Dear Shareholders:
Two of the three equally divided fixed-income sectors of the Trust continue to
be driven by calm market conditions and favorable economic trends. We have
remained relatively cautious in the U.S. government and mortgage markets due to
continued U.S. economic growth and ever-lower unemploy-ment rates. In Europe, we
are also conservatively positioned, keeping durations (measures of interest-rate
sensitivity) short and mostly avoiding local currency exposure. Our high-yield
analysts continue to take a cautious view on corporate credit quality, edging
toward the higher end of the quality spectrum in high-yield bonds.
The Trust's stock market price, which stood at $9.625 on November 29, 1996,
declined to $9.50 on May 30, 1997, while its net-asset-value (NAV) price
decreased from $10.57 to $10.42, representing a total return of 2.95% based on
market price and 2.83% based on NAV. This compares to a 2.14% return for the
J.P. Morgan Non-Dollar Government Bond Index, an unmanaged index of actively
traded government bonds issued from 12 countries (excluding the United States)
with remaining maturities of at least one year, and to a 0.45% return for the
Lehman Brothers Government Bond Index, an unmanaged index of U.S. Treasury and
government-agency obligations.
We believe the Trust continues to benefit from its innovative share repurchase
program. This program, which was implemented in April 1996 authorizes the Trust
to repurchase up to 10% of its outstanding shares annually. The Trust captures
the difference between its NAV and its market price when it repurchases shares
at a discount to its NAV and pays the added value to its shareholders with their
regular monthly distributions. The extra distribution paid to shareholders is
currently adding approximately 50 basis points (0.50%) to the Trust's
distribution rate at both NAV and market price. This higher distribution rate
has helped keep the Trust's market price steady, at approximately $9.50.
U.S. Government/Mortgage
During most of this period, we have kept durations on the short side
(approximately 10%), reflecting our concerns about a possible monetary
tightening by the Federal Reserve Board (the Fed) in response to sustained
economic growth in the United States. We are now less concerned about that
prospect because the Fed has softened its position, and we have moved to a
neutral duration in this sector. We still favor mortgages as a subsector.
High-Yield Corporate
Heavy weightings in media and general industrial bonds have characterized our
approach to this sector, and we have forsaken more speculative elements in favor
of companies with less debt and steadier earnings. The average credit quality of
our holdings in this sector is higher than those of relevant indices and our
competitors. We believe this approach has added to the Trust's stability.
International
With limited exposure to interest-rate moves and mostly U.S. dollar holdings, we
have avoided the worst of the renewed turmoil surrounding the impending European
union. We have decidedly favored the peripheral countries of Europe during this
period, with holdings in Spain, Sweden, Italy, and Ireland. Smaller holdings in
New Zealand and Australia round out the international position. We have also
allocated 5% of our international position to emerging market bonds, an area
that has seen the best returns of any subsector during this period. Strong gains
by bonds in Mexico and Argentina, as well as in Russia and Poland, have helped
the overall effort.
The Trust derives its relative stability of net asset value from the
diversification among the three sectors referred to above, as these sectors do
not always move in sync with economic or financial events.
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
June 12, 1997
----------------
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.
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.
[boxed text]
Performance Summary
(For the six months ended May 31, 1997)
Net Asset Value Per Share
November 30, 1996 $10.57
May 31, 1997 $10.42
New York Stock Exchange Price
November 30, 1996 $9.625
May 30, 1997 (high)* $9.500
April 18, 1997 (low)* $9.125
May 30, 1997 $9.500
*For the period December 1, 1996, through May 31, 1997.
Number of Employees
The Trust is organized as a Massachusetts busi-ness trust and is registered
under the Investment Company Act of 1940, as amended, as a closed-end,
nondiversified, management investment company and has no employees.
Number of Shareholders
As of May 31, 1997, our records indicate that there are 9,458 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.
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, 1997
Bonds -- 94.6%
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds -- 61.6%
Aerospace -- 0.3%
BE Aerospace, Inc., 9.875s,
2006 ........................... $2,000 $ 2,080,000
-------------
Airlines
Airplane Pass Through Trust,
10.875s, 2019 .................. $ 225 $ 248,625
Eastern Airlines, Inc., 11.75s,
1993** ........................... 5,000 0
Eastern Airlines, Inc., 12.75s,
1996** ........................... 3,000 30,000
-------------
$ 278,625
-------------
Automotive -- 1.1%
Exide Corp., 10s, 2005 ............ $2,200 $ 2,293,500
Harvard Industries, Inc., 12s,
2004 ........................... 155 54,250
Lear Corp., 9.5s, 2006 ............ 2,000 2,120,000
Titan Wheel International, Inc.,
8.75s, 2007 ..................... 3,150 3,197,250
-------------
$ 7,665,000
-------------
Banks and Credit Companies -- 0.3%
Advanta Corp., 7.07s, 1997 ......... $2,000 $ 2,000,440
-------------
Building -- 2.7%
American Standard, Inc., 10.5s,
2005 ........................... $5,500 $ 5,383,125
Building Materials Corp., 11.75s,
2004 ........................... 4,775 4,291,531
Johns Manville International
Group, Inc., 10.875s, 2004 ...... 1,950 2,140,125
Nortek, Inc., 9.25s, 2007## ...... 700 693,000
Nortek, Inc., 9.875s, 2004 ......... 2,225 2,247,250
UDC Homes, Inc., 14.25s, 2000 ....... 13 7,368
USG Corp., 9.25s, 2001 ............ 4,275 4,520,813
-------------
$ 19,283,212
-------------
Cellular Telephones -- 0.4%
Millicom International Cellular
Communications Corp., 0s to
2001, 13.5s to 2006 ............ $3,475 $ 2,545,437
-------------
Chemicals -- 0.7%
NL Industries, Inc., 11.75s,
2003 ........................... $1,185 $ 1,303,500
Sterling Chemicals, Inc., 11.25s,
2007## ........................... 1,000 1,065,000
UCC Investors Holdings, Inc.,
10.5s, 2002 ..................... 2,500 2,725,000
UCC Investors Holdings, Inc.,
12s, 2005 ........................ 350 323,750
-------------
$ 5,417,250
-------------
U.S. Bonds -- continued
Computer Software -- Systems -- 0.1%
Anacomp, Inc., 10.875s,
2004## ........................... $ 975 $ 999,375
-------------
Conglomerates -- 0.5%
News America Holdings Inc.,
10.125s, 2012 .................. $3,000 $ 3,396,210
-------------
Consumer Goods and Services -- 3.2%
E & S Holdings Corp., 10.375s,
2006 ........................... $1,000 $ 1,045,000
FoodBrands America, Inc.,
10.75s, 2006 ..................... 1,300 1,508,793
International Semi-Tech
Microelectronics, Inc., 11.5s,
2003 ........................... 3,400 2,074,000
Kindercare Learning Center, Inc.,
9.5s, 2009 ..................... 250 240,625
Panamsat LP, 0s to 1998,
11.375s to 2003 .................. 1,000 965,000
Reeves Industries, Inc., 11s,
2002 ........................... 700 582,750
Remington Arms, Inc., 10s,
2003## ........................... 300 240,000
Revlon, Inc., 10.5s, 2003 ......... 5,000 5,287,500
Samsonite Corp., 11.125s,
2005 ........................... 1,000 1,115,000
Sealy Corp., 10.25s, 2003 ......... 3,550 3,665,375
Syratech Corp., 11s, 2007 ......... 200 212,500
Westpoint Stevens, Inc., 9.375s,
2005 ........................... 5,550 5,785,875
-------------
$ 22,722,418
-------------
Containers -- 1.7%
Calmar, Inc., 11.5s, 2005 ......... $1,500 $ 1,552,500
Gaylord Container Corp., 11.5s,
2001 ........................... 500 526,250
Gaylord Container Corp.,
12.75s, 2005 ..................... 2,350 2,573,250
Ivex Packaging Corp., 12.5s,
2002 ........................... 4,000 4,340,000
Owens-Illinois, Inc., 9.75s, 2004 ... 750 795,000
Owens-Illinois, Inc., 9.95s, 2004 ... 1,250 1,321,875
Silgan Corp., 11.75s, 2002 ......... 1,150 1,213,250
-------------
$ 12,322,125
-------------
Corporate Asset Backed -- 0.2%
Merrill Lynch Mortgage
Investors, Inc., 8.225s, 2023+ .... $1,500 $ 1,290,703
-------------
Defense Electronics -- 0.1%
Alliant Techsystem., Inc.,
11.75s, 2003 ..................... $ 600 $ 661,500
-------------
4
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds -- continued
Entertainment -- 0.5%
Act III Theaters, Inc., 11.875s,
2003 .............................. $ 1,000 $ 1,080,000
AMC Entertainment, Inc., 9.5s,
2009## ........................... 1,025 1,041,656
American Skiing Co., 12s, 2006 ....... 500 518,750
Cinemark USA, Inc., 9.625s,
2008 .............................. 700 710,500
-------------
$ 3,350,906
-------------
Financial Institutions
Americo Life, Inc., 9.25s, 2005 .... $ 300 $ 303,000
-------------
Food and Beverage Products -- 0.7%
Coca-Cola Bottling Group, Inc.,
9s, 2003 ........................ $ 750 $ 776,250
Specialty Foods Corp., 10.25s,
2001 .............................. 2,000 1,960,000
Texas Bottling Group, Inc., 9s,
2003 .............................. 2,500 2,562,500
-------------
$ 5,298,750
-------------
Government National Mortgage
Association -- 9.0%
GNMA, 7s, 2022 -- 2025 ............ $ 7,252 $ 7,090,949
GNMA, 7.5s, 2022 -- 2026 ............ 27,503 27,464,185
GNMA, 8s, 2025 -- 2027 ............ 26,032 26,487,641
GNMA, 9s, 2019 ..................... 3,319 3,551,008
-------------
Total Government National Mortgage
Association .................................... $ 64,593,783
-------------
Machinery -- 0.6%
AGCO Corp., 8.5s, 2006 ............ $ 4,325 $ 4,389,875
-------------
Medical and Health Technology
and Services -- 1.0%
Beverly Enterprises, Inc., 9s,
2006 .............................. $ 750 $ 761,250
Genesis Health, 9.75s, 2005 ......... 2,000 2,085,000
Imed Corp., 9.75s, 2006## ......... 700 710,500
Quorum Health Group, Inc.,
8.75s, 2005 ..................... 1,900 1,947,500
Tenet Healthcare Corp.,
10.125s, 2005 ..................... 1,525 1,662,250
-------------
$ 7,166,500
-------------
Metals and Minerals -- 0.4%
Haynes International, Inc.,
11.625s, 2004 ..................... $ 2,650 $ 2,848,750
-------------
Oil Services -- 1.0%
AmeriGas Partners LP, 10.125s,
2007 .............................. $ 600 $ 630,000
Clark Refining & Manufacturing,
Inc., 0s, 2000 .................. 350 265,125
Oil Services -- continued
Clark USA, Inc., 10.875s, 2005 ....... $ 735 $ 760,725
Falcon Drilling, Inc., 8.875s,
2003 .............................. 2,750 2,791,250
Ferrell Gas LP, 10s, 2001 ......... 2,600 2,691,000
-------------
$ 7,138,100
-------------
Oils -- 0.2%
Noble Drilling Corp., 9.125s,
2006 .............................. $ 1,250 $ 1,343,750
-------------
Printing and Publishing -- 0.1%
Day International Group, Inc.,
11.125s, 2005 ..................... $ 600 $ 636,000
-------------
Real Estate Investment Trusts -- 0.2%
Loewen Group International,
Inc., 7.5s, 2001 .................. $ 1,500 $ 1,492,500
-------------
Restaurants and Lodging -- 0.2%
Red Roof Inns, Inc., 9.625s,
2003 .............................. $ 1,750 $ 1,806,875
-------------
Special Products and Services -- 3.0%
AAF-Mcquay, Inc., 8.875s, 2003 ....... $ 1,500 $ 1,462,500
Blount, Inc., 9s, 2003 ............ 1,250 1,243,750
Buckeye Cellulose Corp., 8.5s,
2005 .............................. 1,010 999,900
Fairfield Manufacturing Corp.,
11.375s, 2001 ..................... 500 527,500
Howmet Corp., 10s, 2003 ............ 2,615 2,824,200
Idex Corp., 9.75s, 2002 ............ 1,350 1,410,750
IMO Industries, Inc., 11.75s,
2006 .............................. 2,000 2,010,000
Interlake Corp., 12s, 2001 ......... 1,750 1,925,000
Interlake Corp., 12.125s, 2002 ..... 1,925 2,026,062
Interlake Revolver, 5.75s,
1997## ........................... 95 94,154
K & F Industries, Inc., 11.875s,
2003 .............................. 769 815,140
Newflow Corp., 13.25s, 2002 ......... 700 756,875
Polymer Group, Inc., 12.25s,
2002 .............................. 1,333 1,464,634
Synthetic Industries, Inc., 9.25s,
2007## ........................... 2,250 2,311,875
Thermadyne Holdings Corp.,
10.25s, 2002 ..................... 750 772,500
Thermadyne Holdings Corp.,
10.75s, 2003 ..................... 1,250 1,290,625
-------------
$ 21,935,465
-------------
Steel -- 1.5%
AK Steel Holdings Corp.,
9.125s, 2006 ..................... $ 500 $ 515,625
5
<PAGE>
Portfolio of Investments -- continued
Bonds -- continued
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds -- continued
Steel -- continued
AK Steel Holdings Corp.,
10.75s, 2004 ..................... $1,500 $ 1,627,500
Armco, Inc., 11.375s, 1999 ......... 600 624,000
Commonwealth Aluminum
Corp., 10.75s, 2006 ............ 750 787,500
Jorgensen (Earle M.) Co.,
10.75s, 2000 ..................... 1,500 1,455,000
Kaiser Aluminum & Chemical
Corp., 9.875s, 2002 ............ 2,550 2,613,750
Northwestern Steel + Wire Co.,
9.5s, 2001 ..................... 150 130,500
WCI Steel, Inc., 10s, 2004 ......... 2,850 2,935,500
-------------
$ 10,689,375
-------------
Stores -- 0.6%
Finlay Fine Jewelry, 10.625s,
2003 ........................... $2,750 $ 2,887,500
Parisian, Inc., 9.875s, 2003 ...... 1,150 1,207,500
-------------
$ 4,095,000
-------------
Supermarkets -- 1.8%
Dominick's Finer Foods Co.,
10.875s, 2005 .................. $2,500 $ 2,778,125
Grand Union Co., 12s, 2004 ......... 700 553,000
Kroger Co., 8.5s, 2003 ............ 500 518,750
Pathmark Stores, Inc., 9.625s,
2003 .............................. 3,100 2,952,750
Ralph's Grocery Co., 10.45s,
2004 .............................. 1,900 2,085,250
Smiths Food & Drug Centers,
11.25s, 2007 ..................... 3,325 3,890,250
-------------
$ 12,778,125
-------------
Telecommunications -- 7.8%
Adelphia Communications
Corp., 9.875s, 2007## ............ $1,250 $ 1,193,750
American Radio Systems Corp.,
9s, 2006 ........................ 775 790,500
Brooks Fiber Properties, Inc., 0s
to 2001, 10.875s to 2006 ......... 2,180 1,482,400
Brooks Fiber Properties, Inc., 0s
to 2001, 11.875s to 2006 ......... 750 483,750
Cablevision Systems Corp.,
9.25s, 2005 ..................... 1,500 1,507,500
Colt Telecom Group PLC, 0s to
2001, 12s to 2006 ............... 500 315,000
Comcast Cellular Holdings, Inc.,
9.5s, 2007## ..................... 3,000 3,003,750
Comcast Corp., 9.375s, 2005 ......... 5,735 5,935,725
Telecommunications -- continued
Diamond Cable Communications
Corp., 0s to 2000, 11.75s to
2005 ........................... $2,090 $ 1,415,975
Echostar Communications
Corp., 12.875s, 2004 ............ 2,000 1,670,000
Echostar Satellite Broadcasting
Corp., 13.125s, 2004 ............ 595 404,600
Falcon Holdings Group, Inc.,
11s, 2003 ........................ 1,757 1,585,540
Globalstar LP/Capital, 11.375s,
2004## ........................... 500 506,250
Granite Broadcasting Corp.,
10.375s, 2005 .................. 800 816,000
ICG Holdings, Inc., 12.5s, 2006 ..... 3,600 2,313,000
Intermedia Capital Partners IV,
LP, 11.25s, 2006 ............... 1,150 1,219,000
Jones Intercable, Inc., 8.875s,
2007 .............................. 3,000 2,985,000
Lenfest Communications, Inc.,
10.5s, 2006 ..................... 2,275 2,434,250
Marcus Cable Operating Co.,
13.5s, 2004 ..................... 3,100 2,666,000
MFS Communications, Inc.,
8.875s, 2006 ..................... 2,550 1,988,311
Mobile Telecommunication
Technologies Corp., 13.5s,
2002 ........................... 1,000 1,030,000
Mobilemedia Communications,
Inc., 10.5s, 2003 ............... 1,150 123,625
Nextel Communications, Inc., 0s
to 1999, 9.75s to 2004 ......... 1,745 1,326,200
Orion Network Systems, Inc.,
11.25s, 2007 ..................... 1,625 1,673,750
Orion Network Systems, Inc.,
12.5s, 2007 ..................... 750 427,500
Paging Network, Inc., 8.875s,
2006 ........................... 3,185 2,834,650
Qwest Communications
International, Inc., 10.875s,
2007## ........................... 750 803,438
Rogers Cablesystems, Inc.,
10.125s, 2012 .................. 3,050 3,187,250
Sprint Spectrum LP, 11s, 2006 ....... 2,125 2,348,125
Sprint Spectrum LP, 12.5s,
2006 ........................... 2,600 1,833,000
Teleport Communications
Group, Inc., 11.125s, 2007 ...... 1,900 1,334,750
Videotron Holdings PLC, 0s to
2000, 11s to 2005 ............... 2,650 2,173,000
6
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds -- continued
Telecommunications -- continued
Western Wireless Corp., 10.5s,
2007 ........................... $ 1,925 $ 1,944,250
-------------
$ 55,755,839
-------------
Transportation -- 0.1%
Moran Transportation Co.,
11.75s, 2004 ..................... $ 700 $ 764,750
-------------
Utilities -- Electric -- 0.7%
Midland Cogeneration Venture
Corp., 10.33s, 2002 ............... $ 4,853 $ 5,193,171
-------------
U.S. Federal Agencies -- 5.0%
Federal Home Loan Mortgage
Corp., 7.5s, 2099 ............... $22,000 $ 21,951,820
Federal National Mortgage
Assn., 7s, 2026--2027 ............ 4,973 4,839,126
Federal National Mortgage
Assn., 7.172s, 2020 ............ 393 395,431
Financing Corp., 0s, 2014 ......... 13,519 3,962,419
Israel Aid, 5.89s, 2005 ............ 5,000 4,687,500
-------------
$ 35,836,296
-------------
U.S. Treasury Obligations -- 15.9%
U.S Treasury Notes, 6.375s,
2000 ........................... $20,000 $ 20,009,400
U.S. Treasury Bonds, 13.375s,
2001 ........................... 20,000 24,984,400
U.S. Treasury Bonds, 10.75s,
2005 ........................... 10,000 12,542,200
U.S. Treasury Bonds, 10.375s,
2012 ........................... 7,200 9,070,848
U.S. Treasury Bonds, 11.25s,
2015 ........................... 27,100 38,935,112
U.S. Treasury Bonds, 8.75s,
2020 ........................... 7,500 8,982,450
-------------
$114,524,410
-------------
Total U.S. Bonds .................................... $442,603,515
-------------
Foreign Bonds -- 33.0%
Argentina -- 1.2%
Republic of Argentina, 6.625s,
2005 ........................... $ 1,940 $ 1,809,050
Republic of Argentina, 11.75s,
2007## ........................... 4,500 4,905,000
Republic of Argentina, 6.438s,
2023 ........................... 1,000 855,000
Republic of Argentina, Floating
Rate, 2023 ..................... 1,750 1,181,250
-------------
$ 8,750,300
-------------
Foreign Bonds -- continued
Australia -- 9.9%
Commonwealth of Australia,
8.75s, 2001 ..................... AUD 26,470 $ 21,583,950
Commonwealth of Australia,
9.75s, 2002 ..................... 17,660 15,031,817
Commonwealth of Australia,
10s, 2002 ........................ 17,670 15,262,203
Commonwealth of Australia,
9.5s, 2003 ..................... 22,640 19,244,844
-------------
$ 71,122,814
-------------
Brazil -- 0.3%
Federal Republic of Brazil,
6.688s, 2001 ..................... $ 435 $ 428,475
Federal Republic of Brazil,
6.938s, 2009 ..................... 2,000 1,745,000
-------------
$ 2,173,475
-------------
Canada -- 1.0%
Gulf Canada Resources Ltd.,
9.25s, 2004 ..................... $ 4,400 $ 4,609,000
Rogers Cantel, Inc., 9.375s,
2008 ........................... 1,500 1,560,000
Videotron Ltd., 10.25s, 2002 ...... 800 848,000
-------------
$ 7,017,000
-------------
Colombia -- 0.1%
Republic of Colombia, 8.66s,
2016## ........................... $ 1,000 $ 1,020,000
-------------
Denmark -- 1.2%
Kingdom of Denmark, 8s, 2001 DKK 5,973 $ 1,021,554
Nykredit Bank, 8s, 2026 ............ 46,946 7,414,427
-------------
$ 8,435,981
-------------
Ecuador -- 0.8%
Republic of Ecuador, 3.5s, 2025 ..... $13,000 $ 5,882,500
-------------
Greece -- 1.8%
Hellenic Republic, 12.6s, 2003 .....GRD 2,185,000 $ 8,452,890
Hellenic Republic, 14.3s, 2003 ..... 580,000 2,220,371
Hellenic Republic, 14.5s, 2003 ..... 600,000 2,295,834
-------------
$ 12,969,095
-------------
Ireland -- 2.0%
Republic of Ireland, 8s, 2000 ...... IEP 4,270 $ 6,833,027
Republic of Ireland, 6.5s, 2001 ..... 4,910 7,555,068
-------------
$ 14,388,095
-------------
Italy -- 1.3%
Republic of Italy, 9.5s, 1999 ....ITL 15,450,000 $ 9,529,633
-------------
Mexico -- 2.3%
Empresas ICA Sociedad SA,
11.875s, 2001 .................. $ 1,000 $ 1,085,000
7
<PAGE>
Portfolio of Investments -- continued
Bonds -- continued
Principal Amount
Issuer (000 Omitted) Value
Foreign Bonds -- continued
Mexico -- continued
United Mexican States, 11.375s,
2016 .......................... $1,000 $ 1,097,500
United Mexican States, 6.25s,
2019 .......................... 4,500 3,358,125
United Mexican States, 6.25s,
2019 .......................... 6,000 4,477,500
United Mexican States, 6.453s,
2019 .......................... 1,000 920,000
United Mexican States, 6.867s,
2019 .......................... 1,500 1,380,000
United Mexican States, 11.5s,
2026 .......................... 4,000 4,410,000
-------------
$ 16,728,125
-------------
New Zealand -- 1.9%
Government of New Zealand,
8s, 2001 ....................... NZD 19,170 $ 13,529,048
-------------
Panama -- 0.4%
Republic of Panama, 7.875s,
2002 .......................... $1,500 $ 1,474,500
Republic of Panama, 7.875s,
2002## ....................... 1,000 990,000
-------------
$ 2,464,500
-------------
Poland -- 0.3%
Government of Poland, 6.938s,
2024 .......................... $2,000 $ 1,957,500
-------------
Russia -- 0.2%
Government of Russia, Floating
Rate, 2049+ .................... $2,000 $ 1,452,500
-------------
Spain -- 3.3%
Government of Spain, 10.1s,
2001 .......................... ESP 1,230,110 $ 9,803,065
Government of Spain, 10.5s,
2003 .......................... 1,226,540 10,381,812
Government of Spain, 7.35s,
2007 .......................... 438,880 3,178,484
-------------
$ 23,363,361
-------------
Sweden -- 1.2%
Kingdom of Sweden, 10.25s,
2000 .......................... SEK 60,700 $ 8,820,087
-------------
United Kingdom -- 3.8%
Bell Cablemedia PLC, 0s to
2000, 11.875s to 2005 ........ GBP 1,250 $ 1,034,375
-------------
Foreign Bonds -- continued
United Kingdom -- continued
Central Transport Rental Finance
Corp., 9.5s, 2003 .............. $1,173 $ 1,090,550
United Kingdom Treasury, 9.5s,
2004 .......................... GBP 13,500 25,033,644
-------------
$ 27,158,569
-------------
Total Foreign Bonds .................................. $236,762,583
-------------
Total Bonds (Identified Cost, $672,813,355) ............ $679,366,098
-------------
Stocks -- 0.2% Shares
U.S. Stocks--0.2%
Apparel and Textiles -- 0.2%
Ithaca Industries, Inc.* .................. 128,000 $ 1,024,000
------------
Building
Atlantic Gulf Communities
Corp.,+* ................................. 244 $ 1,373
------------
Special Products and Services
Alarmguard Holdings, Inc.* ............... 38,360 $ 249,340
------------
Total U.S. Stocks ..................................... $ 1,274,713
------------
Foreign Stocks
United Kingdom
Central Transport Rental Group
PLC, ADR (Special Products
and Services)* ........................... 575,062 $ 161,736
------------
Total Foreign Stocks .................................. $ 161,736
------------
Total Stocks (Identified Cost, $2,926,435) ............. $ 1,436,449
------------
Preferred Stock -- 1.3%
K-III Communications Corp.# ............... 15,643 $ 1,689,444
Cablevision Systems Corp. .................. 58,245 5,518,714
Time Warner, Inc., 10.25s# ............... 2,206 2,437,630
------------
Total Preferred Stock
(Identified Cost, $8,378,875)......................... $ 9,645,788
------------
Rights
United Mexican States* ..................... 14,345,000 $ 0
------------
Short-Term Obligation -- 0.7%
Principal Amount
(000 Omitted)
CSFB Russia Note, due 07/21/97
(Identified Cost, $4,922,186)+ ............. $ 5,000 $ 4,912,515
------------
8
<PAGE>
Principal Amount
Issuer (000 Omitted) Value
Repurchase Agreement -- 4.2%
Goldman Sachs, dated May 30,
1997, due June 2, 1997, total
to be received $30,049,095
(secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded
account), at cost ................. $30,040 $ 30,040,000
-------------
Call Option Purchased
Principal Amount
Issuer/Expiration Month/ of Contracts
Strike Price (000 Omitted)
Canadian Dollars/June/1.365
(Premiums Paid, $341,040) ......... CAD 26,754 $ 2,568
-------------
Total Investments
(Identified Cost, $719,421,891) ............... $725,403,418
------------
Principal Amount
of Contracts
Issuer (000 Omitted) Value
Call Option Written -- (0.1)%
Swiss Francs/Deutsche Marks
March/0.847 (Premium
Received, $244,238) ................ CHF 35,023 $ (1,009,889)
Other Assets,
Less Liabilities -- (0.9)% (6,509,327)
-------------
Net Assets -- 100.0% ........................... $717,884,202
=============
*Non-income producing security.
**Non-income producing security - in default.
#Payment-in-kind bond.
##SEC Rule 144A restriction.
+Restricted security.
AUD = Australian Dollars GBP = British Pounds
CAD = Canadian Dollars GRD = Greek Drachma
CHF = Swiss Francs IEP = Irish Punts
DEM = Deutsche Marks ITL = Italian Lire
DKK = Danish Kroner JPY = Japanese Yen
ECU = European Currency Units NOK = Norwegian Kroner
ESP = Spanish Pesetas NZD = New Zealand Dollars
FIM = Finnish Markkaa SEK = Swedish Kronor
See notes to financial statements
9
<PAGE>
Statement of Assets and Liabilities -- May 31, 1997
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $719,421,891) .............................. $725,403,418
Cash .............................................................................. 42,884
Foreign currency, at value (Identified cost, $202) ................................. 199
Net receivable for forward foreign currency exchange contracts sold ............... 2,031,568
Net receivable for forward foreign currency exchange contracts closed or subject to
master netting agreements ......................................................... 3,644,869
Receivable for investments sold ................................................... 490,465
Interest receivable ............................................................... 13,280,825
Other assets ..................................................................... 6,410
--------------
Total assets .................................................................. $744,900,638
--------------
Liabilities:
Distributions payable to dividend disbursing agent .............................. $ 431,835
Payable for Treasury shares reacquired .......................................... 714,750
Payable for investments purchased ................................................ 23,541,691
Payable for interest rate swaps ................................................... 157,939
Written option outstanding, at value (premium received $244,238) .................. 1,009,889
Net payable for forward foreign currency exchange contracts purchased ............ 787,876
Payable to affiliates --
Management fee .................................................................. 28,748
Administrative fee ............................................................... 591
Transfer agent fee ............................................................... 13,016
Accrued expenses and other liabilities .......................................... 330,101
--------------
Total liabilities ............................................................... $ 27,016,436
--------------
Net assets ........................................................................ $717,884,202
==============
Net assets consist of:
Paid-in capital .................................................................. $727,937,921
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies ................................................................ 9,618,380
Accumulated net realized loss on investments and foreign currency transactions ... (15,552,514)
Accumulated distributions in excess of net investment income ..................... (4,119,585)
--------------
Total ........................................................................... $717,884,202
==============
Shares of beneficial interest outstanding .......................................... 68,904,439
==============
Net asset value per share (net assets [divided by] shares of beneficial interest $10.42
outstanding) ======
</TABLE>
See notes to financial statements
10
<PAGE>
Statement of Operations -- Six Months Ended May 31, 1997
<TABLE>
<S> <C>
Net investment income:
Interest income ......................................................... $ 30,182,510
--------------
Expenses --
Management fee ......................................................... $ 2,537,279
Trustees' compensation ................................................ 82,218
Transfer and dividend disbursing agent fee .............................. 76,810
Administrative fee ...................................................... 27,361
Custodian fee ......................................................... 225,203
Printing ............................................................... 30,817
Auditing fees ......................................................... 30,366
Postage ............................................................... 20,814
Legal fees ............................................................ 2,816
Miscellaneous ......................................................... 66,938
--------------
Total expenses ......................................................... $ 3,100,622
Fees paid indirectly ................................................... (30,196)
--------------
Net expenses ......................................................... $ 3,070,426
--------------
Net investment income ................................................ $ 27,112,084
--------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions ................................................ $ (4,731,706)
Written option transactions .......................................... 356,543
Foreign currency transactions .......................................... 5,216,640
Futures contracts ...................................................... (175,141)
Interest rate swaps ................................................... 291,162
--------------
Net realized gain on investments and foreign currency transactions ... $ 957,498
--------------
Change in unrealized appreciation (depreciation) --
Investments ............................................................ $ (15,817,336)
Written options ...................................................... (765,651)
Translation of assets and liabilities in foreign currencies ............ 6,294,920
Futures contracts ...................................................... 256,555
Interest rate swaps ................................................... (960,260)
--------------
Net unrealized loss on investments ................................. $ (10,991,772)
--------------
Net realized and unrealized loss on investments and foreign currency $ (10,034,274)
--------------
Increase in net assets from operations ........................... $ 17,077,810
==============
</TABLE>
See notes to financial statements
11
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
May 31, 1997
------------------
<S> <C>
Increase (decrease) in net assets:
From operations --
Net investment income .................................................................. $ 27,112,084
Net realized gain on investments and foreign currency transactions ..................... 957,498
Net unrealized loss on investments and foreign currency translation .................. (10,991,772)
--------------
Increase in net assets from operations ............................................. $ 17,077,810
--------------
Distributions declared to shareholders --
From net investment income ............................................................ $ (27,112,084)
In excess of net investment income ................................................... (888,266)
--------------
Total distributions declared to shareholders ....................................... $ (28,000,350)
--------------
Trust share (principal) transactions --
Net asset value of shares reacquired from shareholders ................................. $ (7,164,640)
--------------
Decrease in net assets from Trust share transactions ................................. $ (7,164,640)
--------------
Total decrease in net assets ......................................................... $ (18,087,180)
Net assets:
At beginning of period ............................................................... 735,971,382
--------------
At end of period (including accumulated distributions in excess of net investment income
of $4,119,585 and $3,231,319, respectively) .......................................... $ 717,884,202
==============
<CAPTION>
Year Ended
November 30,
1996
----------------------
<S> <C>
Increase (decrease) in net assets:
From operations --
Net investment income .................................................................. $ 55,599,953
Net realized gain on investments and foreign currency transactions ..................... 6,608,122
Net unrealized loss on investments and foreign currency translation .................. (2,345,397)
--------------------
Increase in net assets from operations ............................................. $ 59,862,678
-----------------
Distributions declared to shareholders --
From net investment income ............................................................ $ (60,602,341)
In excess of net investment income ................................................... 0
-----------------
Total distributions declared to shareholders ....................................... $ (60,602,341)
-----------------
Trust share (principal) transactions --
Net asset value of shares reacquired from shareholders ................................. $ (49,544,782)
-----------------
Decrease in net assets from Trust share transactions ................................. $ (49,544,782)
-----------------
Total decrease in net assets ......................................................... $ (50,284,445)
Net assets:
At beginning of period ............................................................... 786,255,827
-----------------
At end of period (including accumulated distributions in excess of net investment income
of $4,119,585 and $3,231,319, respectively) .......................................... $ 735,971,382
=================
</TABLE>
See notes to financial statements
12
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Per share data (for a Ended Year Ended November 30,
share outstanding May 31, --------------------------------------------------------------
throughout each period): 1997 1996 1995 1994 1993 1992
---------- -------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period ............ $ 10.57 $ 10.50 $ 9.60 $ 10.68 $ 10.23 $ 10.59
--------- -------- -------- ---------- -------- --------
Income from investment operations# --
Net investment income ........................... $ 0.39 $ 0.76 $ 0.79 $ 0.76 $ 0.85 $ 0.95
Net realized and unrealized gain (loss) on
investments and foreign currency transactions ... (0.14) 0.14 0.88 (1.07) 0.55 (0.15)
--------- -------- -------- ---------- -------- --------
Total from investment operations ............... $ 0.25 $ 0.90 $ 1.67 $ (0.31) $ 1.40 $ 0.80
--------- -------- -------- ---------- -------- --------
Less distributions declared to shareholders --
From net investment income ........................ $ (0.39) $ (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)
In excess of net investment income ............... (0.01) -- -- -- -- --
From paid in capital ........................... -- -- -- (0.39) -- (0.11)
--------- -------- -------- ---------- -------- --------
Total distributions declared to shareholders ... $ (0.40) $ (0.83) $ (0.77) $ (0.77) $ (0.95) $ (1.16)
--------- -------- -------- ---------- -------- --------
Net asset value --
end of period ................................. $ 10.42 $ 10.57 $ 10.50 $ 9.60 $ 10.68 $ 10.23
========= ======== ======== ========== ======== ========
Per share market value --
end of period .................................... $ 9.500 $ 9.625 $ 9.125 $ 8.719 $ 9.625 $ 9.875
========= ======== ======== ========== ======== ========
Total return ....................................... 2.95%++ 15.09% 13.84% (1.35)% 6.92% 1.39%
Ratios (to average net assets)/Supplemental data:
Expenses## ....................................... 0.85%+ 0.93% 0.92% 0.86% 0.90% 0.98%
Net investment income ........................... 7.54%+ 7.38% 7.84% 7.50% 8.04% 9.27%
Portfolio turnover .............................. 104% 146% 183% 153% 397% 198%
Net assets at end of period (000 omitted) ......... $717,884 $735,971 $786,256 $804,390 $919,480 $898,756
</TABLE>
+ Annualized
++ Not annualized.
# 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
13
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Per share data (for a Year Ended November 30,
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 income [sec] .......................................... $ 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 data[sec]:
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
<FN>
+ Annualized.
* For the period from the commencement of investment operations, July 20, 1989, to November 30, 1989.
[sec]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%+
</FN>
</TABLE>
See notes to financial statements
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
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, interest rate swaps,
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.
15
<PAGE>
Notes to Financial Statements -- continued
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.
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 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. Dividend income is recorded on the ex-dividend date for
dividends received in cash.
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 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, 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 the earlier of its utilization or
expiration on November 30, 2002, ($10,901,634) and November 30, 2003,
($5,450,296).
17
<PAGE>
Notes to Financial Statements -- continued
(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
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 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 $15,718 for the period ended May 31, 1997.
Administrator -- Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide certain financial, legal, compliance,
shareholder communications and other administrative services. As a partial
reimbursement for the cost of providing these services, the Trust pays MFS an
administrative fee of up to 0.015% per annum of the Trust's average daily net
assets, provided that the administrative fee is not assessed on Trust assets
that exceed $3 billion.
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:
<TABLE>
<CAPTION>
Purchases Sales
-------------- -------------
<S> <C> <C>
U.S. government securities ........................ $231,295,101 $235,655,789
============= =============
Investments (non-U.S. government securities) ...... $495,121,913 $465,775,476
============= =============
</TABLE>
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 ..................... $ 719,421,891
=============
Gross unrealized appreciation ...... $ 15,574,511
Gross unrealized depreciation ...... (9,592,984)
-------------
Net unrealized appreciation ...... $ 5,981,527
=============
(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:
18
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
May 31, 1997 November 30, 1996
---------------------------- ------------------------------
Shares Amount Shares Amount
----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Treasury shares reacquired ...... (750,500) $(7,164,640) (5,222,300) $(49,544,782)
========= ============= =========== ==============
Net Decrease .................. (750,000) $(7,164,640) (5,222,300) $(49,544,782)
========= ============= =========== ==============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 750,500 shares of
beneficial interest were purchased by the Trust during the period ended May 31,
1997, at an average price per share of $9.55 and a weighted average discount of
8.60% per share. The Trust repurchased 5,222,300 shares of beneficial interest
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. Shares held in
Treasury were repurchased in an attempt to return the market value of the
discount to shareholders in the form of higher monthly distributions.
(6) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Net Realized and Net Increase (Decrease)
Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period Ended Investment Income Net Investment Income on Investments from Operations
- ------------------------ ---------------------- ----------------------- --------------------------- ------------------------
Per Per Per Per
Fiscal 1997 Amount Share Amount Share Amount Share Amount Share
- ------------------------ ------------- -------- -------------- -------- ----------------- --------- ---------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
February 28 ......... $14,849,403 $ 0.21 $ 13,248,621 $ 0.19 $ (6,257,659) $(0.09) $ 6,990,962 $0.10
May 31 ............... 15,333,107 0.22 13,863,463 0.20 (3,776,615) (0.05) 10,086,848 0.15
------------ ------- ------------- ------- ------------- ------- ------------- ------
$30,182,510 $ 0.43 $ 27,112,084 $ 0.39 $ (10,034,274) $(0.14) $ 17,077,810 $0.25
============ ======= ============= ======= ============= ======= ============= ======
Fiscal 1996
- -----------------------
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 $ 122,011,811 $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 $400 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 period ended May 31,
1997, was $3,160.
19
<PAGE>
Notes to Financial Statements -- continued
(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 investment 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, 1997, is as follows:
<TABLE>
<CAPTION>
Written Options Transactions
- ---------------------
1997 Calls 1997 Puts
--------------------------------- ----------------------------
Principal Amounts
of Contracts Principal Amounts
(000 omitted) Premiums of Contracts Premiums
------------------ -------------- ------------------ ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -- $ -- -- $ --
Options written --
Australian dollars ........................... 4,824 32,584
Swiss Francs/Deutsche marks .................. 49,028 329,836
U.S. dollars ................................. 36,000 241,875
Options terminated in closing transactions --
Australian dollars ........................... (4,824) (32,584)
Swiss Francs/Deutsche marks .................. (14,005) (85,598)
Options expired --
U.S. dollars ................................. (36,000) (241,875)
-------- ----------- ------ ------
Outstanding, end of period -- 35,023 $ 244,238 -- --
======== =========== ====== ======
Options outstanding at end of period consist of:
Swiss Francs/Deutsche marks .................. 35,023 $ 244,238 $ $
-------- ----------- ------ ------
Outstanding, end of period -- 35,023 $ 244,238 $ -- $ --
======== =========== ====== ======
</TABLE>
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
- ----------------------------------
Net Unrealized
Contracts to Contracts at Appreciation
Settlement Date Deliver/Receive In Exchange For Value (Depreciation)
-------------------------- ----------------- ----------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sales 6/30/97 -- 9/30/97 ...... AUD 41,424,903 $ 31,550,201 $ 31,532,104 $ 18,097
6/30/97 ............... CAD 32,817,266 24,157,430 23,845,156 312,274
8/26/97 -- 9/30/97 ...... CHF 7,682,441 5,286,153 5,498,514 (212,361)
8/26/97 -- 9/30/97 ...... DEM 133,246,713 79,180,452 78,704,244 476,208
9/30/97 .................. DKK 110,977,170 17,506,218 17,196,911 309,307
8/05/97 -- 1/15/98 ...... ECU 20,154,580 23,483,026 23,097,389 385,637
6/30/97 -- 9/30/97 ...... ESP 3,899,171,368 27,280,662 27,024,868 255,794
6/30/97 -- 9/30/97 ...... GBP 32,804,219 53,492,734 53,688,281 (195,547)
6/30/97 -- 9/30/97 ...... IEP 12,105,176 19,031,210 18,279,453 751,757
6/30/97 -- 9/30/97 ...... ITL 35,305,687,460 20,760,343 20,849,388 (89,045)
6/30/97 -- 8/26/97 ...... JPY 5,134,276 43,674 44,522 (848)
9/30/97 ............... NZD 19,577,838 13,387,326 13,447,606 (60,280)
6/30/97 - 09/30/97 ...... SEK 74,571,366 9,750,600 9,670,025 80,575
------------- ------------- ----------
$324,910,029 $322,878,461 $2,031,568
============= ============= ==========
</TABLE>
20
<PAGE>
<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>
Purchases 6/30/97 -- 8/26/97 ...... AUD 5,782,546 $ 4,522,482 $ 4,402,351 $ (120,131)
6/30/97 ............... CAD 11,520,792 8,482,710 8,371,054 (111,656)
8/26/97 -- 9/30/97 ...... CHF 39,873,514 28,437,116 28,638,358 201,242
8/26/97 -- 9/30/97 ...... DEM 73,929,331 43,949,344 43,609,210 (340,134)
9/30/97 ............... DKK 57,590,126 9,003,980 8,924,109 (79,871)
6/30/97 -- 8/26/97 ...... ESP 2,761,384,592 19,340,121 19,128,629 (211,492)
9/30/97 ............... FIM 596,948 116,398 117,108 710
8/26/97 .................. GBP 14,540,272 23,807,515 23,790,866 (16,649)
6/30/97 ............... ITL 19,031,987,705 11,271,878 11,247,904 (23,974)
6/30/97 -- 9/30/97 ...... JPY 7,701,414 65,273 66,989 1,716
9/30/97 ............... NOK 72,912,746 10,352,807 10,319,925 (32,882)
6/30/97 .................. NZD 11,897,284 8,175,456 8,190,292 14,836
6/30/97 .................. SEK 5,262,785 749,663 680,072 (69,591)
------------- ------------- -----------
$168,274,743 $167,486,867 $ (787,876)
============= ============= ===========
</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 receivable of $464,206 with Banker's Trust, $2,867,404 with
Merrill Lynch, $266,043 with Deutschebank, and $288,076 with Swiss Bank Corp.
and a net payable of $30,874 with Morgan Stanley, $207,673 with First Boston,
and $2,313 with Chase Manhattan Bank at May 31, 1997.
At May 31, 1997, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
<TABLE>
<CAPTION>
Interest Rate Swaps
- ---------------
Notional Cash Flows Cash Flows
Principal Amount Paid by Received by Unrealized
Expiration of Contract the Trust the Trust (Depreciation)
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
5\22\04 ITL 17,950,000 Floating 3M-Libor Fixed 7.09% ($157,939)
==========
</TABLE>
At May 31, 1997, 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 May 31, 1997,
the Trust owned the following restricted securities (constituting 1.07% 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.
<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 $ 1,373
CSFB Russian Note, 0s, 7/21/97 4/25/97 5,000,000 4,922,186 4,912,515
Government of Russia, Floating Rate, 2049 3/18/97 2,000,000 1,417,500 1,452,500
Merrill Lynch Mortgage Investors, 8.225s, 2023 6/22/94 1,500,000 1,039,687 1,290,703
-----------
$7,657,091
===========
</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, 1997, and the related statement of operations for the six month period
ended May 31, 1997, the statement of changes in net assets for the six month
period ended May 31, 1997 and for the year ended November 30, 1996, and
financial highlights for the six month period ended May 31, 1997 and for each
of the three years in the period ended November 30, 1996. 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 the periods prior to the year ended November 30, 1994, indicated
herein, 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 and financial highlights. Our procedures included confirmation of
securities owned as of May 31, 1997, by correspondence with the custodian and
brokers or 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, 1997, the results of its operations for the six
month period ended May 31, 1997, the changes in its net assets for the six
month period ended May 31, 1997, and for the year ended November 30, 1996, and
the financial highlights for the six month period ended May 31, 1997, and for
each of the three years in the period ended November 30, 1996, in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 1, 1997
22
<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.
(acquisition planning specialists)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
* Affiliated with the Investment Adviser
(1) Member of Audit Committee
(2) Member of Portfolio Trading Committee
(recycle logo) This report is printed on recycled paper.
MCICE-3 7/97 67M
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
[silhouette logo]
MFS(SM)
INVESTMENT MANAGEMENT
MFS(R) Charter Income Trust
Semiannual Report
May 31, 1997
[graphic--man and woman silhouette]
