<PAGE>
[logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
MFS(R) STRATEGIC
INCOME FUND
SEMIANNUAL REPORT o APRIL 30, 2000
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MUTUAL FUND GIFT KITS (see page 38)
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TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 10
Portfolio of Investments .................................................. 13
Financial Statements ...................................................... 23
Notes to Financial Statements ............................................. 30
Trustees and Officers ..................................................... 41
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
This spring, the U.S. stock market experienced record point drops and volatility
that have given many investors cause for concern. While the recent market
correction has rattled a lot of nerves, it's important to put the current market
environment in perspective. Throughout the history of the market, investors have
experienced numerous corrections (declines of more than 20%) and periods of
extreme volatility. Of course, past performance is no guarantee of future
results; however, over the long term, stock and bond investors have enjoyed
returns that have solidly outpaced inflation.
From our perspective, as we look at the global investment climate at the
beginning of the new millennium, we see many reasons for optimism, as well as
the need to voice some words of caution. Our reasons for being optimistic about
both stock and bond markets include
o STRONG CORPORATE EARNINGS GROWTH: We believe that, over time, the most
important driver of stock prices is corporate earnings. Our research
indicates that the average earnings growth for U.S. companies could approach
15% in 2000, which would bode very well for U.S. equities. We are also
seeing encouraging signs that companies worldwide, and particularly in
Europe, are beginning to focus more on earnings and shareholder value --
that is, delivering stock price performance that will reward investors. As
we research companies around the globe, we are finding that specific areas
of opportunity include technology companies, especially those involved in
wireless telecommunications and in supplying infrastructure and services for
the Internet.
o LOW INFLATION WORLDWIDE: We believe accelerating inflation is one of the
chief factors that could end the current economic boom. While the U.S.
economy continues to grow rapidly, we have not experienced significant signs
of inflation. In our opinion, perhaps the major force keeping inflation at
bay is worldwide productivity increases, fueled by advancing technology. A
technological revolution based on computerization and the Internet appears
to be making it possible for companies to produce more products with fewer
employees, thereby enabling companies to increase earnings without raising
prices. A related factor keeping inflation down is the heightened
competition of an increasingly global marketplace, where, for example,
businesses are beginning to use computer networks and the Internet to shop
worldwide for the lowest prices from suppliers.
o STRONG GLOBAL ECONOMIES: Our outlook is that a majority of national
economies will continue to experience healthy growth with low inflation. In
late January, the current economic boom in the United States became the
longest in the nation's history. It appears to us that the U.S. Federal
Reserve Board's (the Fed's) program of gradual interest-rate increases will
eventually be successful in cooling the somewhat overheated U.S. economy
while prolonging the boom. In Europe, we see strong evidence that most
countries will continue on a moderate growth path with low inflation. A
major reason for this is that European companies have begun to adopt the
practices of downsizing, outsourcing, and consolidation that have helped
revitalize U.S. industry over the past decade. We are witnessing a similar
situation in Japan, as more firms merge, restructure, and invest in
technology. In the Pacific Rim, most economies have recovered from the
economic turmoil of late summer 1998 and are surging ahead. We believe
progress toward restructuring Asia's banking systems and other ailing
industries bodes well for stronger investor confidence in the region. While
business conditions have been less favorable in Latin America due to
relatively high inflation, increased exports and industrial production
suggest to us that the region's recession has ended.
Amid this positive global outlook, however, we believe investors should also
heed some cautionary notes:
o IT IS HIGHLY UNLIKELY THAT U.S. EQUITY MARKETS WILL CONTINUE TO PERFORM AT
THE PACE OF THE LAST SEVERAL YEARS. Although our outlook for U.S. markets
this year is quite positive, we believe it is unrealistic for investors to
expect stock market returns, as measured by the Standard & Poor's 500
Composite Index,(1) to routinely exceed 20%, as they did for each of the
past four years.
o HIGH VALUATIONS, ESPECIALLY OF TECHNOLOGY STOCKS, HAVE MADE U.S. MARKETS
INCREASINGLY VOLATILE. Investor excitement over the past year has pushed
many technology-related stocks to very high relative prices, as expressed by
their price/earnings (P/E) ratios. In general, we believe these higher
valuations are largely supported by the strong earnings growth mentioned
earlier. However, as we've recently experienced, this backdrop has led to a
highly volatile environment, where the market is swift to punish companies
whose earnings are less than expected and where fear can rapidly overcome
the desire to invest for long-term goals.
o RISING INTEREST RATES MAY DAMPEN MARKETS IN THE SHORT TERM, PARTICULARLY IN
THE UNITED STATES AND EUROPE. The Fed's current program of raising interest
rates could potentially cool both stock and bond markets, and the European
Central Bank has tended to follow the lead of the Fed in adjusting its own
interest rates. It is our expectation, however, that in the long term
interest rates will trend down again, perhaps by the end of this year. We
believe that could be favorable for both equity and fixed-income
investments.
On balance, it appears to us that the current global investment climate is well
matched to MFS' research-oriented style of investing. In the equity markets,
where we believe earnings growth is the most reliable indicator of long-term
performance, we feel our research team is second to none in determining the real
value of a company and its long-term earnings potential. To do that, our
portfolio managers and our worldwide team of research analysts spend extensive
time visiting with companies, talking to their customers, and investigating
their competition. In fixed-income investing, we believe the quality of our
research gives us an advantage by helping us determine which types of securities
can add the most value to a fund and by helping us reduce credit risk, which is
the biggest danger to some higher-income bond funds. In sum, MFS Original
Research(R) is one of the most important factors in our ongoing effort to
deliver competitive performance to you, our investors.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
May 18, 2000
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(1)The Standard & Poor's 500 Composite Index (the S&P 500) is a popular,
unmanaged index of common stock total return performance. It is not possible
to invest directly in an index.
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 six months ended April 30, 2000, Class A shares of the Fund had a total
return of 1.22%, Class B shares 0.90%, Class C shares 0.90%, and Class I shares
1.39%. These returns include the reinvestment of any distributions but exclude
the effects of any sales charges.
During the same period, the average multisector income fund tracked by Lipper
Inc., an independent firm that reports mutual fund performance, returned 1.24%.
The Fund's results also compare to returns over the same period for the
following unmanaged indices: 1.51% for the Lehman Brothers Government/ Corporate
Bond Index (the Lehman Index), -4.35% for the Salomon Brothers World Government
Index (the Salomon Index), and 0.08% 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.
Q. TO WHAT DO YOU ATTRIBUTE THE FUND'S SLIGHT UNDERPERFORMANCE OVER THE PERIOD,
RELATIVE TO THE AVERAGE MULTISECTOR INCOME FUND?
A. We think the area that hurt our relative performance was currency,
specifically our overweighted position in the euro, which has continued to
lose value versus the dollar. Outside of currency, we believe we did
relatively well in the six sectors in which we invest: 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.
Q. COULD YOU EXPLAIN HOW THE FUND'S INVESTMENT STRATEGY INCORPORATES THESE SIX
SECTORS?
A. What we try to do in this Fund is provide both sector diversification and
flexibility. We will reallocate assets among the various sectors in response
to, or in anticipation of, global events, taking advantage of what we
perceive as opportunities throughout the world. Our bottom-up MFS Original
Research(R) process plays a key role in this Fund because our approach is to
try to pick bonds issued by good companies and good countries, period; none
of our sectors is meant to replicate an index.
Q. WE'D LIKE TO LOOK AT HOW EACH SECTOR CONTRIBUTED TO PERFORMANCE, AS WELL AS
YOUR OUTLOOK FOR EACH SECTOR. COULD YOU BEGIN WITH THE U.S. GOVERNMENT
SECTOR?
A. In this sector, which includes U.S. Treasuries and mortgage-backed
securities, we have remained conservative by holding mainly cash and
long-term bonds. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) Lately we are seeing
worsening inflation numbers and high oil prices as well as some wage
inflation, which appears to be Federal Reserve Board (Fed) Chairman Alan
Greenspan's biggest worry. Our expectation is that the Fed may raise
short-term interest rates still further and that, therefore, this sector may
not do well over the near term. Eventually, however, we believe the Fed will
succeed in bringing inflation back down and will be able to lower interest
rates again. But in the meantime we are remaining cautious; this sector
allocation was about a quarter of portfolio assets, at the low end of the
Fund's historical range.
Q. LET'S MOVE ON TO THE U.S. HIGH-GRADE CORPORATE BOND SECTOR. HOW DID THIS
AREA PERFORM FOR THE FUND?
A. For the markets in general, this was a weak sector. We believe inflation
concerns and more supply than demand caused spreads to widen over the
period; in other words, the difference in yield (the spread) between
high-grade corporate bonds and U.S. Treasuries increased because high-grade
yields went up, causing prices of existing bonds to fall.
We felt, however, this was a strong area for our portfolio because our
research identified a number of utilities as crossover opportunities. These
are companies whose credit ratings improved over the period, causing their
bonds to cross over to a higher rating and therefore appreciate in value.
These utilities comprised most of our high-grade corporate holdings, so we
feel our research gave us an advantage that helped us to outperform in a
sector that generally performed poorly.
Going forward, our near-term outlook for high-grade corporate bonds is not
particularly rosy. It appears to us that the economy may be slowing and that
inflation may be on the rise, which we believe could cause corporate
earnings to get squeezed. So it's likely we may reduce our holdings in this
sector over the next few months from our current weighting of roughly 12% of
assets.
Q. TELL US ABOUT THE U.S. HIGH-YIELD CORPORATE SECTOR.
A. Because this sector consists of bonds issued by companies with lower credit
ratings ("junk" bonds), one of the keys to success is avoiding defaults.
This is another sector where we feel our Original ResearchSM has
historically helped us add yield to the Fund and at the same time steer
clear of most potentially problematic companies. The numbers appear to bear
out that opinion; in 1999, we were invested in only one of the 88 domestic
companies that defaulted on high-yield debt. We also have been careful to
diversify in the high-yield area, with no company representing more than 1%
of Fund assets.
Since about November of 1999, it has seemed to us that the market has been
expecting a recession because it has been discounting bonds in this sector
in anticipation of a 10% default rate, one of the highest rates we have ever
seen. We disagree with that expectation of recession; we feel this sector
thus represents a great opportunity for our research to identify securities
we believe are selling at bargain prices and offering very attractive
yields. Therefore we have been gradually adding holdings in this sector,
finding some of our best values in media and telecommunications companies.
Q. WHAT ROLE DID INTERNATIONAL DEVELOPED-COUNTRY DEBT PLAY IN THE FUND OVER THE
PERIOD?
A. Actually this sector, in which our main focus is Europe, has recently played
a minimal role in the portfolio. We have been at our lowest allocation ever,
about 8% of assets, because European interest rates have been increasing and
we don't envision the situation turning around in the near future. One
reason is that growth has been accelerating in Europe, so there is upward
pressure on interest rates as competition for capital increases. In terms of
relative value, we feel there is currently more value in the United States.
A problem in Europe has been the disarray among the finance communities of
European monetary union (EMU) countries. They are supposed to be speaking
with one voice, but instead they appear to be speaking with many different
voices. We feel that as a result their central bank, which is supposed to be
protecting the value of the euro, has little credibility. We believe this is
the main reason the Fund's position in the euro has done poorly. The good
news, in our view, is that we are optimistic that nondollar currencies,
including the euro, will eventually begin to appreciate as the U.S. economy
slows.
Q. DID EMERGING MARKET DEBT HELP THE FUND OVER THE PERIOD?
A. Yes, this has been our best-performing sector since the beginning of 1999.
Again, we feel this is an area where our research has helped yield
opportunities that the market in general may have passed over. More than two
years ago, for example, we identified Mexican government bonds as
undervalued issues due to Mexico's improving economy. During the past
quarter, major rating agencies raised these bonds to investment grade. As
with the utility bonds mentioned earlier, the Fund benefited from buying
these bonds early and seeing them appreciate in price as they crossed over
to a higher rating.
Our research has indicated that emerging markets worldwide may be benefiting
from improving fundamentals and rating-agency upgrades. The restoration of
credibility in Brazil, South Korea, and Mexico, as well as continuing
democratization in many of these countries, has led us to believe that
ongoing recoveries in Asia and Latin America may continue to contribute to
Fund performance. Our holdings in this sector currently comprise about 12%
of assets.
Q. FINALLY, WHAT IS THE ROLE OF CONVERTIBLE BONDS AND PREFERRED STOCKS IN
THE FUND?
A. This is a small sector, at about 2% of assets, but we look to these
securities to potentially give an extra kick to performance. Convertibles
are bond-like instruments that also have equity characteristics; generally,
they are corporate bonds that are exchangeable for a certain number of
shares of stock at a preset price.
We tend to add to this sector when the stock market suffers a decline, often
causing convertibles to cheapen and trade more on their bond values, which
are usually lower than their stock values. We feel this gives us a free
option if the stock price should recover and cause the value of the
convertible to appreciate. Level 3 Communications, a wireless
telecommunications and information services company, represents one of our
recent successes in this sector.
Q. SUMMING UP, COULD YOU GIVE US YOUR OUTLOOK FOR FIXED-INCOME INVESTING?
A. Our outlook is that interest rates may keep rising over the near term and
that we may experience continued volatility and uncertainty as the Fed works
to slow down the economy. In the longer term, however, we feel the Fed's
efforts will eventually succeed, which could bring down the competition for
capital and bring down rates, perhaps as early as late 2000.
Because they are currently so cheap, we feel that high-yield bonds issued by
corporations with strong fundamentals and emerging market bonds may continue
to do well, even in the short term. The U.S. economy still appears to be
strong, and we have been seeing improving fundamentals around the world. So
we think the opportunity exists for a flexible fund such as ours to benefit
from investing in selected areas.
Another reason we remain optimistic about bonds is that recent volatility
has underscored the riskiness of the stock market. We think this may induce
many investors to move money into fixed-income securities, which could help
fixed-income prices.
Also, we foresee more demand for fixed-income products as the U.S.
population ages. At the same time, the government has been issuing less debt
because of its huge budget surpluses. We believe this combination of
increased demand and lower supply could potentially drive up bond prices --
another reason we feel the long-term outlook for fixed-income investing is
very good.
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
current only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
It is not possible to invest directly in an index.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
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JAMES T. SWANSON IS SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT. HE IS
PORTFOLIO MANAGER OF MFS STRATEGIC INCOME FUND, MFS GLOBAL GOVERNMENTS FUND, MFS
GLOBAL GOVERNMENTS SERIES (PART OF MFS VARIABLE INSURANCE TRUST), THE STRATEGIC
INCOME SERIES OFFERED THROUGH MFS/SUN LIFE ANNUITY PRODUCTS, AND TWO CLOSED-END
FUNDS, MFS CHARTER INCOME TRUST AND MFS MULTIMARKET INCOME TRUST.
MR. SWANSON JOINED MFS IN 1985 AS VICE PRESIDENT AND WAS NAMED SENIOR VICE
PRESIDENT IN 1989.
HE IS A GRADUATE OF COLGATE UNIVERSITY AND THE HARVARD UNIVERSITY GRADUATE
SCHOOL OF BUSINESS ADMINISTRATION. MR. SWANSON IS A CHARTERED FINANCIAL ANALYST.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT ARE SUPPORTED BY AN
INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH, 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 all charges and expenses, for any other 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>
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FUND FACTS
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OBJECTIVE: SEEKS HIGH CURRENT INCOME BY INVESTING IN FIXED-INCOME
SECURITIES. PLUS, THE FUND SEEKS 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: $284.2 MILLION NET ASSETS AS OF APRIL 30, 2000
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Investment results reflect the percentage change in net
asset value, including reinvestment of dividends. (See Notes to Performance
Summary.)
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH APRIL 30, 2000
<TABLE>
<CAPTION>
CLASS A
6 Months 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +1.22% +2.22% +13.89% +43.40% +124.17%
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Average Annual Total Return Excluding Sales
Charge -- +2.22% + 4.43% + 7.48% + 8.41%
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Average Annual Total Return Including Sales
Charge -- -2.64% + 2.75% + 6.44% + 7.88%
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<CAPTION>
CLASS B
6 Months 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +0.90% +1.71% +11.74% +38.89% +114.23%
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Average Annual Total Return Excluding Sales
Charge -- +1.71% + 3.77% + 6.79% + 7.92%
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Average Annual Total Return Including Sales
Charge -- -2.01% + 2.97% + 6.51% + 7.92%
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<CAPTION>
CLASS C
6 Months 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +0.90% +1.72% +11.79% +39.08% +116.20%
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Average Annual Total Return Excluding Sales
Charge -- +1.72% + 3.79% + 6.82% + 8.02%
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Average Annual Total Return Including Sales
Charge -- +0.78% + 3.79% + 6.82% + 8.02%
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<CAPTION>
CLASS I
6 Months 1 Year 3 Years 5 Years 10 Years
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +1.39% +2.72% +15.22% +44.85% +126.43%
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Average Annual Total Return Excluding Sales
Charge -- +2.72% + 4.83% + 7.69% + 8.52%
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</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 4.75% sales charge. Class B Share Performance Including
Sales Charge takes into account the deduction of the applicable contingent
deferred sales charge (CDSC), which declines over six years from 4% to 0%. Class
C Share Performance Including Sales Charge takes into account the deduction of
the 1% CDSC applicable to Class C shares redeemed within 12 months. Class I
shares have no sales charge and are only available to certain institutional
investors.
Class B, C, and I share performance include the performance of the Fund's Class
A shares for periods prior to their inception (blended performance). Class B and
C blended performance has been adjusted to take into account the CDSC applicable
to Class B and C shares rather than the initial sales charge (load) applicable
to Class A shares. Class I share blended performance has been adjusted to
account for the fact that Class I shares have no sales charge. These blended
performance figures have not been adjusted to take into account differences in
class-specific operating expenses. Because operating expenses of Class B and C
shares are higher than those of Class A, the blended Class B and C share
performance is higher than it would have been had Class B and C shares been
offered for the entire period. Conversely, because operating expenses of Class I
shares are lower than those of Class A, the blended Class I share performance is
lower than it would have been had Class I shares been offered for the entire
period.
All performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details. All results are
historical and assume the reinvestment of capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MORE RECENT RETURNS MAY BE
MORE OR LESS THAN THOSE SHOWN. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE
RESULTS.
PORTFOLIO CONCENTRATION AS OF APRIL 30, 2000
QUALITY
Source: Standard & Poor's and Moody's
Governments 25.9%
"AAA" 4.3%
"A" 6.9%
"BBB" 9.7%
"BB" 15.5%
"B" 26.6%
"CCC" 2.0%
Not Rated 4.6%
Other 4.5%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- April 30, 2000
<TABLE>
<CAPTION>
Bonds - 95.0%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 67.3%
Aerospace - 1.3%
Argo Tech Corp., 8.625s, 2007 $ 1,250 $ 925,000
BE Aerospace, Inc., 9.875s, 2006 1,000 900,000
K & F Industries, Inc., 9.25s, 2007 1,000 925,000
United Defense Industries, Inc., 8.75s, 2007 950 883,500
------------
$ 3,633,500
--------------------------------------------------------------------------------------------------
Banks - 0.4%
Hanvit Bank, 12.75s, 2010## $ 1,000 $ 1,010,000
--------------------------------------------------------------------------------------------------
Banks and Credit Companies - 3.4%
Midland Cogeneration Venture Corp., 10.33s, 2002 $ 1,045 $ 1,068,409
Midland Funding Corp. II, "A", 11.75s, 2005 1,250 1,344,113
Midland Funding Corp., "B", 13.25s, 2006 4,250 4,960,005
Residential Accredit Loans, Inc., 7.75s, 2027 2,522 2,323,130
------------
$ 9,695,657
--------------------------------------------------------------------------------------------------
Building - 1.0%
American Standard, Inc., 7.375s, 2008 $ 1,000 $ 915,000
Building Materials Corp., 8s, 2007 900 769,500
Nortek, Inc., 9.875s, 2004 270 255,825
UDC Homes, Inc., 14.5s, 2000 6 3,048
Williams Scotsman, Inc., 9.875s, 2007 1,000 930,000
------------
$ 2,873,373
--------------------------------------------------------------------------------------------------
Business Services - 0.9%
Iron Mountain, Inc., 10.125s, 2006 $ 670 $ 646,550
Pierce Leahy Corp., 9.125s, 2007 1,000 937,500
Unisystem Corp., 7.875s, 2008 900 861,750
------------
$ 2,445,800
--------------------------------------------------------------------------------------------------
Chemicals - 1.2%
Huntsman Ici Chemicals, 10.125s, 2009 $ 475 $ 470,250
Lyondell Chemical Co., 9.625s, 2007 1,325 1,301,813
NL Industries, Inc., 11.75s, 2003 1,500 1,541,250
Sterling Chemicals, Inc., 11.25s, 2007 25 21,500
------------
$ 3,334,813
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Computer Software - Systems - 0.4%
Anacomp, Inc., 10.875s, 2004 $ 1,200 $ 1,080,000
--------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.8%
Kindercare Learning Centers, Inc., 9.5s, 2009 $ 240 $ 219,000
Polymer Group, Inc., 9s, 2007 900 810,000
Revlon Consumer Products Corp., 8.125s, 2006 95 67,925
Samsonite Corp., 10.75s, 2008 1,250 1,056,250
------------
$ 2,153,175
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U.S. Bonds - continued
Container, Forest and Paper Products - 2.2%
Ball Corp., 8.25s, 2008 $ 2,250 $ 2,120,625
Buckeye Cellulose Corp., 8.5s, 2005 610 581,025
Gaylord Container Corp., 9.75s, 2007 1,225 1,130,062
Riverwood International Corp., 10.25s, 2006 500 487,500
Silgan Holdings, Inc., 9s, 2009 1,000 940,000
U.S. Can Corp., 10.125s, 2006 900 918,000
------------
$ 6,177,212
--------------------------------------------------------------------------------------------------
Corporate Asset Backed - 1.1%
Commercial Mortgage Asset Trust, 7.839s, 2020
(Interest only) $ 53,114 $ 1,734,513
Morgan Stanley Capital I, Inc., 6.86s, 2010 1,680 1,314,600
------------
$ 3,049,113
--------------------------------------------------------------------------------------------------
Energy - 0.5%
Cheasapeake Energy Corp., 9.625s, 2005 $ 175 $ 168,875
Clark USA, Inc., 10.875s, 2005 500 293,750
P&L Coal Holdings Corp., 9.625s, 2008 1,150 1,032,125
------------
$ 1,494,750
--------------------------------------------------------------------------------------------------
Entertainment
Marvel Holdings, Inc, 0s, 1998 (Chapter 11)** $ 445 $ 0
--------------------------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 2.4%
FGLMC, 7.5s, 2030 $ 6,975 $ 6,833,333
--------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 4.0%
FNMA, 7s, 2029 $ 3,166 $ 3,029,432
FNMA, 7.5s, 2099 8,500 8,319,460
------------
$ 11,348,892
--------------------------------------------------------------------------------------------------
Financial Institutions - 1.6%
DTI Holdings, Inc., 0s to 2003, 12.5s, 2008 $ 500 $ 225,000
Dynex Capital, Inc., 7.875s, 2002 1,450 797,500
Natexis AMBS Co. LLC, 8.44s, 2049## 3,800 3,479,291
------------
$ 4,501,791
--------------------------------------------------------------------------------------------------
Financial Services - 1.1%
Constellation Finance LLC, 9.8s, 2001 $ 3,250 $ 2,990,000
Madison River Cap/Madison River, 13.25s, 2010## 250 235,000
------------
$ 3,225,000
--------------------------------------------------------------------------------------------------
Food and Beverage Products - 1.4%
Borden, Inc., 9.25s, 2019 $ 1,750 $ 1,614,497
Borden, Inc., 9.2s, 2021 2,500 2,313,925
------------
$ 3,928,422
--------------------------------------------------------------------------------------------------
Forest and Paper Products - 0.1%
U.S. Timberlands, 9.625s, 2007 $ 460 $ 404,800
--------------------------------------------------------------------------------------------------
Gaming and Hotels - 0.3%
Prime Hospitality Corp., 9.75s, 2007 $ 1,000 $ 952,500
--------------------------------------------------------------------------------------------------
Government National Mortgage Association - 3.7%
GNMA, 8s, 2026 $ 4,013 $ 4,023,508
GNMA, 6.5s, 2028 - 2028 6,125 5,738,312
GNMA, 6.5s, 2029 924 865,358
------------
$ 10,627,178
--------------------------------------------------------------------------------------------------
Healthcare - 0.6%
Tenet Healthcare Corp., 6s, 2005 $ 2,000 $ 1,610,000
--------------------------------------------------------------------------------------------------
Industrial - 0.7%
Allied Waste North America, Inc., 10s, 2009 $ 1,000 $ 687,500
Hayes Wheels International, Inc., 9.125s, 2007 1,000 910,000
IMO Industries, Inc., 11.75s, 2006 500 500,000
------------
$ 2,097,500
--------------------------------------------------------------------------------------------------
Media - 2.9%
American Radio Systems Corp., 9s, 2006 $ 350 $ 353,895
Chancellor Media Corp., 8.125s, 2007 900 891,000
Chancellor Media Corp., 8s, 2008 1,250 1,228,125
Cumulus Media, Inc., 10.375s, 2008 2,750 2,488,750
Echostar DBS Corp., 9.375s, 2009 1,750 1,680,000
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,000 1,000,000
Jones Intercable, Inc., 8.875s, 2007 500 510,080
Outdoor Systems, Inc., 8.875s, 2007 175 169,341
------------
$ 8,321,191
--------------------------------------------------------------------------------------------------
Metals and Minerals - 1.6%
AK Steel Holdings Corp., 9.125s, 2006 $ 400 $ 392,000
Commonwealth Aluminum Corp., 10.75s, 2006 425 421,812
Haynes International, Inc., 11.625s, 2004 1,000 550,000
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 300 286,500
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 750 708,750
Metal Management, Inc., 10s, 2008 1,000 730,000
Thermadyne Holdings Corp., 0s to 2003, 12.5s, 2008 2,000 840,000
WCI Steel, Inc., 10s, 2004 700 686,000
------------
$ 4,615,062
--------------------------------------------------------------------------------------------------
Oils - 1.7%
Triton Energy Ltd/Triton, 9.25s, 2005 $ 4,500 $ 4,455,000
Triton PCS, Inc., 0s to 2003, 11s, 2008 625 445,312
------------
$ 4,900,312
--------------------------------------------------------------------------------------------------
Printing and Publishing - 0.4%
Hollinger International Publishing, 9.25s, 2007 $ 1,250 $ 1,206,250
--------------------------------------------------------------------------------------------------
U.S. Bonds - continued
Retail - 0.2%
Musicland Group, Inc., 9.875s, 2008 $ 850 $ 705,500
--------------------------------------------------------------------------------------------------
Retail and Drugstores - 0.5%
Rite Aid Corp., 5.25s, 2002 $ 3,750 $ 1,457,813
--------------------------------------------------------------------------------------------------
Special Products and Services - 1.2%
AAF-McQuay, Inc., 8.875s, 2003 $ 550 $ 475,750
International Knife & Saw, Inc., 11.375s, 2006 850 552,500
Silicon Graphics, Inc., 5.25s, 2004 3,000 2,122,500
Synthetic Industries, Inc., 13s, 2000 370 364,450
------------
$ 3,515,200
--------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
Marsh Supermarkets, Inc., 8.875s, 2007 $ 150 $ 139,500
--------------------------------------------------------------------------------------------------
Telecommunications - 10.1%
Adelphia Communications Corp., 8.375s, 2008 $ 1,000 $ 890,000
Adelphia Communications Corp., 9.875s, 2007 75 72,563
Allbritton Communications Co., 9.75s, 2007 1,000 937,500
Centennial Cellular Operating Co., 10.75s, 2008 1,000 995,000
Century Communications Corp., 9.5s, 2005 450 428,625
Century Communications Corp., 0s, 2008 1,300 539,500
Charter Communications Holdings, 0s to 2004, 9.92s,
2011 2,250 1,237,500
Comcast Corp., 10.25s, 2001 1,425 1,473,892
Comcast Corp., 9.375s, 2005 360 377,168
Crown Castle International Corp., 9s, 2011 1,250 1,162,500
Focal Communications Corp., 12.125s, 2008 150 96,750
Frontiervision Operating Partnership LP, 11s, 2006 1,150 1,173,000
Granite Broadcasting Corp., 8.875s, 2008 280 241,500
ICG Holdings, Inc., 0s to 2001, 12.5s, 2006 1,100 880,000
Intermedia Communications, Inc., 0s to 2002, 11.25s,
2007 1,800 1,372,500
ITC Deltacom, Inc., 11s, 2007 1,276 1,301,520
Level 3 Communications, Inc., 9.125s, 2008 1,500 1,301,250
Liberty Media Corp., 8.25s, 2030## 4,150 3,969,724
LIN Televison Corp., 8.375s, 2008 700 595,000
Maxcom Telecomunicaciones CV, 13.75s, 2007## 2,525 2,499,750
Nextel Communications, Inc., 0s to 2003, 9.95s, 2008 1,550 1,085,000
Nextel International, Inc., 0s to 2003, 12.125s, 2008 1,500 930,000
NTL, Inc., 0s to 2003, 9.75s, 2008## 1,250 792,187
NTL, Inc., 0s to 2003, 12.375s, 2008 400 262,000
PSINET, Inc., 11s, 2009 750 660,000
PTC International Finance BV, 11.25s, 2009## 185 192,400
Qwest Communications International, Inc., 10.875s,
2007 289 310,409
Spectrasite Holdings, Inc., 10.75s, 2010## 1,500 1,477,500
United International Holdings, 0s to 2003, 10.75s,
2008 650 429,000
Western Wireless Corp., 10.5s, 2007 500 512,500
WorldCom, Inc., 8.875s, 2006 590 613,447
------------
$ 28,809,685
--------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 15.4%
U.S. Treasury Bonds, 9.875s, 2015 $ 2,166 $ 2,913,617
U.S. Treasury Bonds, 0s, 2019 9,000 2,793,780
U.S. Treasury Bonds, 6.125s, 2029 1,816 1,820,249
U.S. Treasury Bonds, 6.25s, 2030 5,000 5,196,850
U.S. Treasury Notes, 8s, 2001 18,750 19,022,437
U.S. Treasury Notes, 6s, 2004 8,510 8,331,801
U.S. Treasury Notes, 4.25s, 2010 3,519 3,593,963
------------
43,672,697
--------------------------------------------------------------------------------------------------
Utilities - Electric - 4.1%
CMS Energy Corp., 6.75s, 2004 $ 1,000 $ 945,000
Niagara Mohawk Power Corp., 8.77s, 2018 1,481 1,536,686
Texas & New Mexico Power Co., 10.75s, 2003 8,190 8,257,158
Waterford 3 Funding Entergy Corp., 8.09s, 2017 851 789,328
------------
$ 11,528,172
--------------------------------------------------------------------------------------------------
Total U.S. Bonds $191,348,191
--------------------------------------------------------------------------------------------------
Foreign Bonds - 27.7%
Argentina - 3.1%
Industrias Metalurgicas Pescarm, 9.5s, 2002## (Metals
& Minerals) $ 250 $ 167,500
Acindar Industria de Argentina, 11.25s, 2004
(Steel - Producers) 1,379 1,103,200
Autopistas Del Sol S.A., 10.25s, 2009 (Industrial)## 2,000 1,660,000
Cablevision S.A., 13.75s, 2007 (Cable Television)## 900 873,000
CIA Latino Americana, 11.625s, 2004 (Sovereign) 1,500 1,005,000
CIA Latino Americana, 11.625s, 2004 (Sovereign)## 1,750 1,163,750
Multicanal S.A., 0s, 2000 (Cable Television) 2,000 1,911,400
Supercanal Holdings S.A., 11.5s, 2005
(Telecommunications)##** 1,000 430,000
Telefonica de Argentina, 9.125s, 2008
(Telecommunications) 500 488,430
------------
$ 8,802,280
--------------------------------------------------------------------------------------------------
Bermuda - 0.5%
Flag Ltd., 8.25s, 2008 (Conglomerate) $ 200 $ 178,000
Global Crossing Holdings Ltd., 9.625s, 2008
(Telecommunications) 1,250 1,225,000
------------
$ 1,403,000
--------------------------------------------------------------------------------------------------
Brazil - 0.8%
Federal Republic of Brazil, 7.375s, 2006 $ 93 $ 83,003
Federal Republic of Brazil, 6s, 2024 2,000 1,275,000
Federal Republic of Brazil, 12.25s, 2030 1,000 915,000
------------
$ 2,273,003
--------------------------------------------------------------------------------------------------
Canada - 1.1%
AT&T Canada, Inc., 0s to 2003, 9.95s, 2008
(Telecommunications) $ 1,500 $ 1,196,970
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 490 400,575
Rogers Cantel, Inc., 9.375s, 2008
(Telecommunications) 1,500 1,492,500
------------
$ 3,090,045
--------------------------------------------------------------------------------------------------
France - 1.4%
Republic of France, 3.5s, 2004 EUR 4,695 $ 4,037,757
--------------------------------------------------------------------------------------------------
Germany - 1.4%
Federal Republic of Germany, 4.5s, 2009 EUR 4,688 $ 4,011,220
--------------------------------------------------------------------------------------------------
Grand Cayman Islands - 0.9% APP Finance IX Ltd., 10.526s, 2001
(Paper & Related Products) $ 3,000 $ 2,625,000
--------------------------------------------------------------------------------------------------
Greece - 3.1%
Fage Dairy Industries S.A., 9s, 2007 (Food and
Beverage Products) $ 4,300 $ 3,569,000
Hellenic Republic, 6.6s, 2004 GRD 603,800 1,667,324
Hellenic Republic, 6s, 2006 639,500 1,728,939
Hellenic Republic, 8.6s, 2008 558,900 1,739,530
------------
$ 8,704,793
--------------------------------------------------------------------------------------------------
Hong Kong - 0.3%
Daewoo Hong Kong Ltd., 5.675s, 2001
(Distribution/Wholesale)** $ 3,000 $ 960,000
--------------------------------------------------------------------------------------------------
Indonesia - 0.3%
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Paper &
Forest Products) $ 1,250 $ 815,625
--------------------------------------------------------------------------------------------------
Luxembourg - 0.1%
Millicom International Cellular, 0s to 2001, 13.5s,
2006 (Telecommunications) $ 255 $ 215,475
--------------------------------------------------------------------------------------------------
Mexico - 1.7%
Alestra S.A. de RL de CV, 12.625s, 2009
(Telecommunications) $ 1,000 $ 970,000
Aztec Hldgs S.A., 11s, 2002 (Industrial) 550 528,000
Bepensa S.A., 9.75s, 2004 (Sovereign) 1,000 925,000
Empresas ICA Sociedad Controladora S.A. de CV, 5s,
2004 (Construction) 500 255,000
Grupo Minero Mexico S.A. de CV, 8.25s, 2008
(Diversified Minerals) 500 412,500
Nuevo Grupo Iusacell S.A., 14.25s, 2006
(Telecommunications)## 1,200 1,254,000
Satelites Mexicanos S.A. de CV, 10.125s, 2004
(Telecommunications) 500 375,000
------------
$ 4,719,500
--------------------------------------------------------------------------------------------------
Netherlands - 1.7%
Cellco Finance N.V. Turkcell, 12.75s, 2005
(Telecommunications)## $ 500 $ 508,750
PT Alatief Freeport Finance, 9.75s, 2001 (Finance) 635 565,150
Tenet Healthcare Corp., 0s, 2002 (Medical and Health
Technology and Services) 2,402 1,924,603
United Pan Europe Communication N.V., 10.875s, 2009
(Cable Television) 2,000 1,830,000
------------
$ 4,828,503
--------------------------------------------------------------------------------------------------
Russia - 3.2%
Russia Principal Loans, 6.906s, 2020** $ 33,805 $ 9,211,862
--------------------------------------------------------------------------------------------------
South Korea - 0.1%
Chohung Bank, 11.5s, 2010 (Banks & Credit Cos.)## $ 250 $ 245,000
--------------------------------------------------------------------------------------------------
Turkey - 0.2%
Republic of Turkey, 11.875s, 2030 $ 500 $ 540,625
--------------------------------------------------------------------------------------------------
United Kingdom - 7.4%
Cable & Wireless Communications, 6.75s, 2008
(Telecommunications) $ 8,973 $ 8,960,189
Colt Telecom Group PLC, 8.875s, 2007
(Telecommunications) DEM 500 234,678
Colt Telecom Group PLC, 0s to 2001, 12s, 2006
(Telecommunications) $ 1,425 1,225,500
Daiwa PB Ltd., 7.241s, 2049 (Banks and Credit Cos.) 6,000 5,160,000
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s, 2005 (Telecommunications) 250 232,500
Dolphin Telecom PLC, 0s to 2004, 14s, 2009
(Telecommunications) 2,800 1,099,000
OTE PLC, 6.125s, 2007 (Industrial) EUR 1,210 1,098,119
Telewest Communications PLC, 9.625s, 2006
(Cable Television) $ 1,050 1,015,875
United Kingdom Treasury, 6.75s, 2004 GBP 1,204 1,948,175
------------
$ 20,974,036
--------------------------------------------------------------------------------------------------
Uruguay - 0.4%
Banco Central Del Uruguay, 6.75s, 2021 (Banks &
Credit Cos.) $ 1,250 $ 1,100,000
--------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 78,557,724
--------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $288,192,361) 269,905,915
--------------------------------------------------------------------------------------------------
Stocks
--------------------------------------------------------------------------------------------------
U.S. Stocks
Real Estate Investment Trusts
Atlantic Gulf Communities Corp.*+ (Identified Cost, $0) 100 $ 15
--------------------------------------------------------------------------------------------------
Preferred Stock - 1.3%
--------------------------------------------------------------------------------------------------
SHARES
--------------------------------------------------------------------------------------------------
Consumer Goods and Services
Renaissance Cosmetics, Inc., 14s** 807 $ 0
--------------------------------------------------------------------------------------------------
Finance - 0.7%
Equitable Iowa Capital Trust, 8.7s 80,000 $ 1,960,000
--------------------------------------------------------------------------------------------------
Media - 0.3%
CSC Holdings, Inc., 11.125s 10,216 $ 1,098,220
--------------------------------------------------------------------------------------------------
Printing and Publishing - 0.3%
Primedia, Inc., 8.625s 9,000 $ 828,000
--------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $4,359,893) $ 3,886,220
--------------------------------------------------------------------------------------------------
Warrants
--------------------------------------------------------------------------------------------------
DTI Holdings, Inc. Expiration Date 3/01/08* 2,500 $ 25
ICO, Inc. Expiration Date 7/01/02* 62,500 38,125
Renaissance Cosmetics, Inc. Expiration Date 8/31/09* 655 0
--------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $55,371) $ 38,150
--------------------------------------------------------------------------------------------------
Rights
--------------------------------------------------------------------------------------------------
United Mexican States* 1,000 $ 0
Banco Central Del Uraguay Vrr B 5 0
--------------------------------------------------------------------------------------------------
Total Rights (Identified Cost, $0) $ 0
--------------------------------------------------------------------------------------------------
Put Options Purchased - 0.2%
--------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) VALUE
--------------------------------------------------------------------------------------------------
Australian Dollar/August/0.66 $ 10,024 $ 2,195
Euro/May/0.935 29,618 4,176
Euro/May/0.98 15,730 0
Euro/May/1.03 7,814 0
Euro/August/1.07 8,117 520
Euro/August/1.04 9,468 4,185
Great British Pound/August/0.62 9,502 49,746
Great British Pound/August/0.615 9,414 57,913
Great British Pound/August/0.595 4,554 139,292
Japanese Yen/May/108.5 1,660,793 8,304
Japanese Yen/June/110 1,490,837 111,813
Japanese Yen/June/102 1,555,627 150,896
Japanese Yen/January/130 70,161 23,293
--------------------------------------------------------------------------------------------------
Total Put Options Purchased (Premiums Paid, $1,754,611) $ 552,333
--------------------------------------------------------------------------------------------------
Repurchase Agreement - 5.7%
--------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED)
--------------------------------------------------------------------------------------------------
Goldman Sachs, dated 04/28/00, due 05/01/00, total to be
received $16,161,714 (Secured by various U.S. Treasury
and Federal Agency Obligations), at Cost $ 16,154 $ 16,154,000
--------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $310,516,236) $290,536,633
--------------------------------------------------------------------------------------------------
Call Options Written - (0.5)%
--------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
--------------------------------------------------------------------------------------------------
Australian Dollars/August/0.61 AUD 9,265 $ (438,521)
Canadian Dollars/September/1.40 CAD 18,575 (12,222)
Japanese Yen/June/102.60 JPY 1,570,482 (749,121)
Japanese Yen/September/93.25 JPY 1,422,179 (356,967)
--------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $826,836) $ (1,556,831)
--------------------------------------------------------------------------------------------------
Euro/August/1.12 EUR 10,196 $ (102)
Japanese Yen/July/108 JPY 1,511,958 (269,128)
Great British Pound/September/.615 GBP 9,413,710 (139,292)
--------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $341,954) $ (408,522)
Other Assets, Less Liabilities - (1.6)% (4,417,705)
--------------------------------------------------------------------------------------------------
Net Assets - 100.0% $284,153,575
--------------------------------------------------------------------------------------------------
* Non-income producing security.
** In default.
## SEC Rule 144A restriction.
+ Restricted security.
</TABLE>
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 JPY = Japanese Yen
DEM = Deutsche Marks NZD = New Zealand Dollars
CAD = Canadian Dollars SEK = Swedish Kronor
EUR = Euro VEB = Venezuelan Bolivar
GBP = British Pounds ZAR = South African Rand
GRD = Greek Drachma
See notes to financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
---------------------------------------------------------------------------------------------
APRIL 30, 2000
---------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $310,516,236) $290,536,633
Cash 34,760
Net receivable for forward foreign currency exchange contracts to sell 1,680,883
Receivable for Fund shares sold 1,066,845
Receivable for written options 139,292
Interest receivable 5,382,115
Other assets 2,792
------------
Total assets $298,843,320
------------
Liabilities:
Payable for Fund shares reacquired $ 589,244
Payable for investments purchased 9,066,085
Net payable for forward foreign currency exchange contracts subject to
master netting agreements 593,010
Net payable for forward foreign currency exchange contracts to purchase 2,277,007
Written options outstanding, at value (premiums received, $1,168,790) 1,965,353
Payable to affiliates -
Management fee 11,463
Administrative fee 409
Shareholder servicing agent fee 2,336
Distribution fee 17,692
Accrued expenses and other liabilities 167,146
------------
Total liabilities $ 14,689,745
------------
Net assets $284,153,575
============
Net assets consist of:
Paid-in capital $326,825,057
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (22,017,531)
Accumulated net realized loss on investments and foreign currency
transactions (20,524,734)
Accumulated distributions in excess of net investment income (129,217)
------------
Total $284,153,575
============
Shares of beneficial interest outstanding 40,650,298
============
Class A shares:
Net asset value and redemption price per share
(net assets of $103,762,547 / 14,749,648 shares of beneficial
interest outstanding) $7.03
=====
Offering price per share (100 / 95.25) $7.38
=====
Class B shares:
Net asset value and offering price per share
(net assets $141,666,532 / 20,328,164 shares of beneficial interest
outstanding) $6.97
=====
Class C shares:
Net asset value and offering price per share
(net assets of $38,368,130 / 5,521,875 shares of beneficial interest
outstanding) $6.95
=====
Class I shares:
Net asset value and offering price per share
(net assets of $356,366 / 50,611 shares of beneficial interest
outstanding) $7.04
=====
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.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
-------------------------------------------------------------------------------------------------
SIX MONTHS ENDED APRIL 30, 2000
-------------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Income -
Interest $12,746,443
Dividend 125,808
-----------
Total investment income $12,872,251
-----------
Expenses -
Management fee $ 1,605,879
Administrative fee 15,823
Trustees' compensation 13,152
Shareholder servicing agent fee 141,224
Distribution and service fee (Class A) 174,882
Distribution and service fee (Class B) 717,495
Distribution and service fee (Class C) 193,358
Custodian fee 71,734
Printing 29,668
Auditing fees 18,500
Postage 18,388
Legal fees 469
Miscellaneous 146,661
-----------
Total expenses $ 3,147,233
Fees paid indirectly (34,783)
Reduction of expenses by investment adviser (1,282,757)
-----------
Net expenses $ 1,829,693
-----------
Net investment income $11,042,558
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(2,002,876)
Written option transactions 99,501
Foreign currency transactions 891,744
-----------
Net realized loss on investments $(1,011,631)
-----------
Change in unrealized depreciation -
Investments $(3,514,468)
Written options (389,238)
Translation of assets and liabilities in foreign currencies (3,134,099)
-----------
Net unrealized loss on investments $(7,037,805)
-----------
Net realized and unrealized loss on investments and foreign currency $(8,049,436)
-----------
Increase in net assets from operations $ 2,993,122
===========
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
--------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
APRIL 30, 2000 OCTOBER 31, 1999
(UNAUDITED)
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 11,042,558 $ 22,531,803
Net realized loss on investments and foreign currency
transactions (1,011,631) (4,247,127)
Net unrealized gain (loss) on investments and foreign
currency translation (7,037,805) 6,458,982
------------ ------------
Increase in net assets from operations $ 2,993,122 $ 24,743,658
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (4,992,244) $ (9,445,543)
From net investment income (Class B) (6,793,394) (12,830,532)
From net investment income (Class C) (1,837,260) (3,777,370)
From net investment income (Class I) (15,956) (27,411)
------------ ------------
Total distributions declared to shareholders $(13,638,854) $(26,080,856)
------------ ------------
Net increase in net assets from Fund share transactions $ 10,369,783 $ 14,151,635
------------ ------------
Total increase (decrease) in net assets $ (275,949) $ 12,814,437
Net assets:
At beginning of period 284,429,524 271,615,087
------------ ------------
At end of period (including (distributions in excess of net investment income)
and accumulated undistributed net investment income of $(129,217) and $2,467,079,
respectively) $284,153,575 $284,429,524
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------
CLASS A
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.30 $ 7.33 $ 8.24 $ 8.19 $ 8.07 $ 7.57
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.29 $ 0.62 $ 0.66 $ 0.69 $ 0.62 $ 0.60
Net realized and unrealized gain
(loss) on investments and
foreign currency (0.20) 0.06 (0.81) 0.13 0.18 0.48
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.09 $ 0.68 $(0.15) $ 0.82 $ 0.80 $ 1.08
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.36) $(0.71) $(0.63) $(0.69) $(0.60) $(0.58)
From net realized gain on investments and
foreign currency transactions -- -- (0.13) (0.08) (0.08) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.36) $(0.71) $(0.76) $(0.77) $(0.68) $(0.58)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 7.03 $ 7.30 $ 7.33 $ 8.24 $ 8.19 $ 8.07
====== ====== ====== ====== ====== ======
Total return(+) 1.22%++ 9.72% (2.21)% 10.40% 10.42% 15.00%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.89%+ 0.88% 0.85% 0.79% 1.13% 1.54%
Net investment income 8.18%+ 8.42% 8.26% 8.26% 7.63% 7.86%
Portfolio turnover 53% 204% 299% 217% 287% 249%
Net assets at end of period (000 omitted) $103,763 $100,469 $95,292 $69,874 $49,432 $41,688
(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 Fund's 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 $ 0.26 $ 0.55 $ 0.58 $ 0.58 $ 0.54 $ 0.53
Ratios (to average net assets):
Expenses## 1.79%+ 1.83% 1.84% 2.01% 2.06% 2.47%
Net investment income 7.28%+ 7.47% 7.24% 7.04% 6.70% 6.89%
+ Annualized.
++ Not annualized.
# 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,
SIX MONTHS ENDED ----------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
(UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.24 $ 7.27 $ 8.18 $ 8.14 $ 8.03 $ 7.53
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.27 $ 0.57 $ 0.61 $ 0.61 $ 0.56 $ 0.55
Net realized and unrealized gain (loss)
on investments and foreign currency (0.20) 0.07 (0.81) 0.15 0.18 0.48
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.07 $ 0.64 $(0.20) $ 0.76 $ 0.74 $ 1.03
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.34) $(0.67) $(0.58) $(0.64) $(0.55) $(0.53)
From net realized gain on investments and
foreign currency transactions -- -- (0.13) (0.08) (0.08) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.34) $(0.67) $(0.71) $(0.72) $(0.63) $(0.53)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.97 $ 7.24 $ 7.27 $ 8.18 $ 8.14 $ 8.03
====== ====== ====== ====== ====== ======
Total return 0.90%++ 9.10% (2.84)% 9.64% 9.68% 14.23%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.54%+ 1.53% 1.51% 1.44% 1.80% 2.27%
Net investment income 7.52%+ 7.77% 7.64% 7.51% 7.02% 7.15%
Portfolio turnover 53% 204% 299% 217% 287% 249%
Net assets at end of period (000 omitted) $141,667 $144,849 $133,872 $71,459 $25,361 $8,365
(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 Fund's 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 $ 0.24 $ 0.50 $ 0.53 $ 0.50 $ 0.49 $ 0.48
Ratios (to average net assets):
Expenses## 2.44%+ 2.48% 2.50% 2.66% 2.73% 3.20%
Net investment income 6.62%+ 6.82% 6.62% 6.29% 6.09% 6.18%
+ 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>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED ----------------------------------------------------------
APRIL 30, 2000 1999 1998 1997 1996 1995
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------
CLASS C
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.22 $ 7.25 $ 8.16 $ 8.12 $ 8.00 $ 7.53
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.27 $ 0.57 $ 0.61 $ 0.60 $ 0.57 $ 0.54
Net realized and unrealized gain (loss)
on investments and foreign currency (0.20) 0.07 (0.81) 0.16 0.18 0.48
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.07 $ 0.64 $(0.20) $ 0.76 $ 0.75 $ 1.02
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.34) $(0.67) $(0.58) $(0.64) $(0.55) $(0.55)
From net realized gain on investments
and foreign currency transactions -- -- (0.13) (0.08) (0.08) --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.34) $(0.67) $(0.71) $(0.72) $(0.63) $(0.55)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.95 $ 7.22 $ 7.25 $ 8.16 $ 8.12 $ 8.00
====== ====== ====== ====== ====== ======
Total return 0.90%++ 9.12% (2.84)% 9.68% 9.80% 14.17%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.54%+ 1.53% 1.51% 1.44% 1.71% 2.20%
Net investment income 7.53%+ 7.78% 7.65% 7.44% 7.12% 7.23%
Portfolio turnover 53% 204% 299% 217% 287% 249%
Net assets at end of period (000 omitted) $38,368 $38,808 $42,213 $20,464 $5,478 $1,060
(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 Fund's 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 $ 0.24 $ 0.50 $ 0.53 $ 0.50 $ 0.51 $ 0.46
Ratios (to average net assets):
Expenses## 2.44%+ 2.48% 2.50% 2.66% 2.64% 3.13%
Net investment income 6.63%+ 6.83% 6.63% 6.21% 6.19% 6.26%
+ 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>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
-------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED OCTOBER 31,
SIX MONTHS ENDED --------------------------------------
APRIL 30, 2000 1999 1998 1997*
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------
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) $ 0.31 $ 0.65 $ 0.72 $ 0.49
Net realized and unrealized gain (loss) on
investments and foreign currency (0.21) 0.07 (0.85) 0.15
------ ------ ------ ------
Total from investment operations $ 0.10 $ 0.72 $(0.13) $ 0.64
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.37) $(0.74) $(0.66) $(0.54)
From net realized gain on investments and foreign
currency transactions -- -- (0.13) --
------ ------ ------ ------
Total distributions declared to shareholders $(0.37) $(0.74) $(0.79) $(0.54)
------ ------ ------ ------
Net asset value - end of period $ 7.04 $ 7.31 $ 7.33 $ 8.25
====== ====== ====== ======
Total return 1.39%++ 10.25% (2.00)% 5.98%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.55%+ 0.53% 0.50% 0.44%+
Net investment income 8.55%+ 8.77% 8.51% 7.69%+
Portfolio turnover 53% 204% 299% 217%
Net assets at end of period (000 omitted) $ 356 $ 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 Fund's 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 $ 0.28 $ 0.58 $ 0.63 $ 0.40
Ratios (to average net assets):
Expenses## 1.45%+ 1.48% 1.49% 1.66%+
Net investment income 7.65%+ 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 (Unaudited)
(1) Business and Organization
MFS Strategic Income Fund (the Fund) is a nondiversified series of MFS Series
Trust VIII (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The Fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities
and tend to be more sensitive to economic conditions.
The Fund can invest in foreign securities. Investments in foreign securities are
vulnerable to the effects of changes in the relative values of the local
currency and the U.S. dollar and to the effects of changes in each country's
legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, forward contracts, and swap
agreements, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data, without exclusive
reliance upon exchange or over-the-counter prices. Short-term obligations, which
mature in 60 days or less, are valued at amortized cost, which approximates
market value. Over-the-counter options on securities are valued by brokers.
Over-the-counter currency options are valued through the use of a pricing model
which takes into account foreign currency exchange spot and forward rates,
implied volatility, and short-term repurchase rates. Equity securities listed on
securities exchanges or reported through the NASDAQ system are reported at
market value using last sale prices. Unlisted equity securities or listed equity
securities for which last sale prices are not available are reported at market
value using last quoted bid prices. Securities for which there are no such
quotations or valuations are valued in good faith, 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 requires that only distributions in excess of tax basis earnings and
profits be reported in the financial statements as distributions from paid-in
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
Realized gain is reported net of any foreign capital gains tax in the Statement
of Operations.
At October 31, 1999, the Fund, for federal income tax purposes, had a capital
loss carryforward of $18,580,519 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on October 31, 2006, ($11,281,953) and October 31, 2007,
($7,298,566).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.50% of
the Fund's average daily net assets and 7.14% of investment income. The
investment adviser has voluntarily agreed to waive a portion of its fee, which
is shown as a reduction of 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, MFS has 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 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 and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $6,734 for the Period ended
April 30, 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
$45,719 for the period ended April 30, 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 $9,761 for the period ended April 30, 2000.
Fees incurred under the distribution plan during the period ended April 30,
2000, were 0.35% of average daily net assets attributable to Class A shares on
an annualized basis.
The Trustees have adopted a distribution plan relating to Class B and Class C
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B and Class C shares. MFD
will pay to securities dealers that enter into a sales agreement with MFD all or
a portion of the service fee attributable to Class B and Class C shares, and
will pay to such securities dealers all of the distribution fee attributable to
Class C shares. The service fee is intended to be consideration for services
rendered by the dealer with respect to Class B and Class C shares. MFD retains
the service fee for accounts not attributable to a securities dealer, which
amounted to $13,708 and $20,512 for Class B and Class C shares, respectively,
for the period ended April 30, 2000. Fees incurred under the distribution plan
during the year ended April 30, 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 Period ended April 30,
2000, were $129, $227,236, and $5,726 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 $ 45,678,654 $ 25,695,460
------------ ------------
Investments (non-U.S. government securities) $103,578,000 $115,285,760
------------ ------------
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 $311,448,820
------------
Gross unrealized appreciation $ 5,503,012
Gross unrealized depreciation (26,415,199)
------------
Net unrealized depreciation $(20,912,187)
============
(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>
Class A Shares
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000 YEAR ENDED OCTOBER 31, 1999
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,265,903 $ 23,473,995 4,360,463 $ 32,110,145
Shares issued to shareholders in
reinvestment of distributions 410,583 2,946,694 775,005 5,687,469
Shares reacquired (2,687,728) (19,351,246) (4,375,018) (32,241,084)
---------- ------------ ---------- ------------
Net increase 988,758 $ 7,069,443 760,450 $ 5,556,530
========== ============ ========== ============
Class B Shares
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000 YEAR ENDED OCTOBER 31, 1999
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------------
Shares sold 3,142,999 $ 22,428,042 6,423,566 $ 46,976,312
Shares issued to shareholders in
reinvestment of distributions 587,392 4,180,046 1,120,537 8,156,487
Shares reacquired (3,420,898) (24,387,745) (5,937,074) (43,369,624)
---------- ------------ ---------- ------------
Net increase 309,493 $ 2,220,343 1,607,029 $ 11,763,175
========== ============ ========== ============
Class C Shares
<CAPTION>
SIX MONTHS ENDED APRIL 30, 2000 YEAR ENDED OCTOBER 31, 1999
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------------
Shares sold 1,129,182 $ 8,033,149 1,932,707 $ 14,084,315
Shares issued to shareholders in
reinvestment of distributions 141,219 1,002,039 274,329 1,991,571
Shares reacquired (1,127,084) (8,019,732) (2,649,473) (19,311,424)
---------- ------------ ---------- ------------
Net increase (decrease) 143,317 $ 1,015,456 (442,437) $ (3,235,538)
========== ============ ========== ============
Class I Shares
SIX MONTHS ENDED APRIL 30, 2000 YEAR ENDED OCTOBER 31, 1999
------------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------------------------------
Shares sold 58,796 $ 422,508 9,730 $ 72,145
Shares issued to shareholders in
reinvestment of distributions 2,194 15,753 3,738 27,444
Shares reacquired (51,949) (373,720) (4,364) (32,121)
---------- ------------ ---------- ------------
Net increase 9,041 $ 64,541 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 to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the six
months ended April 30, 2000, was $926. The Fund had no borrowings during the
period.
(7) Financial Instruments
The Fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange
contracts, 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.
<TABLE>
Written Option Transactions
<CAPTION>
NUMBER OF
CONTRACTS PREMIUMS
---------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding, beginning of period - 4 $ 540,392
Options written 15 3,027,196
Options terminated in closing transactions (7) (2,027,903)
Options exercised (2) (220,756)
Options expired (3) (150,139)
-- ----------
Outstanding, end of period 7 $1,168,790
== ==========
</TABLE>
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
NET UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS AT APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 05/04/00 - 06/16/00 EUR 17,837,203 $16,937,414 $16,236,423 $ 700,991
06/16/00 JPY 2,418,078,916 23,393,812 22,567,844 825,968
10/05/00 VEB 5,961,605,654 8,196,525 8,275,136 (78,611)
05/02/00 ZAR 64,640,255 9,772,828 9,540,293 232,535
----------- ----------- ------------
$58,300,579 $56,619,696 $ 1,680,883
=========== =========== ============
Purchases 06/16/00 AUD 5,477,351 $ 3,375,034 $ 3,197,082 $ (177,952)
05/04/00 - 06/16/00 EUR 25,054,731 23,841,917 22,816,331 (1,025,586)
06/16/00 JPY 3,159,590,482 30,230,657 29,488,345 (742,312)
06/16/00 NZD 220,871 109,110 107,135 (1,975)
06/16/00 SEK 173,928 20,015 19,467 (548)
05/02/00 ZAR 36,073,391 5,652,727 5,324,093 (328,634)
----------- ----------- ------------
$63,229,460 $60,952,453 $ (2,277,007)
=========== =========== ============
</TABLE>
At April 30, 2000, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $635,117 with
First Boston and $269,102 with Deutsche Bank, and a net payable of 1,497,229
with Merrill Lynch.
At April 30, 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 April 30, 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.
<TABLE>
<CAPTION>
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/21/89 - 9/25/95 100 -- $15
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$15
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</TABLE>
<PAGE>
<TABLE>
MFS(R) STRATEGIC INCOME FUND
<S> <C>
TRUSTEES ASSISTANT TREASURERS
Richard B. Bailey - Private Investor; Mark E. Bradley*
Former Chairman and Director (until 1991), Ellen Moynihan*
MFS Investment Management(R) James O. Yost*
Marshall N. Cohan - Private Investor SECRETARY
Stephen E. Cavan*
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; ASSISTANT SECRETARY
Professor of Surgery, Harvard Medical School James R. Bordewick, Jr.*
The Hon. Sir J. David Gibbons, KBE - Chief CUSTODIAN
Executive Officer, Edmund Gibbons Ltd.; State Street Bank and Trust Company
Chairman, Colonial Insurance Company, Ltd.
INVESTOR INFORMATION
Abby M. O'Neill - Private Investor For information on MFS mutual funds, call your
investment professional or, for an information
Walter E. Robb, III - President and Treasurer, kit, call toll free: 1-800-637-2929 any
Benchmark Advisors, Inc. (corporate financial business day from 9 a.m. to 5 p.m. Eastern time
consultants); President, Benchmark Consulting (or leave a message anytime).
Group, Inc. (office services)
INVESTOR SERVICE
Arnold D. Scott* - Senior Executive MFS Service Center, Inc.
Vice President, Director, and Secretary, P.O. Box 2281
MFS Investment Management Boston, MA 02107-9906
Jeffrey L. Shames* - Chairman and Chief For general information, call toll free:
Executive Officer, MFS Investment Management 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
J. Dale Sherratt - President, Insight
Resources, Inc. (acquisition planning For service to speech- or hearing-impaired,
specialists) Ward Smith - Former Chairman call toll free: 1-800-637-6576 any business day
(until 1994), NACCO Industries (holding from 9 a.m. to 5 p.m. Eastern time. (To use
company) this service, your phone must be equipped with
a Telecommunications Device for the Deaf.)
INVESTMENT ADVISER
Massachusetts Financial Services Company For share prices, account balances, exchanges,
500 Boylston Street or stock and bond outlooks, call toll free:
Boston, MA 02116-3741 1-800-MFS-TALK (1-800-637-8255) anytime from a
touch-tone telephone.
DISTRIBUTOR
MFS Fund Distributors, Inc. WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames*
PORTFOLIO MANAGER
James T. Swanson*
TREASURER
W. Thomas London*
+Independent Trustee
*MFS Investment Management
</TABLE>
<PAGE>
MFS(R) STRATEGIC INCOME FUND ------------
BULK RATE
U.S. POSTAGE
PAID
[Logo] M F S(R) MFS
INVESTMENT MANAGEMENT ------------
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-3 06/00 28M 34/234/334/834
