese Yen/January/130 70,161 0
--------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $183,308) $ 0
--------------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.6%
--------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
--------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 10/31/00, due 11/01/00, total to
be received $7,565,383 (Secured by various U.S.
Treasury and Federal Agency Obligations) at Cost $ 7,564 $ 7,564,000
--------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $317,792,138) $289,732,523
--------------------------------------------------------------------------------------------------------
Call Options Written - (0.2)%
--------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
--------------------------------------------------------------------------------------------------------
Australian Dollars/May/0.56 AUD 4,637 $ (344,440)
Euro/November/0.86 EUR 8,570 (150,503)
--------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $140,212) $ (494,943)
--------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.8% 5,064,682
--------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $294,302,262
--------------------------------------------------------------------------------------------------------
* Non-income producing security.
** In default.
## 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 EUR = Euro
BRL = Brazilian Real GBP = British Pounds
CAD = Canadian Dollars GRD = Greek Drachma
CHF = Swiss Franc NOK = Norwegian Krone
CLP = Chilean Peso NZD = New Zealand Dollars
DEM = Deutsche Marks SEK = Swedish Kronor
DKK = Danish Krone
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
-------------------------------------------------------------------------------
OCTOBER 31, 2000
-------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $317,792,138) $289,732,523
Cash 2,362,219
Net receivable for forward foreign currency exchange
contracts to sell 1,473,002
Receivable for investments sold 311,388
Receivable for fund shares sold 749,828
Interest receivable 5,987,538
Other assets 7,204
------------
Total assets $300,623,702
------------
Liabilities:
Payable for fund shares reacquired $ 719,240
Payable for investments purchased 2,357,396
Net payable for forward foreign currency exchange
contracts subject to master netting agreements 1,895,948
Net payable for forward foreign currency exchange
contracts to purchase 680,151
Written options outstanding, at value (premiums received,
$ 140,212) 494,943
Payable to affiliates -
Management fee 3,919
Administrative fee 145
Shareholder servicing agent fee 829
Distribution fee 5,934
Accrued expenses and other liabilities 162,935
------------
Total liabilities $ 6,321,440
------------
Net assets $294,302,262
============
Net assets consist of:
Paid-in capital $346,421,196
Unrealized depreciation on investments and translation of
asset and liabilities in foreign currencies (29,550,641)
Accumulated net realized loss on investments and foreign
currency transactions (23,336,495)
Accumulated undistributed net investment income 768,202
------------
Total $294,302,262
============
Shares of beneficial interest outstanding 44,383,092
==========
Class A shares:
Net asset value and redemption price per share
(net assets of $111,790,577 / 16,754,239 shares of
beneficial interest outstanding) $6.67
=====
Offering price per share (100 / 95.25) $7.00
=====
Class B shares:
Net asset value and offering price per share
(net assets $137,013,327 / 20,737,225 shares of
beneficial interest outstanding) $6.61
=====
Class C shares:
Net asset value and offering price per share
(net assets of $37,955,972 / 5,762,498 shares of
beneficial interest outstanding) $6.59
=====
Class I shares:
Net asset value and offering price per share
(net assets of $7,542,386 / 1,129,130 shares of
beneficial interest outstanding) $6.68
=====
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, 2000
-------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 27,207,894
Dividend 164,621
------------
Total investment income $ 27,372,515
------------
Expenses -
Management fee $ 3,366,540
Administrative fee 41,501
Trustees' compensation 31,213
Shareholder servicing agent fee 287,955
Distribution and service fee (Class A) 363,206
Distribution and service fee (Class B) 1,426,680
Distribution and service fee (Class C) 389,586
Custodian fee 137,553
Printing 56,698
Auditing fees 37,987
Postage 32,500
Legal fees 4,429
Interest expense 1,726
Miscellaneous 217,411
------------
Total expenses $ 6,394,985
Fees paid indirectly (55,277)
Reduction of expenses by investment adviser (2,563,414)
------------
Net expenses $ 3,776,294
------------
Net investment income $ 23,596,221
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(10,023,132)
Written option transactions 1,048,765
Foreign currency transactions (1,669,989)
------------
Net realized loss on investments $(10,644,356)
------------
Change in unrealized appreciation (depreciation) -
Investments $(11,594,481)
Written options 52,564
Translation of assets and liabilities in foreign
currencies (3,028,998)
------------
Net unrealized loss on investments $(14,570,915)
------------
Net realized and unrealized loss on investments and
foreign currency $(25,215,271)
------------
Decrease in net assets from operations $ (1,619,050)
============
See notes to financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
--------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2000 1999
--------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 23,596,221 $ 22,531,803
Net realized loss on investments and foreign currency
transactions (10,644,356) (4,247,127)
Net unrealized gain (loss) on investments and foreign
currency translation (14,570,915) 6,458,982
------------ ------------
Increase (decrease) in net assets from operations $ (1,619,050) $ 24,743,658
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (6,890,957) $ (9,445,543)
From net investment income (Class B) (8,968,337) (12,830,532)
From net investment income (Class C) (2,452,937) (3,777,370)
From net investment income (Class I) (161,903) (27,411)
From paid in capital (Class A) (2,409,403) --
From paid in capital (Class B) (3,135,754) --
From paid in capital (Class C) (857,663) --
From paid in capital (Class I) (56,608) --
------------ ------------
Total distributions declared to shareholders $(24,933,562) $(26,080,856)
------------ ------------
Net increase in net assets from Fund share transactions $ 36,425,350 $ 14,151,635
------------ ------------
Total increase in net assets $ 9,872,738 $ 12,814,437
Net assets:
At beginning of year 284,429,524 271,615,087
------------ ------------
At end of year (including accumulated undistributed net
investment income of $768,202 and $2,467,079,
respectively) $294,302,262 $284,429,524
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.30 $ 7.33 $ 8.24 $ 8.19 $ 8.07
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.60 $ 0.62 $ 0.66 $ 0.69 $ 0.62
Net realized and unrealized gain (loss) on
investments and foreign currency (0.59) 0.06 (0.81) 0.13 0.18
------ ------ ------ ------ ------
Total from investment operations $ 0.01 $ 0.68 $(0.15) $ 0.82 $ 0.80
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.48) $(0.71) $(0.63) $(0.69) $(0.60)
From net realized gain on investments and foreign
currency transactions -- -- (0.13) (0.08) (0.08)
From paid in capital (0.16) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.64) $(0.71) $(0.76) $(0.77) $(0.68)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.67 $ 7.30 $ 7.33 $ 8.24 $ 8.19
====== ====== ====== ====== ======
Total return(+) (0.03)% 9.72% (2.21)% 10.40% 10.42%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.92% 0.88% 0.85% 0.79% 1.13%
Net investment income 8.57% 8.42% 8.26% 8.26% 7.63%
Portfolio turnover 127% 204% 299% 217% 287%
Net assets at end of period (000 omitted) $111,791 $100,469 $95,292 $69,874 $49,432
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. Additionally, the
investment adviser paid a portion of the funds operating expenses. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.54 $ 0.55 $ 0.58 $ 0.58 $ 0.54
Ratios (to average net assets):
Expenses## 1.81% 1.83% 1.84% 2.01% 2.06%
Net investment income 7.68% 7.47% 7.24% 7.04% 6.70%
# 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.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------
CLASS B
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.24 $ 7.27 $ 8.18 $ 8.14 $ 8.03
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.55 $ 0.57 $ 0.61 $ 0.61 $ 0.56
Net realized and unrealized gain (loss) on
investments and foreign currency (0.59) 0.07 (0.81) 0.15 0.18
------ ------ ------ ------ ------
Total from investment operations $(0.04) $ 0.64 $(0.20) $ 0.76 $ 0.74
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.44) $(0.67) $(0.58) $(0.64) $(0.55)
From net realized gain on investments and foreign
currency transactions -- -- (0.13) (0.08) (0.08)
From paid-in capital (0.15) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.59) $(0.67) $(0.71) $(0.72) $(0.63)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.61 $ 7.24 $ 7.27 $ 8.18 $ 8.14
====== ====== ====== ====== ======
Total return (0.67)% 9.10% (2.84)% 9.64% 9.68%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.56% 1.53% 1.51% 1.44% 1.80%
Net investment income 7.89% 7.77% 7.64% 7.51% 7.02%
Portfolio turnover 127% 204% 299% 217% 287%
Net assets at end of period (000 omitted)
$137,013 $144,849 $133,872 $71,459 $25,361
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. Additionally the
investment adviser paid a portion of the funds operating expenses. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.49 $ 0.50 $ 0.53 $ 0.50 $ 0.49
Ratios (to average net assets):
Expenses## 2.45% 2.48% 2.50% 2.66% 2.73%
Net investment income 7.00% 6.82% 6.62% 6.29% 6.09%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------------
CLASS C
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.22 $ 7.25 $ 8.16 $ 8.12 $ 8.00
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.55 $ 0.57 $ 0.61 $ 0.60 $ 0.57
Net realized and unrealized gain (loss) on
investments and foreign currency (0.59) 0.07 (0.81) 0.16 0.18
------ ------ ------ ------ ------
Total from investment operations $(0.04) $ 0.64 $(0.20) $ 0.76 $ 0.75
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.44) $(0.67) $(0.58) $(0.64) $(0.55)
From net realized gain on investments and foreign
currency transactions -- -- (0.13) (0.08) (0.08)
From paid-in capital (0.15) -- -- -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.59) $(0.67) $(0.71) $(0.72) $(0.63)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.59 $ 7.22 $ 7.25 $ 8.16 $ 8.12
====== ====== ====== ====== ======
Total return (0.67)% 9.12% (2.84)% 9.68% 9.80%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.56% 1.53% 1.51% 1.44% 1.71%
Net investment income 7.90% 7.78% 7.65% 7.44% 7.12%
Portfolio turnover 127% 204% 299% 217% 287%
Net assets at end of period (000 omitted) $37,956 $38,808 $42,213 $20,464 $5,478
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. Additionally the
investment adviser paid a portion of the funds operating expenses. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.49 $ 0.50 $ 0.53 $ 0.50 $ 0.51
Ratios (to average net assets):
Expenses## 2.45% 2.48% 2.50% 2.66% 2.64%
Net investment income 7.01% 6.83% 6.63% 6.21% 6.19%
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2000 1999 1998 1997*
----------------------------------------------------------------------------------------------------------------------------
CLASS I
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.31 $ 7.33 $ 8.25 $ 8.15
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.68 $ 0.65 $ 0.72 $ 0.49
Net realized and unrealized gain (loss) on
investments and foreign currency (0.65) 0.07 (0.85) 0.15
------ ------ ------ ------
Total from investment operations $ 0.03 $ 0.72 $(0.13) $ 0.64
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.50) $(0.74) $(0.66) $(0.54)
From net realized gain on investments and foreign
currency transactions -- -- (0.13) --
From paid-in capital (0.16) -- -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.66) $(0.74) $(0.79) $(0.54)
------ ------ ------ ------
Net asset value - end of period $ 6.68 $ 7.31 $ 7.33 $ 8.25
====== ====== ====== ======
Total return 0.33% 10.25% (2.00)% 5.98%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.60% 0.53% 0.50% 0.44%+
Net investment income 9.53% 8.77% 8.51% 7.69%+
Portfolio turnover 127% 204% 299% 217%
Net assets at end of period (000 omitted) $7,542 $304 $238 $230
(S) The investment adviser voluntarily waived a portion of its fee for certain of the periods indicated. Additionally the
investment adviser paid a portion of the funds operating expenses. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $ 0.62 $ 0.58 $ 0.63 $ 0.40
Ratios (to average net assets):
Expenses## 1.49% 1.48% 1.49% 1.66%+
Net investment income 8.64% 7.82% 7.49% 6.47%+
* For the period from the inception of Class I shares, January 8, 1997, through October 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
See notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Strategic Income Fund (the fund) is a non-diversified series of MFS Series
Trust VIII (the trust). The trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
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 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, at fair
value, 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 option 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. 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 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 total 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 net 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 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. During
the year ended October 31, 2000, $6,459,428 was reclassified to accumulated net
realized gain on investments and foreign currency transactions from accumulated
net investment income due to differences between book and tax accounting for
mortgage-backed securities foreign currency transactions. In addition,
$6,459,428 was redesignated as a tax return of capital distribution. This change
had no effect on the net assets or net asset value per share.
At October 31, 2000, accumulated undistributed net investment income under book
accounting were different from tax accounting due to temporary differences in
accounting for currency transactions.
At October 31, 2000, the fund, for federal income tax purposes, had a capital
loss carryforward of $22,312,591 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), October 31, 2007, ($7,298,566),
and October 31, 2008, ($3,732,072).
Multiple Classes of Shares of Beneficial Interest - The fund offers multiple
classes of shares that 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 total expenses in the Statement of Operations. The
fund's management fee is currently being charged at a rate of 0.50% of average
daily net assets. Effective March 1, 2000, the investment adviser voluntarily
agreed to pay all of the fund's operating expenses exclusive of management and
distribution fees such that the fund's aggregate expenses do not exceed 0.08% of
its average daily net assets. Prior to March 1, 2000, the aggregate expenses,
exclusive of management and distribution fees, were all paid by the investment
adviser. This is reflected as a reduction of total 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. Included in Trustees' compensation is a net
periodic pension expense of $13,554 for the year ended October 31, 2000.
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 incurs an administrative fee at
the following annual percentages of the fund's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$91,342 for the year ended October 31, 2000, 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 $18,437 for the year ended October 31,
2000. Fees incurred under the distribution plan during the year ended October
31, 2000, were 0.35% of average daily net assets attributable to Class A shares
on an annualized basis.
The fund's distribution plan provides that the fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
fund's average daily net assets attributable to Class B and Class C shares. MFD
will pay to securities dealers that enter into a sales agreement with MFD all or
a portion of the service fee attributable to Class B and Class C shares, and
will pay to such securities dealers all of the distribution fee attributable to
Class C shares. The service fee is intended to be consideration for services
rendered by the dealer with respect to Class B and Class C shares. MFD retains
the service fee for accounts not attributable to a securities dealer, which
amounted to $26,380 and $38,346 for Class B and Class C shares, respectively,
for the year ended October 31, 2000. Fees incurred under the distribution plan
during the year ended October 31, 2000, were 1.00% 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,
2000, were $409, $370,442, and $11,406 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%.
(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 $164,860,048 $120,117,135
------------ ------------
Investments (non-U.S. government securities) $205,662,230 $223,062,406
------------ ------------
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 $318,839,436
------------
Gross unrealized appreciation $ 3,231,290
Gross unrealized depreciation (32,338,203)
------------
Net unrealized appreciation (depreciation) $(29,106,913)
============
(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, 2000 YEAR ENDED OCTOBER 31, 1999
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,295,873 $ 51,386,498 4,360,463 $ 32,110,145
Shares issued to shareholders in
reinvestment of distributions 800,511 5,650,714 775,005 5,687,469
Shares reacquired (5,103,035) (36,103,001) (4,375,018) (32,241,084)
---------- ------------ ---------- ------------
Net increase 2,993,349 $ 20,934,211 760,450 $ 5,556,530
========== ============ ========== ============
<CAPTION>
Class B shares
YEAR ENDED OCTOBER 31, 2000 YEAR ENDED OCTOBER 31, 1999
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 5,436,728 $ 38,191,428 6,423,566 $ 46,976,312
Shares issued to shareholders in
reinvestment of distributions 1,073,188 7,520,245 1,120,537 8,156,487
Shares reacquired (5,791,362) (40,611,149) (5,937,074) (43,369,624)
---------- ------------ ---------- ------------
Net increase 718,554 $ 5,100,524 1,607,029 $ 11,763,175
========== ============ ========== ============
<CAPTION>
Class C shares
YEAR ENDED OCTOBER 31, 2000 YEAR ENDED OCTOBER 31, 1999
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,060,113 $ 14,405,035 1,932,707 $ 14,084,315
Shares issued to shareholders in
reinvestment of distributions 264,516 1,846,985 274,329 1,991,571
Shares reacquired (1,940,689) (13,557,235) (2,649,473) (19,311,424)
---------- ------------ ---------- ------------
Net increase 383,940 $ 2,694,785 (442,437) $ (3,235,538)
========== ============ ========== ============
<CAPTION>
Class I shares
YEAR ENDED OCTOBER 31, 2000 YEAR ENDED OCTOBER 31, 1999
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,476,567 $ 10,410,900 9,730 $ 72,145
Shares issued to shareholders in
reinvestment of distributions 31,685 217,530 3,738 27,444
Shares reacquired (420,692) (2,932,600) (4,364) (32,121)
---------- ------------ ---------- ------------
Net increase 1,087,560 $ 7,695,830 9,104 $ 67,468
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The fund and other affiliated funds participate in a $1.1 billion unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made for temporary financing needs. 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,
2000, was $2,194. Interest expense incurred on the borrowings amounted to $1,726
for the year ended October 31, 2000. The average dollar amount of borrowings was
$24,044 and the weighted average interest rate on these borrowings was 7.0625%.
(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 4 $ 540,392
Options written 29 4,218,491
Options terminated in closing transactions (11) (2,394,400)
Options exercised (13) (1,085,252)
Options expired (7) (1,139,019)
--- ----------
Outstanding, end of period 2 $ 140,212
=== ==========
At October 31, 2000, 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 12/15/00 AUD 12,031,316 $ 6,654,605 $ 6,236,022 $ 418,583
06/05/01 BRL 18,147,105 9,198,894 9,081,769 117,125
12/15/00 CHF 43,412,133 24,615,720 24,254,431 361,289
11/13/00 CLP 1,096,315,834 1,931,834 1,920,024 11,810
12/15/00 DKK 6,553,901 777,681 748,692 28,989
12/15/00 EUR 24,407,072 20,949,811 20,748,873 200,938
12/15/00 GRD 1,929,177,020 4,963,790 4,820,748 143,042
12/15/00 NOK 64,712,343 6,952,112 6,972,774 (20,662)
12/15/00 NZD 12,261,548 5,070,763 4,858,875 211,888
----------- ----------- ----------
$81,115,210 $79,642,208 $1,473,002
=========== =========== ==========
<CAPTION>
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Purchases 12/15/00 AUD 14,299,897 $ 7,876,818 $ 7,411,864 $ (464,954)
06/05/01 BRL 18,147,102 9,035,152 9,081,769 46,617
12/15/00 CAD 2,183,726 1,480,483 1,431,617 (48,866)
12/15/00 CHF 20,330,993 11,538,589 11,358,960 (179,629)
11/13/00 CLP 1,096,315,834 1,982,130 1,920,025 (62,105)
12/15/00 EUR 21,095,959 18,073,591 17,934,039 (139,552)
12/15/00 GBP 5,012,809 7,108,865 7,278,055 169,190
12/15/00 SEK 173,928 18,327 17,475 (852)
----------- ----------- ----------
$57,113,955 $56,433,804 $ (680,151)
=========== =========== ==========
</TABLE>
At October 31, 2000, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net payable of $898,683 with
Merrill Lynch, $479,862 with First Boston, $385,963 with Deutsche Bank, and
$131,440 with Chase.
At October 31, 2000, 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,
2000, the fund owned the following restricted securities, excluding securities
issued under Rule 144A, constituting less than 1% 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, at fair value, by
the Trustees.
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
--------------------------------------------------------------------------------
Atlantic Gulf Communities Corp. 9/21/89 - 9/25/95 100 $ -- $ 6
---
$ 6
===
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees of MFS Series Trust VII and Shareholders of MFS Strategic
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income fund (the fund), including the schedule of portfolio
investments, as of October 31, 2000, 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 auditing standards generally accepted
in the United States. 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, 2000, 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, 2000, 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 accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
December 8, 2000
<PAGE>
-------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
-------------------------------------------------------------------------------
IN JANUARY 2001, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 2000.
FOR THE YEAR ENDED OCTOBER 31, 2000, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS RECEIVED DEDUCTION FOR
CORPORATIONS IS 1.27%.
-------------------------------------------------------------------------------
<PAGE>
<TABLE>
MFS(R) STRATEGIC INCOME FUND
<S> <C>
TRUSTEES ASSISTANT TREASURERS
Marshall N. Cohan+ - Private Investor Mark E. Bradley*
Robert R. Flaherty*
Lawrence H. Cohn, M.D.+ - Chief of Cardiac Surgery, Laura F. Healy*
Brigham and Women's Hospital; Professor of Ellen Moynihan*
Surgery, Harvard Medical School
SECRETARY
The Hon. Sir J. David Gibbons, KBE+ - Chief Stephen E. Cavan*
Executive Officer, Edmund Gibbons Ltd.; Chairman,
Colonial Insurance Company, Ltd. ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Abby M. O'Neill+ - Private Investor
CUSTODIAN
Walter E. Robb, III+ - President and Treasurer, State Street Bank and Trust Company
Benchmark Advisors, Inc. (corporate financial
consultants); President, Benchmark Consulting AUDITORS
Group, Inc. (office services) Ernst & Young LLP
Arnold D. Scott* - Senior Executive INVESTOR INFORMATION
Vice President, Director, and Secretary, For information on MFS mutual funds, call your
MFS Investment Management investment professional or, for an information
kit, call toll free: 1-800-637-2929 any business
Jeffrey L. Shames* - Chairman and Chief Executive day from 9 a.m. to 5 p.m. Eastern time (or leave a
Officer, MFS Investment Management message anytime).
J. Dale Sherratt+ - President, Insight Resources, INVESTOR SERVICE
Inc. (acquisition planning specialists) MFS Service Center, Inc.
P.O. Box 2281
Ward Smith+ - Former Chairman (until 1994), NACCO Boston, MA 02107-9906
Industries (holding company)
For general information, call toll free:
INVESTMENT ADVISER 1-800-225-2606 any business day from 8 a.m. to
Massachusetts Financial Services Company 8 p.m. Eastern time.
500 Boylston Street
Boston, MA 02116-3741 For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business day
DISTRIBUTOR from 9 a.m. to 5 p.m. Eastern time. (To use
MFS Fund Distributors, Inc. this service, your phone must be equipped with
500 Boylston Street a Telecommunications Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances, exchanges,
CHAIRMAN AND PRESIDENT or stock and bond outlooks, call toll free:
Jeffrey L. Shames* 1-800-MFS-TALK (1-800-637-8255) anytime from a
touch-tone telephone.
PORTFOLIO MANAGER
James T. Swanson* WORLD WIDE WEB
www.mfs.com
TREASURER
James O. Yost*
+ Independent Trustee
* MFS Investment Management
</TABLE>
<PAGE>
MFS(R) STRATEGIC INCOME FUND ------------
PRSRT STD
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)2000 MFS Investment Management.(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
MSI-2 12/00 34M 34/234/334/834
