Dear Shareholders:
The Trust draws upon three distinct fixed-income markets in equal portions:
U.S. government bonds; U.S. corporate bonds (below investment grade); and
international (sovereign) bonds. Despite such a broad mandate, one theme has
become clear over the last 12 months. Inflation rates around the world are
falling and converging toward a common rate of annual increase. The
implications of this transition in global economic reality are enormous and
have triggered several important investment trends. First, with lower
inflation across broad market spectrums, interest rates have fallen, setting
off a renewed search for disappearing yield. Short-term securities no longer
provide the current income that many people relied on for so long to meet
income needs. The appetite for yield propels investors to seek longer
maturities or riskier markets. Second, lower inflation and lower interest
rates have meant higher profits for corporations and credit quality remains
high or improving in these markets. Third, these inflationary and
interest-rate trends have dragged the interest rates of many foreign
countries to levels below those of the United States, and this makes the
United States a high-yielding market compared, for example, to Germany,
Canada, or Japan. As such, foreign central banks and foreign individuals have
been active buyers of U.S. fixed-income securities. This, in turn, has helped
maintain the strength of the dollar and pushed bond prices higher.
All of this has been good news for the Trust, which posted a total return of
15.09% based on market price and 9.84% based on net asset value (NAV) for the
12 months ended November 30, 1996.
We believe the difference in the Trust's strong market price total returns
relative to its NAV resulted primarily from the Trust's innovative share
repurchase program. This program, which was implemented in April 1996,
authorizes the Trust to repurchase annually up to 10% of its outstanding
shares. With its regular monthly distribution the Trust pays to its
shareholders the difference between its NAV and its market price, which it
then recaptures when it repurchases its shares. The extra distribution paid
to shareholders has added approximately 60 basis points (0.60%) to the
Trust's distribution rate at both NAV and market price. We believe this
higher distribution rate has attracted new investors to the Trust, which has
helped move its market price from $9.125 on November 30, 1995 to $9.625 on
November 30, 1996.
U.S. Government Sector
We have become more conservative in this sector, shortening durations
(measures of interest-rate sensitivity), as we suspect that labor markets
will soon run out of surplus workers and drive up the cost of hiring
incremental employees. This could lead to a mild outbreak of inflation after
several years of relatively good news and general price stability.
High-Yield Corporate Bonds
The broad, moderate, widespread economic growth of the United States
continues to bring financial benefits to this sector. Valuations appear
within historic ranges and new issues are met with active demand as the
mutual fund industry continues to gather high-yield assets.
International Sector
Our focus on the non-core nations of Europe has proven beneficial as
convergence toward European Monetary Union has resulted in bond and currency
gains. We are now taking tactical steps away from this focus and directing
investments to "dollar-bloc countries" with favorable fundamentals such as
Canada, Australia, and New Zealand. Our views on global currencies are
largely neutral to the U.S. dollar.
Our outlook is for present inflationary and interest- rate trends to continue
in the foreign markets and in the U.S. high-yield market. However, concerns
over full employment, wage pressures and late-cycle cost-push pressures may
pose a modest threat to U.S. government bonds, causing us to be neutral or
cautious in the near term in this sector.
1
<PAGE>
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
December 26, 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.
Performance Summary
(For the year ended November 30, 1996)
Net Asset Value Per Share
November 30, 1995 $10.50
November 29, 1996 $10.57
New York Stock Exchange Price
November 30, 1995 $ 9.125
November 12, 1996 (high)* $ 9.875
April 8, 1996 (low)* $ 8.875
November 29, 1996 $ 9.625
*For the period December 1, 1995 through November 30, 1996.
Tax Form Summary
In January 1997, shareholders will be mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
Number of Shareholders
As of November 30, 1996, our records indicate that there are 9,960 registered
shareholders and approximately 51,000 shareholders owning Trust shares in
"street" name, such as through brokers, banks and other financial
intermediaries.
Results of Shareholder Meeting
At the annual meeting of shareholders of MFS Charter Income Trust, which was
held on October 24, 1996, the following actions were taken:
Item 1. The election of Richard B. Bailey, Marshall N. Cohan and J. Dale
Sherratt as Trustees of the Trust.
Number of Shares
Nominee For Withhold Authority
Richard B. Bailey 64,787,857.495 1,456,032.492
Marshall N. Cohan 64,822,136.446 1,421,753.541
J. Dale Sherratt 64,969,482.570 1,274,407.417
Trustees continuing in office who were not subject to re-election at this
meeting are A. Keith Brodkin, Lawrence H. Cohn, The Hon. Sir J. David
Gibbons, Abby M. O'Neill, Walter E. Robb, III, Arnold D. Scott, Jeffrey L.
Shames, and Ward Smith.
Item 2. Recommending that the Trust's Declaration of Trust be amended to
require that each Trustee, within thirty days of election, become a
shareholder of the Trust.
Shares
For 13,019,977.927
Against 20,820,552.372
Abstain 2,078,085.688
Non-vote 30,325,274.000
Item 3. The ratification of the selection of Ernst & Young LLP as the
independent public accountants to be employed by the Trust for the fiscal
year ending November 30, 1996.
Number of Shares
For 64,654,744.145
Against 731,530.312
Abstain 857,615.530
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.
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MCR.
2
<PAGE>
Investment Objective and Policy
MFS(R) Charter Income Trust's investment objective is to maximize 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. 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.
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 - November 30, 1996
Bonds - 92.3%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Dollar Denominated - 68.1%
Airlines
Eastern Airlines, Inc., 12.75s, 1996** $3,000 $ 30,000
-----------
Automotive - 1.2%
Exide Corp., 10s, 2005 $1,750 $ 1,824,375
Harvard Industries, Inc., 12s, 2004 2,100 1,806,000
Lear Corp., 9.5s, 2006 2,000 2,150,000
SPX Corp., 11.75s, 2002 2,750 3,066,250
-----------
$ 8,846,625
-----------
Building - 2.5%
American Standard, Inc., 10.5s, 2005 $5,500 $ 5,128,750
Building Materials Corp., 11.75s, 2004 5,000 4,300,000
Nortek, Inc., 9.875s, 2004 2,400 2,388,000
Schuller International Group, Inc., 10.875s, 2004 1,950 2,169,375
UDC Homes, Inc., 12.5s, 2000 13 7,368
USG Corp., 9.25s, 2001 4,275 4,584,937
-----------
$18,578,430
-----------
Chemicals - 1.0%
Arcadian Partners LP, 10.75s, 2005 $2,375 $ 2,645,156
NL Industries, Inc., 11.75s, 2003 985 1,007,163
UCC Investors Holdings, Inc., 10.5s, 2002 2,500 2,731,250
UCC Investors Holdings, Inc., 12s, 2005 1,000 865,000
-----------
$ 7,248,569
-----------
Conglomerates - 0.5%
News America Holdings Inc., 10.125s, 2012 $3,000 $ 3,553,140
-----------
Consumer Goods and Services - 3.3%
Food Brands America, Inc., 10.75s, 2006 $2,800 $ 2,954,000
International Semi-Tech Microelectronics, Inc., 11.5s, 2003 3,500 2,170,000
Ithaca Industries, Inc., 11.125s, 2002* 1,600 1,024,000
Reeves Industries, Inc., 11s, 2002 1,200 1,155,000
U.S. Dollar Denominated - continued
Consumer Goods and Services - continued
Remington Arms, Inc., 9.5s, 2003## $ 600 $ 501,000
Revlon Consumer Products Corp., 10.5s, 2003 5,000 5,225,000
Samsonite Corp., 11.125s, 2005 1,500 1,635,000
Sealy Corp., 9.5s, 2003 3,550 3,594,375
Westpoint Stevens, Inc., 9.375s, 2005 5,550 5,702,625
-----------
$23,961,000
-----------
Containers - 2.1%
Calmar, Inc., 11.5s, 2005 $1,500 $ 1,530,000
Gaylord Container Corp., 12.75s, 2005 2,350 2,573,250
Ivex Packaging Corp., 12.5s, 2002 1,800 1,926,000
Owens-Illinois, Inc., 11s, 2003 3,000 3,318,750
Owens-Illinois, Inc., 9.75s, 2004 750 780,000
Owens-Illinois, Inc., 9.95s, 2004 1,250 1,312,500
Plastic Containers, Inc., 10.75s, 2001 500 526,250
Silgan Corp., 11.75s, 2002 2,150 2,300,500
Stone Container Corp., 10.75s, 2002 1,500 1,554,375
-----------
$15,821,625
-----------
Defense Electronics - 0.5%
Alliant Techsystem, Inc., 11.75s, 2003 $ 600 $ 658,500
B E Aerospace, Inc., 9.875s, 2006 2,000 2,080,000
K & F Industries, Inc., 11.875s, 2003 1,100 1,182,500
-----------
$ 3,921,000
-----------
Entertainment - 1.1%
Act III Theaters, Inc., 11.875s, 2003 $1,000 $ 1,100,000
Albritton Communications Corp., 11.5s, 2004 500 523,750
American Skiing Co., 12s, 2006## 500 515,000
Cinemark USA, Inc., 9.625s, 2008 1,000 1,000,000
Gillett Holdings, Inc., 12.25s, 2002 1 475
SCI Television, Inc., 11s, 2005 2,600 2,798,250
United Artist Theater Circuit, Inc., 11.5s, 2002 1,700 1,797,750
-----------
$ 7,735,225
-----------
4
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated - continued
Financial Institutions - 0.5%
American Life Holdings Co., 11.25s, 2004 $1,250 $ 1,437,500
Americo Life, Inc., 9.25s, 2005 300 300,000
Merrill Lynch Mortgage Investors, 8.083s, 2023 1,500 1,257,422
Phoenix RE Corp., 9.75s, 2003 750 789,375
-----------
$ 3,784,297
-----------
Food and Beverage Products - 0.7%
Coca Cola Bottling Group, Inc., 9s, 2003 $ 750 $ 765,000
Specialty Foods Corp., 10.25s, 2001 2,000 1,910,000
Texas Bottling Group, Inc., 9s, 2003 2,500 2,531,250
-----------
$ 5,206,250
-----------
Machinery - 0.4%
AGCO Corp., 8.5s, 2006 $2,750 $ 2,818,750
-----------
Medical and Health Technology and Services - 1.6%
Beverly Enterprises, 9s, 2006 $ 750 $ 746,250
Genesis Health, 9.75s, 2005 2,000 2,095,000
OrNda Healthcorp, 12.25s, 2002 2,950 3,160,187
Quorum Health Group, Inc., 8.75s, 2005 1,900 1,952,250
Tenet Healthcare Corp., 10.125s, 2005 3,550 3,922,750
-----------
$11,876,437
-----------
Metals and Minerals - 0.3%
Haynes International, Inc., 11.625s, 2004 $2,425 $ 2,534,125
-----------
Oils - 0.6%
Gulf Canada, 9.25s, 2004 $4,400 $ 4,680,500
-----------
Oil Services - 1.3%
AmeriGas Partners LP, 10.125s, 2007 $ 600 $ 631,500
Clark USA, Inc., 10.875s, 2005 1,000 1,035,000
Falcon Drilling, Inc., 8.875s, 2003 2,750 2,777,500
Ferrell Gas LP, 10s, 2001 2,600 2,717,000
Giant Industries, Inc., 9.75s, 2003 500 517,500
Noble Drilling Corp., 9.125s, 2006 1,250 1,337,500
Tuboscope Vetco International, Inc., 10.75s, 2003 550 603,625
-----------
$ 9,619,625
-----------
U.S. Dollar Denominated - continued
Printing and Publishing - 0.1%
Day International Group, Inc., 11.125s, 2005 $ 600 $ 636,000
-----------
Restaurants and Lodging
Red Roof Inns, Inc., 9.625s, 2003 $ 250 $ 251,250
-----------
Special Products and Services - 3.5%
AAF-Mcquay, Inc., 8.875s, 2003 $1,500 $ 1,511,250
Blount, Inc., 9s, 2003 1,250 1,268,750
Buckeye Cellulose Corp., 8.5s, 2005 1,010 997,375
Fairfield Manufacturing Corp., 11.375s, 2001 500 520,000
Howmet Corp., 10s, 2003 2,200 2,387,000
Idex Corp., 9.75s, 2002 1,350 1,414,125
IMO Industries, Inc., 11.75s, 2006 2,000 1,890,000
Interlake Corp., 12s, 2001 750 802,500
Interlake Corp., 12.125s, 2002 1,925 1,973,125
Interlake Revolver, 5.75s, 1997## 116 115,023
Loewen Group International, Inc., 7.5s, 2001 1,500 1,522,500
Mark IV Industries, Inc., 8.75s, 2003 3,500 3,570,000
Newflow Corp., 13.25s, 2002 700 772,625
Polymer Group, Inc., 12.25s, 2002 1,333 1,466,300
Spreckels Industries, Inc., 11.5s, 2000 450 483,750
Synthetic Industries, Inc., 12.75s, 2002 1,900 2,094,750
Thermadyne Holdings Corp., 10.25s, 2002 750 772,500
Thermadyne Holdings Corp., 10.75s, 2003 1,250 1,296,875
Wolverine Tube, Inc., 10.125s, 2002 1,000 1,060,000
-----------
$25,918,448
-----------
Steel - 1.1%
AK Steel Holdings Corp., 10.75s, 2004 $1,500 $ 1,608,750
Algoma Steel, Inc., 12.375s, 2005 700 729,750
Armco, Inc., 11.375s, 1999 600 619,500
Jorgensen (Earle M.) Co., 10.75s, 2000 1,500 1,515,000
5
<PAGE>
Portfolio of Investments - continued
Bonds - continued
Principal Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated - continued
Steel - continued
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 $ 2,550 $ 2,575,500
WCI Steel, Inc., 10s, 2004## 1,000 1,007,500
-----------
$ 8,056,000
-----------
Stores - 1.2%
Finlay Fine Jewelry, 10.625s, 2003 $ 2,750 $ 2,791,250
Parisian, Inc., 9.875s, 2003 450 452,250
Pathmark Stores, Inc., 11.625s, 2002 750 774,375
Pathmark Stores, Inc., 9.625s, 2003 4,750 4,678,750
-----------
$ 8,696,625
-----------
Supermarkets - 1.4%
Dominick's Finer Foods Co., 10.875s, 2005 $ 2,500 $ 2,781,250
Grand Union Co., 12s, 2004 1,300 1,350,375
Kroger Co., 8.5s, 2003 500 513,750
Ralphs Grocery Co., 10.45s, 2004 1,900 1,957,000
Smiths Food & Drug Centers, Inc., 11.25s, 2007 3,325 3,624,250
-----------
$10,226,625
-----------
Telecommunications - 7.4%
American Radio Systems Corp., 9s, 2006 $ 500 $ 487,500
Brooks Fiber Properties, 10.875s, 2006 250 158,125
Brooks Fiber Properties, Inc., 11.875s, 2006## 1,800 1,179,000
Cablevision Systems Corp., 9.25s, 2005 1,500 1,466,250
Comcast Corp., 9.375s, 2005 5,735 5,935,725
Echostar Communications Corp., 12.875s, 2004 2,000 1,655,000
Echostar Satellite Broadcast Corp., 13.125s, 2004 2,370 1,801,200
Falcon Holdings Group, Inc., 11s, 2003 2,613 2,325,668
Granite Broadcasting Corp., 10.375s, 2005 800 802,000
ICG Holdings Inc., 12.5s, 2006 3,000 1,920,000
Intermedia Capital Partners, 11.25s, 2006## 150 152,250
Jones Intercable, Inc., 10.5s, 2008 4,000 4,320,000
U.S. Dollar Denominated - continued
Telecommunications - continued
K-III Communications Corp., 10.625s, 2002 $ 2,650 $ 2,792,437
Lenfest Communications Inc., 10.5s, 2006 875 918,750
Marcus Cable Operating Co., 13.5s, 2004 3,100 2,429,625
MFS Communications, Inc., 9.375s, 2004 50 43,250
MFS Communications, Inc., 8.875s, 2006 4,000 2,900,000
Millicom International Cellular, 13.5s, 2006 1,000 595,000
Mobile Telecommunication Technologies Corp., 13.5s, 2002 1,000 1,035,000
Mobilemedia Communications, Inc., 10.5s, 2003 1,500 667,500
Mobilemedia Communications, Inc., 9.375s, 2007 500 270,000
Paging Network, Inc., 8.875s, 2006 4,450 4,205,250
Park Broadcasting, Inc., 11.75s, 2004 950 1,109,125
ProNet, Inc., 11.875s, 2005 1,000 945,000
Rifkin Acquisition Partners LP, 11.125s, 2006 700 714,000
Rogers Cablesystems, Inc., 10.125s, 2012 3,050 3,149,125
Rogers Cantel, 9.375s, 2008 1,500 1,575,000
Sprint Spectrum LP, 11s, 2006 300 318,750
Sprint Spectrum LP, 12.5s, 2006 4,600 2,990,000
Teleport Communications Group, 11.125s, 2007 2,400 1,626,000
USA Mobil Communication, Inc., 9.5s, 2004 1,875 1,743,750
Western Wireless Corp., 10.5s, 2007## 1,925 1,982,750
-----------
$54,213,030
-----------
Transportation - 0.1%
Moran Transportation Co., 11.75s, 2004 $ 700 $ 750,750
-----------
U.S. Government and Agencies - 31.1%
U.S. Federal Agencies - 2.7%
Federal Home Loan Mortgage Corp., 9s, 2025 $10,181 $10,794,977
Financing Corp., 0s, 2014 13,519 4,161,283
6
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated - continued
U.S. Federal Agencies - continued
Israel Aid, 5.89s, 2005 $ 5,000 $ 4,856,375
------------
$ 19,812,635
------------
Federal National Mortgage Association - 3.8%
FNMA, 7s, 2099 $ 5,000 $ 4,960,900
FNMA, 7.34s, 2020 439 441,580
FNMA, 7.5s, 2010 19,523 19,931,697
FNMA Strips, 7s, 2023 7,310 2,270,654
------------
$ 27,604,831
------------
Government National Mortgage Association - 7.8%
GNMA, 7s, 2022 - 2025 $ 7,516 $ 7,471,599
GNMA, 7.5s, 2022 - 2026 28,594 29,004,875
GNMA, 8s, 2025 - 2026 16,280 16,778,580
GNMA, 9s, 2008 - 2019 3,742 3,919,957
------------
$ 57,175,011
------------
U.S. Treasury Obligations - 16.8%
U.S. Treasury Notes, 8s, 1999 $14,200 $ 15,012,098
U.S. Treasury Notes, 9.125s, 1999 10,000 10,784,400
U.S. Treasury Notes, 6.25s, 2001 17,000 17,289,510
U.S. Treasury Notes, 7.5s, 2001 5,400 5,779,674
U.S. Treasury Notes, 6.875s, 2006 500 528,435
U.S. Treasury Bonds, 13.375s, 2001 20,000 26,128,200
U.S.Treasury Bonds, 10.375s, 2012 7,200 9,509,616
U.S. Treasury Bonds, 12s, 2013 20,000 29,362,400
U.S. Treasury Bonds, 8.75s, 2020 7,500 9,527,325
------------
$123,921,658
------------
Total U.S. Government and Agencies $228,514,135
------------
Utilities - Electric - 0.7%
Midland Cogeneration Venture Corp., 10.33s, 2002 $ 5,116 $ 5,435,248
------------
Foreign - U.S. Dollar Denominated - 3.9%
Banco Nacional de Commerce, 7.25s, 2004 $ 1,500 $ 1,312,500
Bell Cablemedia PLC, 11.875s, 2005 1,250 981,250
Central Transport Rental Group PLC, 9.5s, 2003 1,173 1,099,345
Diamond Cable Communications, 11.75s, 2005 2,090 1,457,775
U.S. Dollar Denominated - continued
Foreign - U.S. Dollar Denominated - continued
Empresas Ica Sociedad Sa, 11.875s, 2001 $ 1,000 $ 1,057,500
Federal Republic of Brazil, 6.6875s, 2001 455 439,075
Federal Republic of Brazil, 8s, 2014 3,817 2,795,890
Government of Poland, 6.5s, 2024 2,000 1,955,000
GPA PLC, 10.875s, 2019 225 249,750
Republic of Argentina, 5.25s, 2023 2,500 1,600,000
Republic of Argentina, 6.375s, 2023 1,000 758,750
Republic of Colombia, 8.66s, 2016## 1,000 1,050,000
United Mexican States, 11.375s, 2016 1,000 1,036,250
United Mexican States, 6.25s, 2019 2,500 1,846,875
United Mexican States, 6.45313s, 2019 2,000 1,695,000
United Mexican States, 6.453s, 2019 1,000 847,500
United Mexican States, 11.5s, 2026 5,000 5,225,000
Videotron Holdings PLC, 10.25s, 2002 800 852,000
Videotron Holdings PLC, 11s, 2005 2,650 2,086,875
------------
$ 28,346,335
------------
Total U.S. Dollar Denominated $501,260,044
------------
Foreign Bonds - 24.2%
Austalia - 6.7%
Commonwealth of Australia, 8.75s, 2001 AUD 7,400 $ 6,445,704
Commonwealth of Australia, 10s, 2002 16,700 15,547,003
Commonwealth of Australia, 9.5s, 2003 29,510 27,159,844
------------
$ 49,152,551
------------
Canada - 3.4%
Government of Canada, 7.5s, 2003 CAD 30,880 $ 25,339,314
------------
Denmark - 6.5%
Kingdom of Denmark, 6s, 1999 DKK 38,609 $ 6,786,277
Kingdom of Denmark, 9s, 2000 70,850 13,667,297
7
<PAGE>
Portfolio of Investments - continued
Bonds - continued
Principal Amount
Issuer (000 Omitted) Value
Foreign Bonds - continued
Denmark - continued
Kingdom of Denmark, 8s, 2001 DKK 126,947 $ 23,841,906
Kingdom of Denmark, 7s, 2007 18,753 3,238,877
------------
$ 47,534,357
------------
Ireland - 1.7%
Republic of Ireland, 8s, 2000 IEP 7,000 $ 12,641,771
------------
Spain - 1.7%
Government of Spain, 8.3s, 1998 ESP 66,690 $ 535,843
Government of Spain, 7.8s, 1999 162,900 1,315,026
Government of Spain, 10.1s, 2001 1,034,680 9,104,482
Government of Spain, 10.5s, 2003 162,900 1,510,114
Government of Spain, 8s, 2004 27,510 227,271
------------
$ 12,692,736
------------
Sweden - 0.5%
Kingdom of Sweden, 10.25s, 2000 SEK 20,200 $ 3,428,919
------------
United Kingdom - 3.7%
United Kingdom Treasury, 9s, 2000 GBP 2,000 $ 3,564,762
United Kingdom Treasury, 7s, 2001 11,700 19,637,019
United Kingdom Treasury, 9.75s, 2002 2,000 3,764,398
------------
$ 26,966,179
------------
Total Foreign Bonds $177,755,827
------------
Total Bonds
(Identified Cost, $658,015,498) $679,015,871
------------
Common Stocks - 0.2%
Shares
Atlantic Gulf Communities Corp. 244 $ 1,128
Central Transport Rental Group PLC 575,063 197,678
Gillett Holdings, Inc.+ 33,891 1,287,858
Triton Group Ltd. 383,601 335,651
------------
Total Common Stocks
(Identified Cost, $1,649,675) $ 1,822,315
------------
Preferred Stocks - 1.1%
Issuer Shares Value
Cablevision Systems Corp. 47,837 $ 4,209,656
K-III Communications Corp.# 15,201 1,520,100
Time Warner, Inc.# 2,096 2,271,540
------------
Total Preferred Stocks
(Identified Cost, $7,632,950) $ 8,001,296
------------
Short-Term Obligations - 3.6%
Principal Amount
(000 Omitted)
Argentina Treasury Bill,
due 01/17/97 $ 2,500 $ 2,475,990
Eurolira Time Deposit, due
04/21/97 ITL 18,200,000 12,009,000
Eurolira Time Deposit, due
05/12/97 18,230,000 12,028,797
------------
Total Short-Term Obligations
(Identified Cost, $26,256,283) $ 26,513,787
------------
Repurchase Agreement - 1.4%
Goldman Sachs, in a joint
trading account ($10,197,000
par), dated 11/29/96, total to
be received by the Trust,
$10,201,810, collateralized by
various U.S. Treasury and
federal agency obligations
(with $141,990,000 par and
valued at $143,939,000), at
Cost $10,197,000 $ 10,197,000
------------
Total Investments
(Identified Cost, $703,751,406) $725,550,269
Other Assets,
Less Liabilities - 1.4% 10,421,113
------------
Net Assets - 100.0% $735,971,382
============
</TABLE>
+ Restricted security.
* Non-income producing security.
** Non-income producing security in default.
# Payment-in-kind bond.
## SEC Rule 144A restriction.
Abbreviations have been used throughout the report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars
CAD = Canadian Dollars
CHF = Swiss Francs
DEM = Deutsche Marks
DKK = Danish Kroner
ESP = Spanish Pesetas
GBP = British Pounds
IEP = Irish Punts
ITL = Italian Lire
SEK = Swedish Kronor
THB = Thai Bahts
See notes to financial statements
8
<PAGE>
Statement of Assets and Liabilities - November 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at value (identified cost, $703,751,406) $725,550,269
Cash 1,534,874
Foreign currency, at value (identified cost, $3,002,312) 2,955,455
Net receivable for interest rate swap agreements 802,321
Interest receivable 12,860,989
Other assets 8,511
------------
Total assets $743,712,419
------------
Liabilities:
Distributions payable to dividend disbursing agent $ 457,971
Payable for Treasury shares reacquired 20,865
Payable for investments purchased 4,948,437
Net payable for forward foreign currency exchange contracts sold 748,432
Net payable for forward foreign currency exchange contracts purchased 275,558
Net payable for forward foreign currency exchange contracts 703,571
Payable for futures variation margin 24,062
Payable to affiliates -
Management fee 42,357
Transfer agent fee 13,225
Accrued expenses and other liabilities 506,559
------------
Total liabilities $ 7,741,037
------------
Net assets $735,971,382
============
Net assets consist of:
Paid-in capital $735,102,561
Unrealized appreciation on investments and translation of assets and liabilities in foreign currencies 20,610,152
Accumulated net realized loss on investments and foreign currency transactions (16,510,012)
Accumulated distributions in excess of net investment income (3,231,319)
------------
Total $735,971,382
============
Shares of beneficial interest outstanding 69,654,939
============
Net asset value per share (net assets / shares of beneficial interest outstanding) $10.57
======
</TABLE>
See notes to financial statements
9
<PAGE>
Statement of Operations - Year Ended November 30, 1996
<TABLE>
<CAPTION>
<S> <C>
Net investment income:
Interest income $62,635,800
-----------
Expenses -
Management fee $ 5,286,368
Trustees' compensation 147,769
Investor communication fee 601,551
Custodian fee 424,534
Transfer and dividend disbursing agent fee 163,916
Postage 78,385
Printing 59,315
Auditing fees 58,820
Legal fees 13,701
Miscellaneous 269,561
-----------
Total expenses $ 7,103,920
Fees paid indirectly (68,073)
-----------
Net expenses $ 7,035,847
-----------
Net investment income $55,599,953
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 9,231,351
Written option transactions 264,875
Foreign currency transactions (2,973,896)
Futures contracts (774,503)
Swaps 860,295
-----------
Net realized gain on investments and foreign currency transactions $ 6,608,122
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 2,846,899
Written option (188,302)
Translation of assets and liabilities in foreign currencies (5,549,760)
Futures contracts (256,555)
Interest rate swap agreements 802,321
-----------
Net unrealized loss on investments $(2,345,397)
-----------
Net realized and unrealized gain on investments and foreign currency $ 4,262,725
-----------
Increase in net assets from operations $59,862,678
===========
</TABLE>
See notes to financial statements
10
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended November 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 55,599,953 $ 61,734,301
Net realized gain on investments and foreign currency transactions 6,608,122 2,846,273
Net unrealized gain (loss) on investments and foreign currency translation (2,345,397) 57,431,307
------------ ------------
Increase in net assets from operations $ 59,862,678 $122,011,881
------------ ------------
Distributions declared to shareholders -
From net investment income $(60,602,341) $(59,963,107)
------------ ------------
Total distributions declared to shareholders $(60,602,341) $(59,963,107)
------------ ------------
Trust share (principal) transactions -
Net asset value of shares reacquired from shareholders $(49,544,782) $(80,182,474)
------------ ------------
Decrease in net assets from Trust share transactions $(49,544,782) $(80,182,474)
------------ ------------
Total decrease in net assets $(50,284,445) $(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
(accumulated distributions in excess of net investment income) of ($3,231,319) and
$2,855,012, respectively) $735,971,382 $786,255,827
============ ============
</TABLE>
See notes to financial statements
11
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------------------
Per share data (for a
share outstanding
throughout each period): 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 10.50 $ 9.60 $ 10.68 $ 10.23 $ 10.59
-------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.76 $ 0.79 $ 0.76 $ 0.85 $ 0.95
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.14 0.88 (1.07) 0.55 (0.15)
-------- -------- -------- -------- --------
Total from investment operations $ 0.90 $ 1.67 $ (0.31) $ 1.40 $ 0.80
-------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.83) $ (0.77) $ (0.35) $ (0.72) $ (0.90)
From net realized gain on investments and foreign
currency transactions -- -- (0.03) (0.23) (0.15)
From paid-in capital -- -- (0.39) -- (0.11)
-------- -------- -------- -------- --------
Total distributions declared to shareholders $ (0.83) $ (0.77) $ (0.77) $ (0.95) $ (1.16)
-------- -------- -------- -------- --------
Net asset value - end of period $ 10.57 $ 10.50 $ 9.60 $ 10.68 $ 10.23
======== ======== ======== ======== ========
Per share market value - end of period $ 9.625 $ 9.125 $ 8.719 $ 9.625 $ 9.875
======== ======== ======== ======== ========
Total return 15.09% 13.84% (1.35)% 6.92% 1.39%
Ratios (to average net assets)/Supplemental data:
Expenses## 0.93% 0.92% 0.86% 0.90% 0.98%
Net investment income 7.38% 7.84% 7.50% 8.04% 9.27%
Portfolio turnover 146% 183% 153% 397% 198%
Net assets at end of period (000 omitted) $735,971 $786,256 $804,390 $919,480 $898,756
</TABLE>
# 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.
See notes to financial statements
12
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------
Per share data (for a
share outstanding
throughout each period): 1991 1990 1989*
-------- -------- --------
<S> <C> <C> <C>
Net asset value - beginning of period $ 9.93 $ 11.00 $ 11.16
-------- -------- --------
Income from investment operations -
Net investment incomeS. $ 1.06 $ 1.17 $ 0.43
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 1.10 (0.73) (0.21)
-------- -------- --------
Total from investment operations $ 2.16 $ 0.44 $ 0.22
-------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (1.06) $ (1.22) $ (0.38)
From net realized gain on investments and foreign currency
transactions -- (0.07) --
From paid-in capital (0.44) (0.22) --
-------- -------- --------
Total distributions declared to shareholders $ (1.50) $ (1.51) $ (0.38)
-------- -------- --------
Net asset value - end of period $ 10.59 $ 9.93 $ 11.00
======== ======== ========
Per share market value - end of period $ 10.875 $ 9.125 $ 11.000
======== ======== ========
Total return 37.96% (3.32)% (14.15)%+
Ratios (to average net assets)/Supplemental dataS.:
Expenses 1.02% 1.08% 0.74%+
Net investment income 10.34% 11.32% 11.32%+
Portfolio turnover 416% 184% 480%
Net assets at end of period (000 omitted) $923,287 $864,254 $977,875
* For the period from the commencement of investment operations, July 20, 1989 to November 30,
1989.
+ Annualized.
S. The investment adviser 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%+
</TABLE>
See notes to financial statements
13
<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
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. 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 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. 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. The Trust, along with other
affiliated entities of Massachusetts Financial Service 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.
14
<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 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.
15
<PAGE>
Notes to Financial Statements - continued
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 financial statement and
tax reporting purposes as required by federal income tax regulations. 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. Dividend income is recorded on the ex-dividend date for dividends
received in cash.
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 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. During the year ended November 30, 1996, accumulated
distributions in excess of net investment income was decreased by $1,083,943,
accumulated net realized loss on investments and foreign currency was
increased by $2,934,874, and paid-in capital was decreased by $1,850,931, due
to differences between book and tax accounting for currency transactions.
This change had no effect on the net assets or net asset value per share.
At November 30, 1996, the Trust, for federal income tax purposes, had a
capital loss carryforward of $16,351,930, which may be applied against any
net taxable realized gains of each succeeding year until
16
<PAGE>
the earlier of its utilization or expiration on November 30, 2002 ($10,901,634)
and November 30, 2003 ($5,450,296).
(3) Transactions with Affiliates
Investment Adviser - The Trust has an investment advisory agreement with 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 0.32% 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 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 $30,270 for the year ended
November 30, 1996.
Transfer Agent - MFSC acts as registrar and dividend disbursing agent for the
Trust. The agreement provides that the Trust will pay MFSC an account
maintenance fee and a dividend services 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 services 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 $281,072,643 $291,662,301
============ ============
Investments (non-U.S. government securities) $729,935,861 $778,812,069
============ ============
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 $703,908,887
============
Gross unrealized appreciation $ 28,227,252
Gross unrealized depreciation (6,585,870)
------------
Net unrealized appreciation $ 21,641,382
============
17
<PAGE>
Notes to Financial Statements - continued
(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>
Year Ended Year Ended
November 30, 1996 November 30, 1995
------------------------------------------------------------
Shares Amount Shares Amount
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Treasury shares acquired (5,222,300) $(49,544,782) (8,908,300) $(80,182,474)
---------- ------------ ---------- ------------
Net decrease (5,222,300) $(49,544,782) (8,908,300) $(80,182,474)
========== ============ ========== ============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 5,222,300 shares
of beneficial interest were purchased by the Trust during the year ended
November 30, 1996 at an average price per share of $10.25 and a weighted
average discount of 7.47% per share. The Trust repurchased 8,908,300 shares
of beneficial interest during the year ended November 30, 1995 at an average
price per share of $9.00 and a weighted average discount of 9.82% per share.
(6) Quarterly Financial Information
(Unaudited)
<TABLE>
<CAPTION>
Net Realized and Net Increase (Decrease)
Net Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period Ended Investment Income Investment Income on Investments from Operations
- ---------------------- ------------------------------------------------------------------------------------------------
Per Per Per Per
Fiscal 1996 Amount Share Amount Share Amount Share Amount Share
- ----------- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
February 29 $15,564,900 $0.21 $13,742,420 $0.18 $ (7,664,018) $(0.10) $ 6,078,402 $0.08
May 31 15,903,936 0.21 14,151,263 0.19 (14,425,872) (0.17) (274,609) 0.02
August 31 15,721,897 0.22 14,102,486 0.20 25,010,066 0.05 39,112,552 0.25
November 30 15,445,067 0.22 13,603,784 0.19 1,342,549 0.36 14,946,333 0.55
----------- ----- ----------- ----- ------------ ------ ------------ -----
$62,635,800 $0.86 $55,599,953 $0.76 $ 4,262,725 $ 0.14 $ 59,862,678 $0.90
=========== ===== =========== ===== ============ ====== ============ =====
Fiscal 1995
- -----------
February 28 $17,644,418 $0.21 $15,926,649 $0.19 $ 20,521,446 $ 0.30 $ 36,448,095 $0.49
May 31 17,446,967 0.23 15,482,169 0.20 34,562,460 0.48 50,044,629 0.68
August 31 17,558,133 0.23 15,759,926 0.21 (7,979,553) (0.08) 7,780,373 0.13
November 30 16,345,031 0.22 14,565,557 0.19 13,173,227 0.18 27,738,784 0.37
----------- ----- ----------- ----- ------------ ------ ------------ -----
$68,994,549 $0.89 $61,734,301 $0.79 $ 60,277,580 $ 0.88 $122,011,881 $1.67
=========== ===== =========== ===== ============ ====== ============ =====
</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 Trust 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 year ended
November 30, 1996 was $8,092.
18
<PAGE>
(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 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
November 30, 1996 is as follows:
Written Option Transactions
- ---------------------------
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
------------------------------ ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Australian Dollars 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)
Canadian Dollars -- -- (12,253) (27,425)
Deutsche Marks/British Pounds (18,255) (81,159) -- --
------- --------- ---------- ---------
Outstanding, end of period -- $ -- -- $ --
======= ========= ========== ==========
</TABLE>
19
<PAGE>
Notes to Financial Statements - continued
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 2/20/97 AUD 46,288,014 $ 36,018,665 $ 37,653,448 $(1,634,783)
2/20/97 CAD 45,734,415 34,232,346 34,090,295 142,051
2/07/97 CHF 462,409 388,106 356,545 31,561
12/12/96 - 2/07/97 DEM 31,717,128 21,097,887 20,635,176 462,711
2/03/97 DKK 284,883,895 49,942,831 48,535,384 1,407,447
12/12/96 ESP 3,459,662,210 27,241,435 26,653,238 588,197
2/24/97 GBP 22,802,151 36,985,090 38,258,020 (1,272,930)
2/24/97 IEP 7,652,000 12,300,973 12,844,747 (543,774)
12/12/96 ITL 39,265,356,390 25,854,652 25,915,135 (60,483)
2/03/97 SEK 46,917,806 7,124,952 6,993,381 131,571
------------ ------------ -----------
$251,186,937 $251,935,369 $ (748,432)
============ ============ ===========
Purchases 2/20/97 AUD 23,204,582 $ 18,305,724 $ 18,875,999 $ 570,275
2/20/97 CAD 26,043,457 19,597,155 19,412,715 (184,440)
2/07/97 CHF 462,409 391,077 356,545 (34,532)
12/12/96 - 02/07/97 DEM 36,644,268 24,188,256 23,840,572 (347,684)
12/12/96 ESP 2,145,263,329 17,014,219 16,527,109 (487,110)
2/24/97 GBP 7,256,031 11,908,235 12,174,350 266,115
2/03/97 SEK 27,826,793 4,210,885 4,147,750 (63,135)
12/24/96 THB 56,000,000 2,183,023 2,187,976 4,953
------------ ------------ -----------
$ 97,798,574 $ 97,523,016 $ (275,558)
============ ============ ===========
</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 $703,571 at November 30, 1996.
At November 30, 1996, the Trust had sufficient cash and/or securities to
cover any commitments under these contracts.
Futures Contract
- ----------------
Unrealized
Expiration Contracts Position Depreciation
- -------------------------------------------------------------------------------
5 year U.S. Treasury - December 1996 (70) (7,588,438) $(256,555)
At November 30, 1996, the Trust had sufficient cash and/or securities to
cover margin requirements on open futures contracts.
Interest Rate Swap
<TABLE>
<CAPTION>
Notional Cash Flows Cash Flows
Principal Amount Paid by Received by Unrealized
Expiration of Contract the Trust the Trust Appreciation
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/22/01 ITL 18,200,000,000 Floating 6M Libor Fixed 8.055% $802,321
========
</TABLE>
At November 30, 1996, the Trust has segregated sufficient cash and/or
securities to cover margin requirements on open interest rate swaps.
(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 November 30,
1996, the Trust owned the following restricted securities (constituting 0.2%
of net assets) which may not be publicly sold without registration under the
Securities Act of
20
<PAGE>
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.
<TABLE>
<CAPTION>
Date of
Description Acquisition Share/Par Amount Cost Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 8/2/89 244 $ 0 $ 1,128
Merrill Lynch Mortgage Investors,
8.083s, 2023 6/22/94 1,500,000 1,039,687 1,257,422
----------
$1,258,550
==========
</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
November 30, 1996, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in
the period then ended, and financial highlights for each of the three years
in the period then ended. 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 20, 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 the
securities owned as of November 30, 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 November 30, 1996, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the three
years in the period then ended, in conformity with generally accepted
accounting principles.
Ernst & Young LLP
Boston, Massachusetts
January 8, 1997
22
<PAGE>
<PAGE>
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.
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, Dividend
Disbursing Agent
and Plan Agent
MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
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-2-1/97 75M
<PAGE>
[MFS LOGO]
INVESTMENT MANAGEMENT
MFS(R) Charter Income Trust
Annual Report
for Year Ended
November 30, 1996
