Dear Shareholders:
While the world's economies have been remarkably stable for the past several
months, financial markets have been anything but. The United States has seen
gradual economic growth continue largely unabated. Japanese economic weakness
is still evident but may be reversing, while the recession in Europe has not
yet turned around. Still, no dramatic changes have been seen in any of these
regions. Unlike the stable condition of world economies, the world bond
markets have lurched from one of the best years ever in 1995 to a sudden and
debilitating sell-off in the first quarter of 1996. For the six-month period
ended May 31, 1996, the market price of the Trust on the New York Stock
Exchange rose from $9.125 on November 30, 1995 to $9.50 on May 31, 1996,
while the net asset value of the Trust declined from $10.50 per share to
$10.20, representing a total return of 1.38%, based on net asset value, and
8.65% based on market price. These returns assume the reinvestment of all
distributions paid during the period.
We believe the difference in the Trust's total returns based on its market
price versus the returns based on net asset value reflects investors'
positive response to a repurchase program announced by the Board of Trustees
on April 10, 1996. Under this program, up to 10% of the outstanding shares of
the Trust are to be repurchased annually when the shares are trading at a
discount to net asset value. In addition, the Trustees voted to pay to
shareholders special distributions on a monthly basis throughout each year
based on the difference between the market price of any shares repurchased
under the program and the net asset value of such shares at the time of
repurchase. These special distributions of the captured economic value may
constitute a return of capital to shareholders for tax purposes. We believe
this plan to return the value of the discount to shareholders in the form of
higher monthly distributions may continue to have a positive effect on the
discount and should not disrupt the portfolio management of the Trust. This
plan replaces the existing share repurchase plan previously implemented by
the Trustees in November 1994.
U.S. Government Sector
We changed from a positive view toward U.S. Treasuries to a neutral view as
job growth in the United States began to show real strength in the second
quarter of 1996, signaling higher risks for bonds. The principal value and
interest on Treasury securities are guaranteed by the U.S. government if held
to maturity. Our move to conservatism includes an overweighted mortgage
position relative to other government securities, since mortgages tend to
have defensive characteristics. Our focus in the coming months will be on
protecting investors from capital loss in the event of higher inflation in
the United States. Inflation remains the biggest threat to bond values but,
so far in this recovery, has remained tame.
High-Yield Corporate Bonds
The yield premium for high-yield corporate bonds is no longer compelling, but
it reflects rational expectations that corporate liquidity in the United
States is already at high levels and may continue to be so. With yield
differentials so slight, we are favoring the higher-quality end of the risk
spectrum in this sector. Adding further weight to this decision, we would
argue that the economic cycle in the United States is in its later stages,
running the risk of eventual economic slowdown and a possibility of higher
bond casualty rates.
International Sector
We have moved significant sections of this portion of the portfolio to the
non-core sovereign bond issuers in Europe. Significantly, we have sold our
German and Netherlands positions and have bought obligations of countries
such as Spain, Italy, Sweden, Ireland and, notably, New Zealand, which have
shown promising signs of improvement. The trend toward following the U.S.
lead of higher yield and lower bond prices may continue if economic strength
in the developed nations resumes. We are at our lowest non-dollar position in
many years.
Looking ahead, it is possible we will continue to witness steeper peaks
and valleys in the financial markets, while we expect underlying economic
fundamentals to show little change. In this environment, we believe it will
be even more important for
1
<PAGE>
the Trust to steer a steady course and remain diversified.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
June 10, 1996
----------
In accordance with Section 23(c) of the Investment Company Act of 1940, the
Trust hereby gives notice that it may from time to time repurchase shares of
the Trust in the open market at the option of the Board of Trustees and on
such terms as the Trustees shall determine.
Number of Shareholders
As of May 31, 1996, our records indicate that there are 10,485 registered
shareholders and approximately 55,500 shareholders owning Trust shares in
"street" name, such as through brokers, banks and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the Trust, please write or
call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MCR.
Performance Summary
(For the six months ended May 31, 1996)
Net Asset Value Per Share
November 30, 1995 $10.50
May 31, 1996 $10.20
New York Stock Exchange
Price
November 30, 1995 $ 9.125
May 31, 1996 (high)* $ 9.500
April 8, 1996 (low)* $ 8.875
May 31, 1996 $ 9.500
*For the period December 1, 1995 through May 31, 1996.
Number of Employees
The Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as a closed-end,
non-diversified, management investment company and has no employees.
Investment Objective and Policy
MFS(R) Charter Income Trust's investment objective is to enhance current income.
The Trust will seek to achieve this objective by investing approximately
one-third of its assets in each of the following sectors of the fixed-income
securities markets: U.S. government securities and related options; debt
obligations of foreign governments and other foreign issuers; and high-yielding
corporate fixed-income securities, some of which may involve equity features.
There are special risks associated with high yield and foreign securities.
Government guarantees apply to individual securities only and not to prices and
yields of shares in a managed portfolio. During periods of unusual market or
economic conditions, the Trust may invest up to 50% of its assets in any one
sector and may choose not to invest in a sector in order to achieve its
investment objective. The Trust may also enter into options and futures
transactions and forward foreign currency exchange contracts and purchase
securities on a "when-issued" basis.
2
<PAGE>
Dividend Reinvestment and
Cash Purchase Plan
The Trust offers a Dividend Reinvestment and Cash Purchase Plan which allows you
to reinvest either all of the distributions or only the long-term capital gains
paid by the Trust. Unless the shares are trading at a premium (exceeding net
asset value), purchases are made at the market price. Otherwise, purchases will
be made at a discounted price of either the net asset value or 95% of the market
price, whichever is greater. You can also buy shares of the Trust. Investments
from $100 to $500 can be made in January and July on the 15th of the month or
shortly thereafter.
If your shares are in the name of a brokerage firm, bank or other nominee, you
can ask the firm or nominee to participate in the Plan on your behalf. If the
nominee does not offer the Plan, you may wish to request that your shares be
re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the Trust. However, when shares are bought
on the New York Stock Exchange or otherwise on the open market, each participant
pays a pro rata share of the commissions. A service fee of $0.75 is charged for
each cash purchase as well as a pro rata share of the brokerage commissions, if
any. The automatic reinvestment of distributions does not relieve you of any
income tax that may be payable (or required to be withheld) on the
distributions.
To enroll in or withdraw from the Plan or to receive a brochure providing a
complete description of the Plan, please contact the Plan agent at the address
and telephone number located on the back cover of this report. Please have
available the name of the Trust and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. When you withdraw from the Plan, you can receive
the value of the reinvested shares in one of two ways: a check for the value of
the full and fractional shares, or a certificate for the full shares and a check
for the fractional shares.
3
<PAGE>
Portfolio of Investments -- May 31, 1996
Bonds -- 88.7%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Dollar Denominated -- 60.3%
Financial Institutions -- 1.2%
American Annuity Group, Inc., 9.5s, 2001 $2,000 $ 2,070,000
American Annuity Group, Inc., 11.125s, 2003 1,000 1,080,000
American Life Holdings Co., 11.25s, 2004 2,000 2,100,000
Americo Life, Inc., 9.25s, 2005 300 282,000
Merrill Lynch Mortgage Investors, 8.227s, 2023+## 1,500 1,102,969
Phoenix RE Corp., 9.75s, 2003 750 793,125
Tiphook Finance Corp., 8s, 2000 2,056 1,470,040
----------
$ 8,898,134
----------
Foreign -- U.S. Dollar Denominated -- 1.9%
Bell Cablemedia PLC, 0s, 2005 $1,250 $ 787,500
Diamond Cable Communication PLC, 0s, 2005 2,090 1,259,225
Federal Republic of Brazil, 8.75s, 2001 465 428,381
Federal Republic of Brazil, 0s, 2012 1,000 652,500
GPA PLC, 10.875s, 2019 225 234,563
Republic of Argentina, 0s, 2005 2,970 2,286,900
Republic of Argentina, 0s, 2023 5,000 2,843,750
Republic of Poland Discount Notes, 0s, 2014 1,000 748,750
Republic of Poland Discount Notes, 6.813s, 2024 1,000 921,250
United States of Mexico, 6.25s, 2019 4,000 2,570,000
Videotron Holdings PLC, 0s, 2005 2,650 1,775,500
----------
$14,508,319
----------
Industrials -- 31.9%
Airlines -- 0.3%
K & F Industries, Inc., 13.75s, 2001 $ 950 $ 985,625
K & F Industries, Inc., 11.875s, 2003 1,100 1,188,000
----------
$ 2,173,625
----------
Automotive -- 1.1%
Exide Corp., 10s, 2005 $1,750 $ 1,723,750
Harvard Industries, Inc., 12s, 2004 3,250 3,250,000
SPX Corp., 11.75s, 2002 2,750 2,942,500
----------
$ 7,916,250
----------
Building -- 2.4%
American Standard, Inc., 0s, 2005 $5,500 $ 4,730,000
Building Materials Corp., 0s, 2004 4,000 2,980,000
Nortek, Inc., 9.875s, 2004 2,400 2,292,000
Schuller International Group, Inc., 10.875s, 2004 2,950 3,186,000
UDC Homes, Inc., 14.5s, 2000 13 6,698
USG Corp., 9.25s, 2001 4,275 4,403,250
----------
$17,597,948
----------
Cellular Telephones -- 0.2%
Rogers Cantel, Inc., 9.375s, 2008 $1,500 $ 1,488,750
----------
Chemicals -- 1.2%
Arcadian Partners LP, 10.75s, 2005 $2,575 $ 2,793,875
Koppers Industries, Inc., 8.5s, 2004 500 472,500
NL Industries, Inc., 11.75s, 2003 2,360 2,430,800
UCC Investors Holdings, Inc., 10.5s, 2002 2,500 2,662,500
UCC Investors Holdings, Inc., 0s, 2005 1,000 840,000
----------
$ 9,199,675
----------
4
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated -- continued
Industrials -- continued
Conglomerates -- 0.5%
News America Holdings, Inc., 10.125s, 2012 $3,000 $ 3,358,740
---------
Consumer Goods and Services -- 3.1%
Foodbrands America, Inc., 10.75s, 2006 $2,800 $ 2,849,000
International Semi-Tech Microelectronics, Inc., 0s, 2003 3,500 2,047,500
Ithaca Industries, Inc., 11.125s, 2002 1,600 672,000
Reeves Industries, Inc., 11s, 2002 1,200 1,056,000
Remington Arms, Inc., 9.5s, 2003+## 600 552,000
Revlon Consumer Products Corp. 10.5s, 2003 5,000 5,075,000
Samsonite Corp., 11.125s, 2005 1,500 1,530,000
Sealy Corp., 9.5s, 2003 3,550 3,496,750
Westpoint Stevens, Inc., 9.375s, 2005 5,750 5,577,500
---------
$22,855,750
---------
Containers -- 1.7%
Calmar, Inc., 11.5s, 2005 $1,500 $ 1,470,000
Container Corp. of America, 9.75s, 2003 1,500 1,492,500
Ivex Packaging Corp., 12.5s, 2002 1,800 1,899,000
Owens-Illinois, Inc., 11s, 2003 2,100 2,278,500
Owens-Illinois, Inc., 9.75s, 2004 1,750 1,780,625
Owens-Illinois, Inc., 9.95s, 2004 1,250 1,281,250
Plastic Containers, Inc., 10.75s, 2001 500 497,500
Silgan Corp., 11.75s, 2002 2,150 2,236,000
---------
$12,935,375
---------
Defense Electronics -- 0.1%
Alliant Techsystems, Inc., 11.75s, 2003 $ 600 $ 651,000
---------
Entertainment -- 0.9%
ACT III Theatres, Inc., 11.875s, 2003 $1,000 $ 1,102,500
Allbritton Communications Corp., 11.5s, 2004 500 511,250
Gillett Holdings, Inc., 12.25s, 2002 474 498,096
SCI Television, Inc., 11s, 2005 2,450 2,572,500
United Artist Theater Circuit, Inc., 11.5s, 2002 1,700 1,776,500
---------
$ 6,460,846
---------
Food and Beverage Products -- 0.7%
Coca-Cola Bottling Group Southwest, Inc., 9s, 2003 $ 750 $ 747,188
Specialty Foods Corp., 10.25s, 2001 2,000 1,820,000
Texas Bottling Group, Inc., 9s, 2003 2,500 2,493,750
---------
$ 5,060,938
---------
Forest and Paper Products -- 0.5%
Gaylord Container Co., 0s, 2005 $2,350 $ 2,473,375
SD Warren Co., 12s, 2004 600 630,000
Stone Consolidated Corp., 10.25s, 2000 600 619,500
---------
$ 3,722,875
---------
Medical and Health Technology and Services -- 2.1%
Beverly Enterprises, Inc., 9s, 2006 $ 650 $ 601,250
Community Health System, 10.25s, 2003 3,450 3,639,750
Integrated Health Services, Inc., 10.75s, 2004 2,750 2,818,750
OrNda Healthcorp, 12.25s, 2002 2,950 3,193,375
5
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated -- continued
Industrials -- continued
Medical and Health Technology and Services -- continued
Quorum Health Group, Inc., 8.75s, 2005 $1,900 $ 1,843,000
Tenet Healthcare Corp., 10.125s, 2005 3,550 3,763,000
---------
$15,859,125
---------
Metals and Minerals -- 0.1%
Easco Corp., 10s, 2001 $ 950 $ 959,500
---------
Oil Services -- 1.4%
Amerigas Partners LP, 10.125s, 2007 $ 600 $ 633,000
Falcon Drilling Co., 8.875s, 2003 2,750 2,681,250
Ferrell Gas LP, 10s, 2001 2,600 2,678,000
Giant Industries, Inc., 9.75s, 2003 500 500,000
Global Marine, Inc., 12.75s, 1999 1,500 1,631,250
Nuevo Energy Co., 9.5s, 2006 1,590 1,574,100
Tuboscope Vetco International, Inc., 10.75s, 2003 550 568,563
---------
$10,266,163
---------
Oils -- 0.6%
Gulf Canada, 9.25s, 2004 $4,400 $ 4,356,000
Kelley Oil & Gas Corp., 13.5s, 1999 450 479,250
---------
$ 4,835,250
---------
Printing and Publishing -- 0.1%
Day International Group, Inc., 11.125s, 2005 $ 600 $ 618,000
---------
Special Products and Services -- 3.3%
AAF-McQuay, Inc., 8.875s, 2003 $1,500 $ 1,425,000
Blount, Inc., 9s, 2003 1,250 1,275,000
Buckeye Cellulose Corp., 8.5s, 2005 1,010 974,650
Fairfield Manufacturing, 11.375s, 2001 500 512,500
Howmet Corp., 10s, 2003## 2,200 2,332,000
IMO Industries, Inc., 11.75s, 2006## 2,000 2,070,000
Idex Corp., 9.75s, 2002 1,350 1,404,000
Interlake Corp., 12s, 2001 750 783,750
Interlake Corp., 12.125s, 2002 1,500 1,485,000
Interlake Revolver, "B", 5.75s, 1997## 157 153,936
Mark IV Industries, Inc., 8.75s, 2003 3,500 3,526,250
Newflo Corp., 13.25s, 2002 700 752,500
Polymer Group, Inc., 12.25s, 2002 1,333 1,446,305
Spreckels Industries, Inc., 11.5s, 2000 450 465,750
Synthetic Industries, Inc., 12.75s, 2002 1,625 1,722,500
Talley Manufacturing & Technology, Inc., 10.75s, 2003 1,200 1,218,000
Thermadyne Industries Holdings Corp., 10.25s, 2002 750 755,625
Thermadyne Industries Holdings Corp., 10.75s, 2003 1,250 1,250,000
Wolverine Tube, Inc., 10.125s, 2002 1,000 1,035,000
---------
$24,587,766
---------
Steel -- 1.1%
AK Steel Holdings Corp., 10.75s, 2004 $1,500 $ 1,638,750
Armco, Inc., 11.375s, 1999 600 619,500
Jorgensen (Earle M.) Co., 10.75s, 2000 1,500 1,488,750
6
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated -- continued
Industrials -- continued
Steel -- continued
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 $2,100 $ 2,110,500
UCAR Global Enterprises, 12s, 2005 800 916,000
WCI Steel, Inc., 10.5s, 2002 1,300 1,332,500
---------
$ 8,106,000
---------
Stores -- 1.4%
Eckerd (Jack) Corp., 9.25s, 2004 $1,800 $ 1,854,000
Finlay Fine Jewelry, 10.625s, 2003 2,750 2,777,500
Parisian, Inc., 9.875s, 2003 450 427,500
Pathmark Stores, Inc., 11.625s, 2002 5,250 5,355,000
Pathmark Stores, Inc., 9.625s, 2003 250 236,875
---------
$10,650,875
---------
Supermarkets -- 1.5%
Dominick's Finer Foods, 10.875s, 2005 $2,500 $ 2,650,000
Grand Union Co., 12s, 2004 1,300 1,222,000
Kroger Co., 8.5s, 2003 500 505,000
Ralphs Grocery Co., 10.45s, 2004 1,900 1,819,250
Safeway Stores, Inc., 9.875s, 2007 750 832,500
Smith's Food & Drug Centers, Inc., 11.25s, 2007 3,325 3,370,719
Stop & Shop Cos., Inc., 9.75s, 2002 500 550,000
---------
$10,949,469
---------
Telecommunications -- 7.6%
American Communication Services, Inc., 0s, 2006## $ 700 $ 364,000
American Radio Systems Corp., 9s, 2006 500 472,500
Bell & Howell Co., 10.75s, 2002 250 266,250
Brooks Fiber Properties, 0s, 2006## 1,800 1,008,000
Cablevision Industries Corp., 10.75s, 2002 3,400 3,663,500
Cablevision Systems Corp., 9.25s, 2005 750 716,250
Century Communications, 9.5s, 2005 3,700 3,653,750
Comcast Corp., 9.375s, 2005 2,750 2,722,500
Continental Cablevision, Inc., 8.875s, 2005 1,000 1,045,000
Continental Cablevision, Inc., 8.3s, 2006## 3,000 2,990,370
EchoStar Communications Corp., 0s, 2004## 2,000 1,310,000
Falcon Holdings Group, Inc., 11s, 2003# 3,709 3,579,290
Granite Broadcasting Corp., 10.375s, 2005 800 788,000
Infinity Broadcasting Corp., 10.375s, 2002 200 214,500
Intelcom Group, Inc., 0s, 2006## 3,000 1,657,500
Jones Intercable, Inc., 10.5s, 2008 4,000 4,220,000
K-III Communications Corp., 10.625s, 2002 2,650 2,782,500
Le Groupe Videotron Ltee, 10.25s, 2002 1,000 1,050,000
MFS Communications, Inc., 0s, 2004 3,650 2,764,875
MFS Communications, Inc., 0s, 2006 4,000 2,450,000
Marcus Cable Co., 0s, 2004 2,975 2,160,594
Metrocall, Inc., 10.375s, 2007 1,550 1,526,750
Mobile Telecommunication Technologies, 13.5s, 2002 1,000 1,047,500
Mobilemedia Communications, Inc., 0s, 2003 1,250 931,250
MobileMedia Corp., 9.375s, 2007 750 708,750
Paging Network, Inc., 8.875s, 2006 4,550 4,345,250
Park Broadcasting, Inc., 11.75s, 2004## 650 654,875
7
<PAGE>
Principal Amount
Issuer 000 Omitted) Value
U.S. Dollar Denominated -- continued
Industrials -- continued
Telecommunications -- continued
ProNet, Inc., 11.875s, 2005 $ 1,800 $ 1,908,000
Rifkin Acquisition Partners LP, 11.125s, 2006## 800 788,000
Rogers Cablesystems Ltd., 10.125s, 2012 3,050 3,027,125
USA Mobile Communication, 9.5s, 2004 1,875 1,800,000
---------
$ 56,616,879
---------
Total Industrials $236,870,799
---------
Transportation -- 0.1%
Eastern Airlines, Inc., 12.75s, 1996** $ 3,000 $ 75,000
Moran Transportation Co., 11.75s, 2004 700 700,000
---------
$ 775,000
---------
U.S. Government and Agencies -- 24.3%
U.S. Federal Agencies -- 4.1%
Federal Home Loan Mortgage Corp., 9s, 2025 $11,474 $ 11,923,159
Financing Corp., 0s, 2014 35,119 9,069,262
Israel Aid, 5.75s, 2000 4,865 4,709,807
Israel Aid, 5.89s, 2005 5,000 4,582,750
---------
$ 30,284,978
---------
Federal National Mortgage Association -- 3.2%
FNMA, 7.5s, 2009 - 2010 $20,661 $ 20,654,056
FNMA, 0s, 2020 751 750,155
FNMA, Stripped Mortgage-Backed Security, 0s, 2023 7,648 2,631,307
---------
$ 24,035,518
---------
Government National Mortgage Association -- 7.0%
GNMA, 7s, 2022 - 2025 $19,648 $ 18,695,813
GNMA, 7.5s, 2022 - 2026 29,722 29,062,256
GNMA, 9s, 2015 - 2019 4,166 4,373,279
---------
$ 52,131,348
---------
U.S. Treasury Obligations -- 10.0%
U.S. Treasury Notes, 6.125s, 1997 $ 1,000 $ 1,002,340
U.S. Treasury Notes, 8s, 1999 16,200 16,893,522
U.S. Treasury Notes, 7.5s, 2002 5,000 5,199,200
U.S. Treasury Bonds, 10.75s, 2005 8,400 10,577,448
U.S. Treasury Bonds, 12s, 2005 2,700 3,611,250
U.S. Treasury Bonds, 12s, 2013 20,000 27,918,800
U.S. Treasury Zero Coupon Strips, 0s, 2003 15,000 9,579,900
---------
$ 74,782,460
---------
Total U.S. Government and Agencies $181,234,304
---------
Utilities -- Electric -- 0.9%
El Paso Electric Co., 8.9s, 2006 $ 250 $ 249,375
Midland Cogeneration Venture Corp., 10.33s, 2002 5,478 5,744,757
Westinghouse Electric Corp., 8.375s, 2002 750 746,438
---------
$ 6,740,570
---------
Total U.S. Dollar Denominated $449,027,126
---------
8
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C> <C>
Foreign Denominated -- 28.4%
Australia -- 3.2%
Commonwealth of Australia, 8.75s, 2001 AUD 28,000 $ 22,452,904
Commonwealth of Australia, 9.5s, 2003 1,500 1,241,133
---------
$ 23,694,037
---------
Canada -- 3.8%
Canadian Government, 7.5s, 2003 CAD 25,480 $ 18,561,344
Canadian Government, 9s, 2004 12,250 9,688,230
---------
$ 28,249,574
---------
Denmark -- 4.8%
Kingdom of Denmark, 9s, 2000 DKK 70,850 $ 13,359,735
Kingdom of Denmark, 8s, 2001 123,924 22,481,787
---------
$ 35,841,522
---------
Ireland -- 1.6%
Irish Gilts, 8s, 2000 IEP 7,000 $ 11,529,224
---------
Italy -- 2.0%
Republic of Italy, 8.5s, 1999 ITL 6,940,000 $ 4,499,734
Republic of Italy, 9.5s, 1999 5,780,000 3,834,317
Republic of Italy, 8.5s, 2004 10,510,000 6,531,897
---------
$ 14,865,948
---------
New Zealand -- 3.2%
Government of New Zealand, 8s, 1998 NZD 4,700 $ 3,124,037
Government of New Zealand, 8s, 2001 32,100 20,835,500
---------
$ 23,959,537
---------
Spain -- 3.2%
Government of Spain, 8.3s, 1998 ESP 415,000 $ 3,258,681
Government of Spain, 10.5s, 2003 744,000 6,234,595
Government of Spain, 10.9s, 2003 415,000 3,544,900
Government of Spain 10s, 2005 1,350,000 10,988,739
---------
$ 24,026,915
---------
Sweden -- 3.3%
Kingdom of Sweden, 10.25s, 2000 SEK 151,500 $ 24,753,544
---------
United Kingdom -- 3.3%
United Kingdom Gilts, 9s, 2000 GBP 11,630 $ 18,962,594
United Kingdom Gilts, 7s, 2001 3,950 5,948,418
---------
$ 24,911,012
---------
Total Foreign Denominated $211,831,313
---------
Total Bonds (Identified Cost, $665,310,652) $660,858,439
---------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Common Stocks and Warrants -- 0.1%
<S> <C> <C>
Shares Value
American Communications Services 600 $ 66,000
Atlantic Gulf Communities Corp.## 244 1,525
Forest Oil Corp., Warrants 595 223
Gillett Holdings, Inc.## 33,891 813,384
Triton Group Ltd. 383,601 191,801
-----------
Total Common Stocks and Warrants (Identified Cost, $1,191,448) $ 1,072,933
-----------
Preferred Stocks -- 0.9%
Cablevision Systems Corp.## 30,284 $ 2,937,543
K-III Communications Corp.# 14,355 1,435,542
Time Warner, Inc.#,## 2,000 1,985,000
-----------
Total Preferred Stocks (Identified Cost, $6,174,200) $ 6,358,085
-----------
Repurchase Agreement -- 4.9%
Principal Amount
(000 Omitted)
Goldman Sachs, dated 5/31/96, due 6/3/96, total to be received $36,430,083
(secured by various U.S. government securities in a jointly traded account), at
Cost $ 36,414 $ 36,414,000
-----------
Short-Term Obligations -- 3.4%
Eurolira Deposit, 9.225s, 1996 19,720,000 $ 12,805,193
Eurolira Deposit, 8.54s, 1996 19,250,000 12,499,999
-----------
Total Short-Term Obligations (Identified Cost, $24,944,157) $ 25,305,192
-----------
Total Investments (Identified Cost, $734,034,457) $730,008,649
-----------
Put Option Written
Description/Expiration Month/Strike Price Principal Amount
Canadian Dollars/June/1.385 (Premium received, $27,425) of Contracts
(000 Omitted)
CAD (12,253) $ (6,384)
-----------
Other Assets, Less Liabilities -- 2.0% $ 15,063,695
-----------
Net Assets -- 100.0% $745,065,960
===========
</TABLE>
+Restricted security.
#Payment-in-kind bond.
##SEC Rule 144A restriction.
*Non-income producing security.
**Non-income producing security -- in default.
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 = Austrialian Dollars GBP = British Pounds
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NZD = New Zealand Dollars
ESP = Spanish Pesetas SEK = Swedish Kronor
See notes to financial statements
10
<PAGE>
Statement of Assets and Liabilities -- May 31, 1996
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $734,034,457) $730,008,649
Cash 130,174
Net receivable for forward foreign currency exchange contracts sold 3,948,340
Net receivable for interest rate swap agreements 213,725
Receivable for investments sold 882,228
Interest receivable 14,895,724
Other assets 8,511
-----------
Total assets $750,087,351
-----------
Liabilities:
Payable to dividend disbursing agent $ 496,313
Payable for investments purchased 512,100
Payable for Treasury shares reacquired 922,631
Written options outstanding, at value (premiums received, $27,425) 6,384
Net payable for forward foreign currency exchange contracts purchased 2,589,630
Net payable for forward foreign currency exchange contracts 110,078
Payable to affiliates --
Management fee 14,543
Transfer agent fee 45,000
Accrued expenses and other liabilities 324,712
-----------
Total liabilities $ 5,021,391
-----------
Net assets $745,065,960
Net assets consist of:
Paid-in capital $769,161,251
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (2,564,619)
Accumulated net realized loss on investments and foreign currency transactions (22,622,730)
Accumulated undistributed net investment income 1,092,058
-----------
Total $745,065,960
===========
Shares of beneficial interest outstanding 73,020,239
===========
Net asset value per share (net assets / shares of beneficial interest
outstanding) $ 10.20
=======
</TABLE>
11
<PAGE>
Statement of Operations -- Six Months Ended May 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Net investment income:
Interest income $ 31,468,837
------------
Expenses --
Management fee $ 2,687,392
Trustees' compensation 92,058
Custodian fee 247,440
Transfer and dividend disbursing agent fee 90,286
Postage 41,526
Printing 29,261
Auditing fees 28,145
Legal fees 6,767
Miscellaneous 380,353
------------
Total expenses $ 3,603,228
Fees paid indirectly (28,074)
------------
Net expenses $ 3,575,154
------------
Net investment income $ 27,893,683
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ 1,481,448
Written option transactions 237,450
Foreign currency transactions 1,754,089
Futures contracts (42,709)
------------
Net realized gain on investments and foreign currency transactions $ 3,430,278
------------
Change in unrealized depreciation --
Investments and interest rate swap agreements $(23,125,085)
Written option (167,261)
Translation of assets and liabilities in foreign currencies (2,227,822)
------------
Net unrealized loss on investments $(25,520,168)
------------
Net realized and unrealized loss on investments and foreign
currency $(22,089,890)
------------
Increase in net assets from operations $ 5,803,793
============
</TABLE>
12
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Year Ended
Ended November 30,
May 31, 1996 1995
------------ --------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations --
Net investment income $ 27,893,683 $ 61,734,301
Net realized gain on investments and foreign currency transactions 3,430,278 2,846,273
Net unrealized gain (loss) on investments and foreign currency
translation (25,520,168) 57,431,307
---------- ------------
Increase in net assets from operations $ 5,803,793 $122,011,881
---------- ------------
Distributions declared from net investment income $(29,656,637) $(59,963,107)
---------- ------------
Total distributions declared to shareholders $(29,656,637) $(59,963,107)
---------- ------------
Trust share (principal) transactions --
Net asset value of shares reacquired $(17,337,023) $(80,182,474)
---------- ------------
Decrease in net assets from Trust share transactions $(17,337,023) $(80,182,474)
---------- ------------
Total decrease in net assets $(41,189,867) $(18,133,700)
Net assets:
At beginning of period 786,255,827 804,389,527
---------- ------------
At end of period (including accumulated undistributed net
investment income of $1,092,058 and $2,855,012, respectively) $745,065,960 $786,255,827
========== ============
</TABLE>
13
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Per share data (for shares Six Months
outstanding throughout Ended
each period): May 31,
1996 1995 1994
--------- --------- ----------
Year Ended November 30,
-------------------------
<S> <C> <C> <C>
Net asset value -- beginning of
period $10.50 $9.60 $10.68
--------- --------- ----------
Income from investment operations#-
Net investment incomeS. $0.37 $0.79 $0.76
Net realized and unrealized gain
(loss) on investments and foreign
currency transactions (0.27) 0.88 (1.07)
--------- --------- -----------
Total from investment operations $0.10 $1.67 $(0.31)
--------- --------- -----------
Less distributions declared to shareholders --
From net investment income $(0.40) $(0.77) $(0.35)
From net realized gain on
investments and foreign currency
transactions -- -- (0.03)
From paid-in capital -- -- (0.39)
--------- --------- -----------
Total distributions declared to
shareholders $(0.40) $(0.77) $(0.77)
--------- --------- -----------
Net asset value -- end of period $10.20 $10.50 $9.60
========= ========= ===========
Per share market value -- end of
period $9.50 $9.125 $8.719
========= ========= ===========
Total return 8.65%+++ 13.84% (1.35)
Ratios (to average net assets)/
Supplemental dataS.:
Expenses## 0.93%+ 0.92% 0.86%
Net investment income 7.20%+ 7.84% 7.50%
Portfolio turnover 81% 183% 153%
Net assets at end of period
(000 omitted) $745,066 $786,256 $804,39
0
</TABLE>
+ Annualized.
+++ Not annualized.
* For the period from the commencement of investment operations, July 20, 1989
to November 30, 1989.
# Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Trust's expenses are
calculated without reduction for fees paid indirectly.
S. The investment advisor did not impose a portion of its management fee for
the periods indicated. If this fee had been incurred by the Trust, the net
investment income per share and the ratios would have been:
Net investment income -- -- --
Ratios (to average net assets):
Expenses -- -- --
Net investment income -- -- --
<TABLE>
<CAPTION>
Per share data (for shares outstanding
throughout each period): 1993 1992 1991 1990 1989*
----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $10.23 $10.59 $9.93 $11.00 $11.16
----- ----- ----- ----- --------
Income from investment operations#-
Net investment incomeS. $0.85 $0.95 $1.06 $1.17 $0.43
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions 0.55 (0.15) 1.10 (0.73) (0.21)
----- ----- ----- ----- --------
Total from investment operations $1.40 $0.80 $2.16 $0.44 $0.22
----- ----- ----- ----- --------
Less distributions declared to shareholders --
From net investment income $(0.72) $(0.90) $(1.06) $(1.22) $(0.38)
From net realized gain on investments
and foreign currency transactions (0.23) (0.15) -- (0.07) --
From paid-in capital -- (0.11) (0.44) (0.22) --
----- ----- ----- ----- --------
Total distributions declared to
shareholders $(0.95) $(1.16) $(1.50) $(1.51) $(0.38)
----- ----- ----- ----- --------
Net asset value -- end of period $10.68 $10.23 $10.59 $9.93 $11.00
===== ===== ===== ===== ========
Per share market value -- end of period $9.625 $9.875 $10.875 $9.125 $11.000
===== ===== ===== ===== ========
Total return 6.92% 1.39% 37.96% (3.32)% (14.15)%+
Ratios (to average net assets)/
Supplemental dataS.:
Expenses## 0.90% 0.98% 1.02% 1.08% 0.74%+
Net investment income 8.04% 9.27% 10.34% 11.32% 11.32%+
Portfolio turnover 397% 198% 416% 184% 480%
Net assets at end of period
(000 omitted) $919,480 $898,756 $923,287 $864,254 $977,875
</TABLE>
+ Annualized.
+++ Not annualized.
* For the period from the commencement of investment operations, July 20,
1989 to November 30, 1989.
# Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Trust's expenses are
calculated without reduction for fees paid indirectly.
S. The investment advisor did not impose a portion of its management fee
for the periods indicated. If this fee had been incurred by the Trust, the
net investment income per share and the ratios would have been:
Net investment income -- -- -- $1.17 $0.42
Ratios (to average net assets):
Expenses -- -- -- 1.10% 1.02%
Net investment income -- -- -- 11.30% 11.04%
14
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Charter Income Trust (the Trust) is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as a non-diversified, closed-end management investment company.
(2) Significant Accounting Policies
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.
Investment Valuations -- Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the
base currency and translated into U.S. dollars at the closing daily exchange
rate. Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates. Equity securities listed on securities
exchanges or reported through the NASDAQ system are valued at last sale
prices. Unlisted equity securities or listed equity securities for which last
sale prices are not available are valued at last quoted bid prices.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the
Trustees.
Repurchase Agreements -- The Trust may enter into repurchase agreements with
institutions that the Trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Trust
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Trust to
obtain those securities in the event of a default under the repurchase
agreement. The Trust monitors, on a daily basis, the value of the securities
transferred to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is greater than amounts owed to
the Trust under each such repurchase agreement.
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.
15
<PAGE>
Written Options -- The Trust may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Trust. The Trust, 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
Trust's management on the direction of interest rates.
Futures Contracts -- The Trust may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Trust is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Trust
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Trust. The Trust's investment in futures contracts is designed
to hedge against anticipated future changes in interest or exchange rates or
securities prices. Should interest or exchange rates or securities prices move
unexpectedly, the Trust may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
Forward Foreign Currency Exchange Contracts -- The Trust 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 Trust will enter into
forward contracts for hedging purposes as well as for non-hedging purposes. For
hedging purposes, the Trust may enter into contracts to deliver or receive
foreign currency it will receive from or require for its normal investment
activities. It 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 Trust may enter into
contracts with the intent of changing the relative exposure of the Trust'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 for financial statement purposes as unrealized until the contract
settlement date.
Swap Agreements -- The Trust may enter into swap agreements. A swap is an
exchange of cash payments between the Trust 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 Trust
uses swaps for both hedging and non-hedging purposes. For hedging purposes,
the Trust may use swaps to reduce its exposure to interest and foreign
exchange rate fluctuations. For non-hedging purposes the Trust may use swaps
to take a position on anticipated changes in the underlying financial index.
16
<PAGE>
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for both financial
statement and tax reporting purposes as required by federal income tax
regulations. Dividend income is recorded on the ex-dividend date for
dividends received in cash. 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 Trust uses the effective interest method for reporting interest income
on payment-in-kind (PIK) bonds, whereby interest income on PIK bonds is
recorded ratably by the Trust at a constant yield to maturity. Legal fees and
other related expenses incurred to preserve and protect the value of a
security owned are added to the cost of the security; other legal fees are
expensed. Capital infusions, which are generally non-recurring, incurred to
protect or enhance the value of high-yield debt securities, are reported as
an addition to the cost basis of the security. Costs that are incurred to
negotiate the terms or conditions of capital infusions or that are expected
to result in a plan of reorganization are reported as realized losses.
Ongoing costs incurred to protect or enhance an investment, or costs incurred
to pursue other claims or legal actions, are reported as operating expenses.
Fees Paid Indirectly -- The Trust's custodian bank calculates its fee based on
the Trust's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Trust. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions -- The Trust'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.
The Trust files a tax return annually using tax accounting methods required
under provisions of the Code which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Trust's tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that
reported to shareholders on Form 1099-DIV. Foreign taxes have been provided
for on interest income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded
as a reduction of investment income. Distributions to shareholders are
recorded on the ex-dividend date.
The Trust distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains.
At November 30, 1995, the Trust, for federal income tax purposes, had a
capital loss carryforward of $29,847,236, which may be applied against any
net taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on November 30, 2002 ($24,396,940) and November 30,
2003 ($5,450,296).
(3) Transactions with Affiliates
Investment Adviser -- The Trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities.
17
<PAGE>
The management fee is computed daily and paid monthly at an effective annual
rate of 0.32% of average daily net assets and 4.57% of investment income.
The Trust pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain of the
officers and Trustees of the Trust are officers or directors of MFS and and
MFS Service Center, Inc. (MFSC). The Trust has an unfunded defined benefit
plan for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $17,058 for the period
ended May 31, 1996.
Transfer Agent -- MFSC acts as registrar and dividend disbursing agent for
the Trust under an agreement which provides that the Trust will pay MFSC an
account maintenance fee and a dividend service fee and will reimburse MFSC
for reasonable out-of-pocket expenses. The account maintenance fee is
computed as follows:
Total Number of Accounts Annual Account Fee
- --------------------------- -------------------
Less than 75,000 ............. $9.00
75,000 and over .............. $8.00
The dividend service fee is $0.75 per dividend reinvestment and $0.75 per
cash infusion.
(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 $166,476,544 $235,626,891
========= ===========
Investments (non-U.S. government securities) $415,868,987 $391,662,666
========= ===========
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Trust, as computed on a federal income tax basis,
are as follows:
Aggregate cost $734,322,358
==========
Gross unrealized depreciation $(16,397,996)
Gross unrealized appreciation 12,084,287
----------
Net unrealized depreciation $ (4,313,709)
==========
(5) Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
Period Ended Year Ended
May 31, 1996 November 30, 1995
-------------------------- ----------------------------
Shares Amount Shares Amount
- ------------------------ ---------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
Treasury shares acquired (1,857,000) $(17,337,023) (8,908,300) $(80,182,474)
-------- ---------- -------- ------------
Net decrease (1,857,000) $(17,337,023) (8,908,300) $(80,182,474)
======== ========== ======== ============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 1,857,000 and
8,908,300 shares of beneficial interest were purchased by the Trust during
the period ended May 31, 1996 and the year ended November 30, 1995,
respectively, at an average price per share of $9.34 and $9.00 and a weighted
average discount of 8.68% and 9.82% per share, respectively.
18
<PAGE>
(6) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Quarterly Period Investment Income Net Investment Income
- -------------------- ------------------------ ----------------------
Per Per
Fiscal 1996 Amount Share Amount Share
-------------------- ------------- ------- ----------- ------
<S> <C> <C> <C> <C>
February 29 $15,564,900 $0.21 $13,742,420 $0.18
May 31 15,903,936 0.21 14,151,263 0.19
------------ ----- ---------- -----
$31,468,836 $0.42 $27,893,683 $0.37
============ ===== ========== =====
Fiscal 1995
--------------------
February 28 $17,644,418 $0.21 $15,926,649 $0.19
May 31 17,446,967 0.23 15,482,169 0.20
August 31 17,558,133 0.23 15,759,926 0.21
November 30 16,345,031 0.22 14,565,557 0.19
------------ ----- ---------- -----
$68,994,549 $0.89 $61,734,301 $0.79
============ ===== ========== =====
Fiscal 1994
--------------------
February 28 $17,037,002 $0.20 $15,303,844 $0.18
May 31 17,735,385 0.21 15,755,834 0.18
August 31 18,216,955 0.21 16,449,052 0.20
November 30 18,962,913 0.22 17,004,858 0.20
------------ ----- ---------- -----
$71,952,255 $0.84 $64,513,588 $0.76
============ ===== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Realized and Increase (Decrease)
Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period on Investments from Operations
- --------------- ---------------------- -----------------------
Per Per
Fiscal 1996 Amount Share Amount Share
- --------------- ------------ ------ ------------ -------
<S> <C> <C> <C> <C>
February 29 $ (7,664,018) $(0.10) $ 6,078,402 $ 0.08
May 31 (14,425,872) (0.17) (274,609) 0.02
---------- ---- ---------- -----
$(22,089,890) $(0.27) $ 5,803,793 $ 0.10
========== ==== ========== =====
Fiscal 1995
- ---------------
February 28 $ 20,521,446 $ 0.30 $ 36,448,095 $ 0.49
May 31 34,562,460 0.48 50,044,629 0.68
August 31 (7,979,553) (0.08) 7,780,373 0.13
November 30 13,173,227 0.18 27,738,784 0.37
---------- ---- ---------- -----
$ 60,277,580 $ 0.88 $122,011,881 $ 1.67
========== ==== ========== =====
Fiscal 1994
- ---------------
February 28 $ (8,290,789) $(0.09) $ 7,013,055 $ 0.09
May 31 (54,227,431) (0.63) (38,471,597) (0.45)
August 31 (12,329,851) (0.15) 4,119,201 0.05
November 30 (18,453,754) (0.20) (1,448,896) 0.00
---------- ---- ---------- -----
$(93,301,825) $(1.07) $(28,788,237) $(0.31)
========== ==== ========== =====
</TABLE>
(7) Line of Credit
The Trust entered into an agreement which enables it to participate with
other funds managed by MFS in an unsecured line of credit with a bank which
permits borrowings up to $350 million, collectively. Borrowings may be made
to temporarily finance the repurchase of Treasury 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 Trust for the
period ended May 31, 1996 was $4,072.
(8) Financial Instruments
The Trust trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates.
These financial instruments include written options, forward foreign currency
exchange contracts and swap agreements. The notional or contractual amounts
of these instruments represent the investment the Trust 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. A summary of obligations under these financial
instruments at May 31, 1996, is as follows:
19
<PAGE>
Notes to Financial Statements -- continued
<TABLE>
<CAPTION>
Written Option Transactions
1996 Calls 1996 Puts
------------------------------------ -------------------------------------
Principal Amounts of Principal Amounts of
Contracts (000 Omitted) Premiums Contracts (000 Omitted) Premiums
- ----------------------------------------------- ------------------------ -------- ------------------------ ----------
<S> <C> <C> <C> <C>
Outstanding, beginning of period --
Australian Dollars 5,259 $ 33,450 11,814 $ 118,129
Deutsche Marks/British Pounds 30,795 197,650 -- --
Japanese Yen -- -- 1,145,000 146,711
Japanese Yen/Deutsche Marks -- -- 7,116,131 253,689
Options written --
Australian Dollars 6,861 37,184 -- --
Canadian Dollars 12,253 27,425
Deutsche Marks/British Pounds 36,510 162,318 -- --
Japanese Yen -- -- 2,560,000 314,992
Options terminated in closing transactions --
Australian Dollars (12,120) (70,634) (4,966) (30,347)
Deutsche Marks/British Pounds (49,050) (278,809) -- --
Japanese Yen -- -- (3,705,000) (461,703)
Japanese Yen/Deutsche Marks -- -- (7,116,131) (253,689)
Options expired --
Australian Dollars -- -- (6,848) (87,782)
Deutsche Marks/British Pounds (18,255) (81,159) -- --
--------- ------ ----------- --------
Outstanding, end of period $ --
-- 12,253 $ 27,425
========= ====== =========== ========
Options outstanding at end of period consist of --
Canadian Dollars $ --
-- 12,253 $ 27,425
--------- ------ ----------- --------
Outstanding, end of period $ --
-- 12,253 $ 27,425
========= ====== =========== ========
</TABLE>
At May 31, 1996, the Trust had sufficient cash and/or securities at least
equal to the value of the written options.
Interest Rate Swaps
<TABLE>
<CAPTION>
Swap Notional Termination Payment made Payments received Unrealized
Counterparty Amount Date by the Trust by the Trust Appreciation
- ---------------- ---- ------------- --------- ---------------- ------------------ -------------
<S> <C> <C> <C> <C> <C> <C>
J.P. Morgan ITL 19,720,000,000 4/20/99 Floating--6M Libor Fixed--9.535% $208,725
J.P. Morgan ITL 19,250,000,000 5/10/99 Floating--6M Libor Fixed--8.835% 5,000
-----------
$213,725
===========
</TABLE>
At May 31, 1996, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts at Appreciation
Settlement Date Deliver/Receive In Exchange for Value (Depreciation)
- ---------- --------------------- ----------------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales 8/30/96 CAD 43,418,349 $ 31,716,931 $ 31,747,583 $ (30,652)
8/14/96 CHF 21,089,490 16,947,403 17,009,707 (62,304)
6/12/96 - 11/25/96 DEM 83,568,362 55,387,579 55,353,963 33,616
9/09/96 DKK 217,177,571 36,772,362 37,116,950 (344,588)
8/13/96 ESP 1,314,439,521 10,221,182 10,201,128 20,054
8/09/96 GBP 16,464,732 24,865,614 25,510,077 (644,463)
8/22/96 IEP 7,652,000 11,954,488 12,154,804 (200,316)
8/06/96 ITL 66,632,674,663 44,167,296 44,913,075 (745,779)
6/07/96 JPY 7,781,163,803 78,312,451 72,108,045 6,204,406
10/18/96 NZD 31,004,366 20,731,566 20,714,978 16,588
8/02/96 SEK 183,051,393 26,952,456 27,250,678 (298,222)
---------------- ------------- ------------
$358,029,328 $354,080,988 $3,948,340
================ ============= ============
20
<PAGE>
Net Unrealized
Contracts to Contracts at Appreciation
Settlement Date Deliver/Receive In Exchange for Value (Depreciation)
- ---------- --------------------- ----------------------- ------------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Purchases 6/12/96 - 11/04/96 DEM 64,997,064 $ 43,108,517 $ 42,898,396 $ (210,121)
8/13/96 ESP 693,643,200 5,393,259 5,384,059 (9,200)
8/06/96 ITL 25,962,791,994 16,626,722 16,746,001 119,279
6/07/96 JPY 7,781,163,803 74,597,633 72,108,045 (2,489,588)
---------------- ------------- ------------
$139,726,131 $137,136,501 $(2,589,630)
================ ============= ============
</TABLE>
Forward foreign currency purchases and sales under master netting
arrangements and closed forward foreign currency exchange contracts excluded
from above amounted to a net payable of $110,078 at May 31, 1996.
At May 31, 1996, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
(9) Restricted Securities
The Trust may invest not more than 20% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At May 31, 1996,
the Trust owned the following restricted securities (constituting 2.78% of
net assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). The Trust does not have the right to
demand that such securities be registered. The value of these securities is
determined by valuations supplied by a pricing service or brokers or, if not
available, in good faith by or at the direction of the Trustees. Certain of
these securities may be offered and sold to "qualified institutional buyers"
under Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Share/Par
Description Acquisition Amount Cost Value
- -------------------------------------------------- ------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
American Communication Services, Inc., 0s, 2006 3/21/96 700,000 $ 376,663 $ 364,000
Atlantic Gulf Communities 8/02/89 244 0 1,525
Brooks Fiber Properties, 0s, 2006 2/16/96 1,800,000 1,077,932 1,008,000
Cablevision Systems Corp. 2/09/96 30,284 2,987,000 2,937,543
Continental Cablevision, 8.3s, 2006 12/08/96 3,000,000 3,030,000 2,990,370
Echostar Communications Corp., 0s, 2004 3/19/96 2,000,000 1,207,060 1,310,000
Gillett Holdings, Inc. 10/08/92 33,891 320,040 813,384
Howmet Corp., 10s, 2003 1/30/96 2,200,000 2,348,625 2,332,000
IMO Industries, Inc., 11.75s, 2006 2/22/96 2,000,000 2,082,500 2,070,000
Intelcom Group, Inc., 0s, 2006 4/25/96 3,000,000 1,635,630 1,657,500
Interlake Revolver, "B", 5.75s, 1997 1/21/94 157,479 140,595 153,936
Merrill Lynch Mortgage Investors, 8.227s, 2023 6/22/94 1,500,000 1,039,687 1,102,969
Park Broadcasting, Inc., 11.75s, 2004 5/06/96 650,000 633,685 654,875
Remington Arms, Inc., 9.5s, 2003 11/19/93 600,000 596,250 552,000
Rifkin Acquisition Partners LP, 11.125s, 2006 1/26/96 800,000 800,000 788,000
Time Warner, Inc. 4/22/96 2,000 2,012,500 1,985,000
-----------
$20,721,102
===========
</TABLE>
21
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Trustees and Shareholders of MFS Charter Income Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Charter Income Trust, including the schedule of portfolio investments, as of
May 31, 1996, and the related statement of operations for the six-month
period ended May 31, 1996, the statement of changes in net assets for the
six-month period ended May 31, 1996 and for the year ended November 30, 1995,
and financial highlights for the six-month period ended May 31, 1996 and for
each of the two years in the period ended November 30, 1995. These financial
statements and financial highlights are the responsibility of the Trust's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits. The financial
highlights for each of the four years in the period ended November 30, 1993
and for the period from July 21, 1989 (commencement of operations) to
November 30, 1989 were audited by other auditors whose report dated January
19, 1994 expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of
securities owned as of May 31, 1996, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from
brokers were not received. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Charter Income Trust at May 31, 1996, the results of its operations for the
six-month period ended May 31, 1996, the changes in its net assets for the
six-month period ended May 31, 1996 and the year ended November 30, 1995, and
the financial highlights for the six-month period ended May 31, 1996 and for
each of the two years in the period ended November 30, 1995, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 3, 1996
22
<PAGE>
[Back Cover]
MFS(R) Charter Income Trust
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), Massachusetts
Financial Services Company; Director,
Cambridge Bancorp; Director,
Cambridge Trust Company
Marshall N. Cohan(1)
Private Investor
Lawrence H. Cohn, M.D.(2)
Chief of Cardiac Surgery,
Brigham and Women's Hospital;
Professor of Surgery,
Harvard Medical School
The Hon. Sir J. David Gibbons, KBE(2)
Chief Executive Officer,
Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill(2)
Private Investor;
Director, Rockefeller Financial Services, Inc.
(investment advisers)
Walter E. Robb, III(1)
President and Treasurer,
Benchmark Advisors, Inc.
(corporate financial consultants)
President, Benchmark Consulting
Group, Inc. (office services);
Trustee, Landmark Funds
(mutual funds)
Arnold D. Scott*
Senior Executive Vice President,
Director and Secretary,
Massachusetts Financial
Services Company
Jeffrey L. Shames*
President and Director,
Massachusetts Financial
Services Company
J. Dale Sherratt(1)
President, Insight Resources, Inc.
(acquisition planning specialists)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
Portfolio Manager
James T. Swanson*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar and Dividend
Disbursing Agent
MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Independent Auditors
Ernst & Young LLP
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
*Affiliated with the Investment Adviser
(1) Member of Audit Committee
(2) Member of Portfolio Trading Committee MCICE-3 7/96 69.5M
<PAGE>
[Front Cover]
[MFS logo]
MFS(R) Charter Income Trust
Semiannual Report
May 31, 1996
