{FRONT COVER]
[MFS LOGO]
MFS(SM)
INVESTMENT MANAGEMENT
MFS(R) Charter Income Trust
Annual Report
for Year Ended
November 30, 1997
[Illustration of man and women conversing in front of window]
<PAGE>
Dear Shareholders:
The past year has seen an astonishing shrinkage in bond yields across the
world's fixed-income markets. With these falling yields, we have also witnessed
a rapid shrinkage in the yield premium, or advantage, usually inherent in
lower-rated bond categories. These two events are symptomatic of a world
financial system awash in excess funds. Fed by Japan's lethargic economy and its
remarkably low government bond rates, and by continued accommodation in European
monetary policy, this liquidity wave has propelled prices of corporate and
emerging market bonds upward in every category. Furthermore, the U.S. economy
has continued to expand with no signs of inflation, and emboldened investors
seeking yield have gone abroad with great confidence.
The only global concerns arose in Asia, which was mired in a widespread currency
crisis. Malaysia and Thailand were hard hit in the crisis, although the Trust
owned bonds in neither country. Only 0.2% of the Trust's assets were in Asia at
the time of the August crisis, and those bonds were in two solid companies in
Indonesia. However, as the fourth quarter progressed, concern grew, and many
credit-sensitive sectors suffered a widening of yields relative to U.S.
Treasuries. The Trust has again been able to take advantage of these conditions
during the past year. Although its mandate requires an equal asset weighting
among U.S. government and agency securities, U.S. corporate high-yield bonds,
and international sovereign bonds, we actively manage the bonds within each
sector.
The Trust's stock market price, which stood at $9.625 on November 30, 1996,
increased to $9.69 on November 28, 1997, while its net asset value (NAV) price
increased from $10.57 to $10.69, representing a total return of 9.25% based on
market price and 9.78% based on NAV. This compares to a -3.39% return for the
J.P. Morgan Non-Dollar Government Bond Index, an unmanaged index of actively
traded government bonds issued by 12 countries, excluding the United States,
with remaining maturities of at least one year, and to a 6.48% 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 and reinstated in
March 1997, 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 and pays the captured value to its
shareholders with their regular monthly distributions.
U.S. Government/Mortgage
Earlier this year we abandoned our cautious view on U.S. Treasuries and went to
a strategy of trading "the range"; that is, we would sell U.S. government bonds
near yields of 6.25% and buy them back when they approached yields of 6.75%.
This reflected our view that no change in interest-rate levels was underway. On
November 28, 1997, U.S. Treasuries comprised 60% of this sector, with 40% of
that in mortgages. Interest-rate sensitivity, as measured by duration, was five
years, a relatively long position.
High-Yield Corporate
Again, this market has confounded skeptics and posted impressive returns.
Spurred by growing mutual fund interest and favorable takeovers in the
telecommunications industry, returns again were in double digits. Our heaviest
weightings were in the media, consumer products, and general industrial areas.
Research remains the key to success in this sector.
International
This sector has been problematic. Foreign currencies have lost their allure, and
the previously fertile investing ground of Europe has largely dissipated as
European monetary union approaches and convergence opportunities have fallen
away. Currently, we hold sovereign debt in Sweden, France, Italy, and the United
Kingdom, as well as bonds in Australia and New Zealand. During 1997, we added to
emerging-market debt holdings, with up to 6% of the Trust's assets invested in
bonds of nations such as Argentina, Mexico, and Poland.
1
<PAGE>
Because the Trust has been trading at a discount to its net asset value, the
yield on its shares is seen as relatively high by comparative yield standards,
given the average quality of its bonds.
We remain responsive to your suggestions and stay committed to the goal of
reducing volatility through a diversified fixed-income approach, underscored by
credit research.
Respectfully,
/s/ A. Keith Brodkin
- ---------------------
A. Keith Brodkin
Chairman and President
/s/ James T. Swanson
- ---------------------
James T. Swanson
Portfolio Manager
December 15, 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.
Performance Summary
(For the year ended November 30, 1997)
Net Asset Value Per Share
November 30, 1996 $10.570
November 30, 1997 $10.690
New York Stock Exchange Price
November 29, 1996 $ 9.625
July 28, 1997 (high)* $10.000
April 18, 1997 (low)* $ 9.125
November 28, 1997 $9.6875
*For the period December 1, 1996, through November 30, 1997.
Tax Form Summary
In January 1998, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1997.
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, nondiversified,
management investment company and has no employees.
Number of Shareholders
As of November 30, 1997, our records indicate that there are 8,928 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.
Results of Shareholder Meeting
At the annual meeting of shareholders of MFS[RegTM] Charter Income Trust, which
was held on October 22, 1997, the following actions were taken:
Item 1. The election of A. Keith Brodkin, Lawrence H. Cohn, Abby M. O'Neill,
Jeffrey L. Shames, and Ward Smith as Trustees of the Trust.
Number of Shares
Nominee For Withhold Authority
- ------------------- ------------------- -------------------
A. Keith Brodkin 59,161,447.466 963,690.566
Lawrence H. Cohn 59,134,424.146 990,713.886
Abby M. O'Neill 59,060,413.121 1,064,724.911
Jeffrey L. Shames 59,083,731.196 1,041,406.836
Ward Smith 59,040,306.171 1,084,831.861
Trustees continuing in office who were not subject to re-election at this
meeting are Richard B. Bailey, Marshall N. Cohan, The Hon. Sir J. David
Gibbons, KBE, Walter E. Robb, III, Arnold D. Scott, and J. Dale Sherratt.
2
<PAGE>
Item 2. 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, 1998.
Number of Shares
----------------
For 58,996,641.042
Against 352,786.511
Abstain 775,710.479
Investment Objective and Policy
The 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, 1997
Bonds - 89.8%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - 61.0%
Aerospace - 1.0%
BE Aerospace, Inc., 9.875s, 2006 ................................ $ 2,000 $ 2,120,000
Howmet Corp., 10s, 2003 ......................................... 2,615 2,902,650
K + F Industries, Inc., 9.25s, 2007## ........................... 1,200 1,221,000
United Defense Industries, Inc., 8.75s, 2007## .................. 1,350 1,343,250
------------
$ 7,586,900
------------
Airlines
Airplane Pass-Through Trust, 10.875s, 2019 ...................... $ 225 $ 268,760
-----------
Automotive - 0.8%
Exide Corp., 10s, 2005 .......................................... $ 2,200 $ 2,299,000
Titan Wheel International, Inc., 8.75s, 2007 .................... 3,150 3,283,875
-----------
$ 5,582,875
-----------
Building - 1.5%
Building Materials Corp., 8s, 2007## ............................ $ 1,000 $ 982,500
Johns Manville International Group, Inc., 10.875s, 2004 ......... 1,950 2,184,000
Nortek, Inc., 9.25s, 2007 ....................................... 850 860,625
Nortek, Inc., 9.875s, 2004 ...................................... 2,225 2,280,625
UDC Homes, Inc., 14.5s, 2000 .................................... 13 7,368
USG Corp., 9.25s, 2001 .......................................... 4,275 4,542,187
-----------
$10,857,305
-----------
Chemicals - 0.8%
Harris Chemical North America, Inc., 10.25s, 2001 ............... $ 650 $ 679,250
NL Industries, Inc., 11.75s, 2003 ............................... 1,185 1,303,500
Sterling Chemicals, Inc., 11.25s, 2007 .......................... 1,125 1,192,500
UCC Investors Holdings, Inc., 12s, 2005 ......................... 350 337,750
UCC Investors Holdings, Inc., 10.5s, 2002 ....................... 1,875 2,100,000
-----------
$ 5,613,000
-----------
Conglomerates - 0.5%
News America Holdings, Inc., 10.125s, 2012 ...................... $ 3,000 $ 3,474,060
-----------
Consumer Goods and Services - 2.2%
Armco, Inc., 9s, 2007 ........................................... $ 600 $ 592,500
Cole National Group, Inc., 8.625s, 2007## ....................... 1,600 1,592,000
E & S Holdings Corp., 10.375s, 2006 ............................. 1,315 1,213,087
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds - continued
Consumer Goods and
Services - continued
Kindercare Learning Centers, Inc., 9.5s, 2009 ................... $ 855 $ 837,900
Reeves Industries, Inc., 11s, 2002** ............................ 700 519,750
Sealy Corp., 10.25s, 2003 ....................................... 3,550 3,834,000
Silgan Holdings Inc., 9s, 2009 .................................. 1,500 1,537,500
Westpoint Stevens, Inc., 9.375s, 2005 ........................... 5,550 5,799,750
------------
$ 15,926,487
------------
Containers - 0.7%
Gaylord Container Corp., 9.75s, 2007 ............................ $ 3,950 $ 3,910,500
Gaylord Container Corp., 12.75s, 2005 ........................... 775 835,062
------------
$ 4,745,562
------------
Corporate Asset Backed - 0.2%
Merrill Lynch Mortgage Investors, Inc., 8.103s, 2023+ ........... $ 1,500 $ 1,408,125
------------
Defense Electronics - 0.1%
Alliant Techsystem., Inc., 11.75s, 2003 ......................... $ 600 $ 660,000
------------
Entertainment - 0.7%
Act III Theaters, Inc., 11.875s, 2003 ........................... $ 1,000 $ 1,077,500
Allbritton Communications Co., 9.75s, 2007 ...................... 1,500 1,511,250
AMC Entertainment, Inc., 9.5s, 2009 ............................. 1,025 1,050,625
American Skiing Co., 12s, 2006 .................................. 500 552,500
Cinemark USA, Inc., 9.625s, 2008 ................................ 700 724,500
------------
$ 4,916,375
------------
Financial Institutions
Americo Life, Inc., 9.25s, 2005 ................................. $ 300 $ 306,375
------------
Food and Beverage Products - 0.7%
Coca-Cola Bottling Group, Inc., 9s, 2003 ........................ $ 750 $ 768,750
Specialty Foods Corp., 10.25s, 2001 ............................. 2,000 2,000,000
Texas Bottling Group, Inc., 9s, 2003 ............................ 2,500 2,562,500
------------
$ 5,331,250
------------
Forest and Paper Products - 0.5%
Calmar, Inc., 11.5s, 2005 ....................................... $ 1,500 $ 1,612,500
U.S. Timberlands, 9.625s, 2007 .................................. 2,020 2,065,450
------------
$ 3,677,950
------------
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Industrial - 0.8%
Keystone Consolidated Industries, Inc., 9.625s, 2007## .......... $ 425 $ 435,625
Lear Corp., 9.5s, 2006 .......................................... 2,000 2,180,000
Wheeling Pittsburgh Corp., 9.25s, 2007## ........................ 2,000 1,992,500
Williams Scotsman Inc., 9.875s, 2007 ............................ 1,000 1,035,000
------------
$ 5,643,125
------------
Information, Paging and
Technology - 2.9%
Anacomp Inc., 10.875s, 2004 ..................................... $ 975 $ 1,004,250
Brooks Fiber Properties, Inc., 10.875, 2006 ..................... 380 312,075
Brooks Fiber Properties, Inc., 10s, 2007 ........................ 575 655,500
Colt Telecommunications Group PLC, 12s, 2006 .................... 500 390,000
ICG Holdings, Inc., 12.5s, 2006 ................................. 4,500 3,307,500
Iron Mountain, Inc., 8.75s, 2009## .............................. 1,800 1,818,000
Iron Mountain, Inc., 10.125s, 2006 .............................. 150 162,750
Millicom International Cellular Communications Corp., 13.5s, 2006 3,575 2,609,750
Nextel Communications, Inc., 9.75s, 2004 ........................ 2,270 1,957,875
Nextel Communications, Inc., 9.75s, 2007## ...................... 350 203,000
Paging Network, Inc., 8.875s, 2006 .............................. 3,185 3,101,394
Sprint Spectrum LP, 12.5s, 2006 ................................. 2,600 2,021,500
Sprint Spectrum LP, 11s, 2006 ................................... 2,125 2,390,625
Telesystem International Wireless Inc., 10.5s, 2007## ........... 1,500 817,500
------------
$ 20,751,719
------------
Machinery - 0.6%
AGCO Corp., 8.5s, 2006 .......................................... $ 4,200 $ 4,326,000
------------
Media - 3.6%
American Radio Systems Corp., 9s, 2006 .......................... $ 835 $ 887,188
Cablevision Systems Corp., 9.25s, 2005 .......................... 1,500 1,575,000
Chancellor Media Corp., 8.75s, 2007 ............................. 1,220 1,232,200
Comcast Corp., 9.375s, 2005 ..................................... 4,385 4,690,503
EchoStar Communications Corp., 12.895s, 2004 .................... 2,350 2,115,000
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds - continued
Media - continued
EchoStar Satellite Broadcasting Corp., 13.125s, 2004 ............ $ 1,320 $ 1,089,000
Falcon Holdings Group, Inc., 11s, 2003# ......................... 1,853 1,946,129
Intermedia Capital Partners IV, LP, 11.25s, 2006 ................ 2,025 2,242,687
Jones Intercable, Inc., 8.875s, 2007 ............................ 3,150 3,276,000
Lenfest Communications, Inc., 10.5s, 2006 ....................... 2,275 2,496,812
Marcus Cable Operating Co., 13.5s, 2004 ......................... 3,100 2,836,500
Outdoor Systems, Inc., 8.875s, 2007 ............................. 1,525 1,574,563
------------
$ 25,961,582
------------
Medical and Health Technology
and Services - 0.9%
Beverly Enterprises, Inc., 9s, 2006 ............................. $ 750 $ 768,750
Genesis Health Ventures, Inc., 9.75s, 2005 ...................... 2,000 2,065,000
Quorum Health Group, Inc., 8.75s, 2005 .......................... 1,900 1,957,000
Tenet Healthcare Corp., 8.625s, 2007 ............................ 458 468,305
Tenet Healthcare Corp., 10.125s, 2005 ........................... 1,067 1,157,695
------------
$ 6,416,750
------------
Metals and Minerals - 1.6%
Hayes Wheels International, Inc., 9.125s, 2007 .................. $ 2,340 $ 2,398,500
Haynes International, Inc., 11.625s, 2004 ....................... 2,650 3,034,250
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 .................. 2,550 2,639,250
WCI Steel, Inc., 10s, 2004 ...................................... 3,350 3,467,250
------------
$ 11,539,250
------------
Oil Services - 0.9%
AmeriGas Partners LP, 10.125s, 2007 ............................. $ 600 $ 646,500
Clark USA, Inc., 10.875s, 2005 .................................. 1,035 1,117,800
Falcon Drilling, Inc., 8.875s, 2003 ............................. 2,550 2,690,250
Ferrell Gas LP, 10s, 2001 ....................................... 2,200 2,321,000
------------
$ 6,775,550
------------
</TABLE>
5
<PAGE>
Portfolio of Investments - continued
Bonds - continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Oils - 0.7%
Gulf Canada, 9.25s, 2004 ........................................ $ 4,090 $ 4,315,645
Noble Drilling Corp., 9.125s, 2006 .............................. 850 940,576
------------
$ 5,256,221
------------
Printing and Publishing - 0.1%
Day International Group, Inc., 11.125s, 2005 .................... $ 600 $ 645,000
Golden Books Publishing, Inc., 7.65s, 2002 ...................... 130 123,500
------------
$ 768,500
------------
Restaurants and Lodging - 0.5%
Prime Hospitality Corp., 9.75s, 2007 ............................ $ 1,000 $ 1,065,000
Red Roof Inns, Inc., 9.625s, 2003 ............................... 2,800 2,891,000
------------
$ 3,956,000
------------
Special Products and Services - 2.5%
AAF- McQuay, Inc., 8.875s, 2003 ................................. $ 1,700 $ 1,691,500
Blount, Inc., 9s, 2003 .......................................... 1,250 1,300,000
Buckeye Cellulose Corp., 8.5s, 2005 ............................. 1,010 1,025,150
Fairfield Manufacturing Corp., 11.375s, 2001 .................... 500 527,500
Idex Corp., 9.75s, 2002 ......................................... 1,050 1,086,750
IMO Industries, Inc., 11.75s, 2006 .............................. 2,000 2,195,000
Interlake Corp., 12s, 2001 ...................................... 1,750 1,925,000
Interlake Corp., 12.125s, 2002 .................................. 1,925 2,011,625
Interlake Revolver, 8.438s, 1999## .............................. 94 93,810
International Knife And Saw, Inc., 11.375s, 2006 ................ 450 487,125
Polymer Group, Inc., 9s, 2007 ................................... 1,525 1,498,312
Synthetic Industries, Inc., 9.25s, 2007 ......................... 2,250 2,317,500
Thermadyne Industries Holdings Corp., 10.25s, 2002 .............. 750 778,125
Thermadyne Industries Holdings Corp., 10.75s, 2003 .............. 1,250 1,321,875
------------
$ 18,259,272
------------
Steel - 0.4%
Alaska Steel Holdings Corp., 9.125s, 2006 ....................... $ 575 $ 592,250
Alaska Steel Holdings Corp., 10.75s, 2004 ....................... 1,460 1,562,200
Commonwealth Aluminum Corp., 10.75s, 2006 ....................... 750 806,250
------------
$ 2,960,700
------------
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds - continued
Stores - 1.1%
Finlay Fine Jewelry Corp., 10.625s, 2003 ........................ $ 2,750 $ 2,894,375
Jitney Jungle Stores of America, Inc., 12s, 2006 ................ 295 333,350
Parisian, Inc., 9.875s, 2003 .................................... 1,150 1,219,000
Revlon, Inc., 10.5s, 2003 ....................................... 3,200 3,376,000
------------
$ 7,822,725
------------
Supermarkets - 0.7%
Kroger Co., 8.5s, 2003 .......................................... $ 500 $ 525,320
Pathmark Stores, Inc., 9.625s, 2003 ............................. 2,505 2,467,425
Ralph's Grocery Co., 10.45s, 2004 ............................... 1,000 1,126,250
Shoppers Food Warehouse Corp., 9.75s, 2004## .................... 785 785,000
------------
$ 4,903,995
------------
Telecommunications - 3.5%
Adelphia Communications Corp., 9.875s, 2007 ...................... $1,250 $1,284,375
Bell Cablemedia PLC, 11.875, 2005 ................................ 1,250 1,097,537
Comcast Cellular Holdings Inc., 9.5s, 2007 ....................... 3,060 3,167,100
Fox/Liberty Networks LLC, Inc., 8.875s, 2007## ................... 1,800 1,786,500
Globalstar LP / Capital, 11.375s, 2004 ........................... 575 577,875
Granite Broadcasting Corp., 10.375s, 2005 ........................ 800 830,000
Intermedia Communications Inc., 8.875s, 2007## ................... 1,000 1,000,000
ITC Deltacom Inc., 11s, 2007 ..................................... 300 321,750
Mobile Telecommunication Technologies Corp., 13.5s, 2002 ......... 1,000 1,142,500
Orion Network Systems, Inc., 11.25s, 2007 ........................ 1,625 1,836,250
Orion Network Systems, Inc., 12.5s, 2007 ......................... 750 547,500
Qwest Communications International, Inc., 10.875s, 2007 .......... 750 843,750
RCN Corp., 11.125s, 2007## ....................................... 500 290,000
Rogers Cablesystems, Inc., 10.125s, 2012 ......................... 3,050 3,294,000
T/SF Communications Corp., 10.375s, 2007## ....................... 1,250 1,228,125
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Telecommunications - continued
Teleport Communications Group, Inc., 11.125, 2007 ............... $ 3,170 $ 2,512,225
Western Wireless Corp., 10.5s, 2007 ............................. 1,925 2,057,344
WorldCom, Inc., 8.875s, 2006 .................................... 1,881 2,016,169
------------
$ 25,833,000
------------
Transportation - 0.1%
Eastern Airlines, Inc., 11.75s, 1993 ............................ $ 5,000 $ 0
Eastern Airlines, Inc., 12.75s, 1996 ............................ 3,000 30,000
Moran Transportation Co., 11.75s, 2004 .......................... 700 786,625
------------
$ 816,625
------------
Utilities - Electric - 0.9%
El Paso Electric Co., 8.9s, 2006 ................................ $ 400 $ 434,696
Midland Cogeneration Venture Corp., 10.33s, 2002 ................ 4,772 5,209,794
Midland Funding Corp., 10.33s, 2002 ............................. 676 738,133
------------
$ 6,382,623
------------
Government National Mortgage
Association - 8.2%
GNMA, 7s, 2022 .................................................. $ 5,630 $ 5,661,261
GNMA, 7.5s, 2022 ................................................ 27,281 27,868,171
GNMA, 8s, 2025 .................................................. 24,788 25,631,870
------------
$ 59,161,302
------------
Federal National Mortgage
Association - 1.1%
FNMA, 5s, 2023 .................................................. $ 3,875 $ 3,182,344
FNMA, 6.907s, 2020 .............................................. 208 207,633
FNMA, 7s, 2026 .................................................. 4,885 4,894,441
------------
$ 8,284,418
------------
U.S. Federal Agencies - 4.3%
Federal Home Loan Mortgage Corp., 7.5s, 2099 .................... $ 19,000 $ 19,403,750
Federal Home Loan PC C00515, 7.5s, 2027 ......................... 2,326 2,375,159
Financing Corp., 0s, 2014 ....................................... 13,519 4,766,394
Israel Aid, 5.89s, 2005 ......................................... 5,000 4,900,650
------------
$ 31,445,953
------------
U.S. Treasury Obligations - 15.8%
U.S. Treasury Bonds, 6.375s, 2027 ............................... $ 4,728 $ 4,916,364
U.S. Treasury Bonds, 6.625s, 2027 ............................... 8,472 9,071,648
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds - continued
U.S. Treasury Obligations - continued
U.S. Treasury Bonds, 8.75s, 2020 ................................ $ 7,500 $ 9,869,550
U.S. Treasury Bonds, 10.375s, 2012 .............................. 7,200 9,502,848
U.S. Treasury Bonds, 10.75s, 2005 ............................... 10,000 12,939,100
U.S. Treasury Bonds, 11.25s, 2015 ............................... 27,100 42,085,487
U.S. Treasury Bonds, 13.375s, 2001 .............................. 20,000 24,965,600
U.S. Treasury Notes, 6.25s, 2002 ................................ 965 980,073
------------
$114,330,670
------------
Total U.S. Bonds .............................................. $441,951,004
------------
Foreign Bonds - 28.8%
Argentina - 1.1%
AutopistasSol SA, 10.25s, 2009## ................................ $ 2,500 $ 2,325,000
Republic of Argentina, 6.688s, 2005 ............................. 1,920 1,696,800
Republic of Argentina, 9.75s, 2027 .............................. 2,201 2,032,623
Republic of Argentina, 11.75s, 2007## ........................... 4,500 4,185,000
------------
$ 9,339,423
------------
Australia - 5.1%
Commonwealth of Australia, 9.5s, 2003 ........................... AUD 26,715 $ 21,348,473
Commonwealth of Australia,
7.5s, 2005 ..................................................... 20,795 15,402,799
------------
$ 36,751,272
------------
Brazil - 0.7%
Power Finance Corp. Ltd., 7.5s, 2009 (Financial Institution)## .. $ 500 $ 425,000
CSN Iron SA, 9.125s, 2007 (Steel)## ............................. 1,250 1,043,750
Federal Republic of Brazil, 6.75s, 2009 ......................... 1,000 787,500
Federal Republic of Brazil, 6.813s, 2001 ........................ 393 370,912
------------
$ 2,627,162
------------
Canada - 0.6%
Rogers Cantel, Inc., 9.375s, 2008 (Cellular Phone) .............. $ 1,500 $ 1,582,500
PCI Chemical Canada Inc., 9.25s, 2007 (Chemical)## .............. 500 492,500
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds - continued
Canada - continued
Videotron Ltd., 10.25s, 2002 (Telecommunications) ............... $ 800 $ 840,976
Repap New Brunswick, Inc., 10.625s, 2005 (Forest Products) ...... 1,800 1,746,000
------------
$ 4,661,976
------------
Colombia - 0.1%
Republic of Colombia, 8.66s, 2016## ............................. $ 1,000 $ 1,020,000
------------
Ecuador - 0.5%
Republic of Ecuador, 3.5s, 2025 ................................. $ 7,000 $ 3,753,750
------------
Germany - 0.1%
Colt Telecom Group Plc, 8.875s, 2007 (Telecommunications) ....... DEM 1,000 $ 563,889
Italy - 3.8%
Republic of Italy, 8.5s, 2004 ................................... ITL 10,500,000 $ 6,948,547
Republic of Italy, 9.5s, 1999 ................................... 19,540,000 11,827,140
Republic of Italy, 9.5s, 2006 ................................... 12,520,000 8,967,184
------------
$ 27,742,871
------------
Mexico - 2.0%
United Mexican States, 6.25s, 2019 .............................. $ 4,000 $ 3,240,000
United Mexican States, 11.5s, 2026 .............................. 3,250 3,770,000
United Mexican States, 11.375s, 2016 ............................ 1,000 1,140,000
Empresas ICA Sociedad SA, 11.875s, 2001 (Construction Company) .. 1,000 1,075,700
United Mexican States, 6.25s, 2019 .............................. 5,500 4,455,000
United Mexican States, 6.813s, 2019 ............................. 1,000 911,250
------------
$ 14,591,950
------------
New Zealand - 5.1%
Government of New Zealand, 8s, 2001 ............................. NZD 56,620 $ 36,727,652
-----------
Panama - 0.9%
Republic of Panama, 7.875s, 2002## .............................. $ 1,000 $ 972,500
Republic of Panama, 8.875s, 2027 ................................ 2,280 2,103,300
Principal Amount
Issuer (000 Omitted) Value
Foreign Bonds - continued
Panama - continued
Republic of Panama, 8.875s, 2027 ................................ $ 2,000 $ 1,866,000
Republic of Panama, 7.875s, 2002 ................................ 1,500 1,439,250
------------
$ 6,381,050
------------
Poland - 0.3%
Government of Poland, 6.688s, 2024 .............................. $ 2,000 $ 1,895,000
------------
Russia - 0.3%
Russia Interest Notes, 6.7225s, 2049+ ........................... $ 2,000 $ 1,308,750
Russia Principal Loan, 6.625s, 2049 ............................. 1,500 858,750
------------
$ 2,167,500
------------
Sweden - 2.6%
Kingdom of Sweden, 6s, 2005 ..................................... SEK 36,000 $ 4,625,907
Kingdom of Sweden, 10.25s, 2000 ................................. 32,400 4,623,715
Kingdom of Sweden, 13s, 2001 .................................... 58,400 9,253,979
------------
$ 18,503,601
------------
United Kingdom - 5.6%
Diamond Cable Communications Corp. PLC, 11.75, 2005
(Telecommunications .......................................... $ 2,090 $ 1,577,950
Videotron Holdings PLC, (Telecommunications), 11s, 2005 ......... 450 428,625
------------
U.K. Treasury Stock, 10s, 2003 .................................. GBP 20,070 38,952,072
------------
$ 40,958,647
------------
Total Foreign Bonds ........................................... $208,585,743
------------
Municipal Bonds - 1.2%
Sales and Excise Tax Revenue - 0.3%
Puerto Rico Commonwealth Infrastructure Financing, 5s, 2021 ..... $ 1,750 $ 1,700,493
------------
State and Local Appropriation - 0.7%
California Str, 5s, 2023 ........................................ 1,000 $ 963,540
New York Str Dormitory Authority Revenues, 5s, 2015 ............. 4,000 3,846,120
Chicago Illinois Board Of Education, 0s, 2012 ................... 1,000 457,830
------------
$ 5,267,490
------------
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Municipal Bonds - continued
Water and Sewer Utility Revenue - 0.2%
Metropolitan Water District South California, 5s, 2026 .......... $ 1,500 $ 1,445,025
------------
Total Municipal Bonds ......................................... $8,413,008
------------
Total Bonds
(Identified Cost, $645,532,543) .............................. $658,949,755
------------
Stocks - 0.1%
U.S. Stocks - 0.1% Shares
Atlantic Gulf Communities Corp.+* .............................. 244 $ 1,067
Ithaca Industries, Inc.* ....................................... 128,000 640,000
Nextel Communications, Inc.* ................................... 2,703 68,251
------------
Total U.S. Stocks $ 709,318
------------
Total Stocks
(Identified Cost, $1,643,617) $ 709,318
------------
Preferred Stock - 1.7%
Cablevision Systems Corp. ...................................... 61,528 $ 7,014,192
Primedia Inc.* ................................................. 15,643 1,669,890
Time-Warner, Inc.# ............................................. 3,140 3,579,600
------------
Total Preferred Stock
(Identified Cost, $9,276,875) $ 12,263,682
------------
Warrants
Globalstar Telecommunications Expire 2/15/04##* ................ 575 $ 69,000
Orion Network Systems, Inc. Expire 1/15/07* .................... 1,625 16,250
Orion Network Systems, Inc. Expire 1/15/07* .................... 750 15,000
------------
Total Warrants
(Identified Cost, $62,580) $ 100,250
------------
Rights
United Mexican States* ......................................... 1,538,000 $ 0
Atlantic Gulf Communities Corp.* ............................... 21 0
------------
Total Rights
(Identified Cost, $0) $ 0
------------
Short-Term Obligations - 8.3%
Principal Amount
Issuer (000 Omitted) Value
CSFB Moscow Note, due
12/30/97+ ............................................ $ 5,000 $ 4,955,771
Federal Home Loan Bank, due 12/01/97 .................. 36,100 36,100,000
Federal Home Loan Mortgage Corp., due 12/11/97 ........ 19,300 19,270,890
------------
Total Short-Term Obligations,
at Amortized Cost .................................. $60,326,661
------------
Total Investments
(Identified Cost, $716,842,275) .................... $732,349,666
------------
Call Options Written - (0.17)%
Principal Amount
of Contracts
Issuer/Expiration Month/Strike Price (000 Omitted)
Swiss Francs / Deutsche Marks / March / 0.8470 ........ CHF 35,023 $ (1,251,233)
------------
Total Call Options Written
(Premiums Received, $244,238) $ (1,251,233)
------------
Other Assets,
Less Liabilities - (0.9)% (6,513,607)
------------
Net Assets - 100.0% $724,584,826
============
</TABLE>
*Non-income producing security.
**Non-income producing security-in-default.
#Payment-in-kind security.
##SEC Rule 144A restriction.
+Restricted Security.
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 ESP = Spanish Pesetas
CAD = Canadian Dollars ITL = Italian Lire
CHF = Swiss Francs NZD = New Zealand Dollars
DEM = Deutsche Marks SEK = Swedish Kronor
DKK = Danish Kroner GBP = British Pounds
See notes to financial statements
9
<PAGE>
Statement of Assets and Liabilities - November 30, 1997
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $716,842,275) ................................. $ 732,349,666
Cash .................................................................................. 356,042
Net receivable for forward foreign currency exchange contracts to sell ................ 1,169,599
Net receivable for forward foreign currency exchange contracts closed
or subject to master netting agreements .............................................. 6,559,542
Receivable for investments sold ....................................................... 2,272,764
Interest and dividends receivable ..................................................... 12,921,938
Receivable for swap agreements ........................................................ 228,283
Other assets .......................................................................... 6,410
-------------
Total assets ........................................................................ $ 755,864,244
-------------
Liabilities:
Distributions payable ................................................................. $ 397,850
Payable for Trust shares reacquired ................................................... 253,246
Payable for investments purchased ..................................................... 28,804,043
Written options outstanding, at value (premiums received, $244,238) ................... 1,251,233
Net payable for forward foreign currency exchange contracts to purchase ............... 191,711
Payable to affiliates -
Management fee ....................................................................... 54,352
Transfer agent fee ................................................................... 12,399
Administrative fee ................................................................... 1,187
Accrued expenses and other liabilities ................................................ 313,397
-------------
Total liabilities ................................................................... $ 31,279,418
-------------
Net assets ............................................................................. $ 724,584,826
=============
Net assets consist of:
Paid-in capital ....................................................................... $ 717,053,833
Unrealized appreciation on investments and translation of assets and liabilities in 22,199,693
foreign currencies
Accumulated net realized loss on investments and foreign currency transactions ........ (13,348,896)
Accumulated distributions in excess of net investment income .......................... (1,319,804)
-------------
Total ............................................................................... $ 724,584,826
=============
Shares of beneficial interest outstanding .............................................. 67,797,539
=============
Net asset value per share (net assets [divided by] shares of beneficial interest ....... $ 10.69
outstanding) =============
</TABLE>
See notes to financial statements
10
<PAGE>
Statement of Operations - Year Ended November 30, 1997
<TABLE>
<S> <C>
Net investment income:
Interest ................................................................... $ 59,564,496
Dividends .................................................................. 243,861
------------
Total investment income .................................................. $ 59,808,357
------------
Expenses -
Management fee ............................................................ $ 5,055,572
Trustees' compensation .................................................... 157,412
Administrative fee ........................................................ 82,143
Investor communication expense ............................................ 224,337
Custodian fee ............................................................. 413,711
Transfer and dividend disbursing agent fee ................................ 147,958
Audit fees ................................................................ 57,616
Postage ................................................................... 44,239
Printing .................................................................. 32,989
Legal fees ................................................................ 6,088
Miscellaneous ............................................................. 57,430
------------
Total expenses ........................................................... $ 6,279,495
Fee paid indirectly ....................................................... (97,744)
------------
Net expenses ............................................................. $ 6,181,751
------------
Net investment income ................................................... $ 53,626,606
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions .................................................. $ (4,608,701)
Written option transactions .............................................. 19,784
Foreign currency transactions ............................................ 10,280,471
Futures contracts ........................................................ (175,141)
Interest rate swaps ...................................................... 899,144
------------
Net realized gain on investments and foreign currency transactions ...... $ 6,415,557
------------
Change in unrealized appreciation (depreciation) -
Investments .............................................................. $ (6,291,472)
Written options .......................................................... (1,006,995)
Translation of assets and liabilities in foreign currencies .............. 9,205,491
Futures contracts ........................................................ 256,555
Interest rate swaps ...................................................... (574,038)
------------
Net unrealized gain on investments ...................................... $ 1,589,541
------------
Net realized and unrealized gain on investments and foreign currency ... $ 8,005,098
------------
Increase in net assets from operations ................................ $ 61,631,704
============
</TABLE>
See notes to financial statements
11
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended November 30,
-----------------------------------
1997 1996
----------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income ................................................................... $ 53,626,606 $ 55,599,953
Net realized gain on investments and foreign currency transactions ...................... 6,415,557 6,608,122
Net unrealized gain (loss) on investments and foreign currency translation .............. 1,589,541 (2,345,397)
------------- -------------
Increase in net assets from operations ................................................. $ 61,631,704 $ 59,862,678
------------- -------------
Distributions declared to shareholders -
From net investment income .............................................................. $ (53,626,606) $ (60,602,341)
In excess of net investment income ...................................................... (1,342,926) --
------------- -------------
Total distributions declared to shareholders .......................................... $ (54,969,532) $ (60,602,341)
------------- -------------
Trust share (principal) transactions -
Net asset value of shares reacquired from shareholders ................................. $ (18,048,728) $ (49,544,782)
------------- -------------
Decrease in net assets from Trust share transactions .................................. $ (18,048,728) $ (49,544,782)
------------- -------------
Total decrease in net assets ......................................................... (11,386,556) (50,284,445)
Net assets:
At beginning of period .................................................................. 735,971,382 786,255,827
------------- -------------
At end of period (including accumulated distributions in excess of net investment income
of $(1,319,804) and $(3,231,319), respectively) ........................................ $ 724,584,826 $ 735,971,382
============= =============
</TABLE>
See notes to financial statements
12
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------
Per share data (for shares outstanding 1997 1996
throughout each period): -------------- ----------
<S> <C> <C>
Net asset value - beginning of period ..................... $ 10.57 $ 10.50
-------- -------
Income from investment operations:# -
Net investment income .................................... $ 0.78 $ 0.76
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................... 0.14 0.14
-------- -------
Total from investment operations ........................ $ 0.92 $ 0.90
-------- -------
Less distributions declared to shareholders -
From net investment income ............................... $ (0.78) $ (0.83)
From net realized gain on investments and foreign currency
transactions ............................................ -- --
In excess of net investment income ....................... (0.02) --
From paid-in capital ..................................... -- --
---------- --------
Total distributions declared to shareholders ............ $ (0.80) $ (0.83)
---------- --------
Net asset value - end of period .......................... $ 10.69 $ 10.57
========== ========
Per share market value - end of period ................... $ 9.6875 $9.625
========== ========
Total return ............................................. 9.25% 15.09%
Ratios (to average net assets)/Supplemental data:
Expenses## .............................................. 0.87% 0.93%
Net investment income ................................... 7.41% 7.38%
Portfolio turnover ....................................... 180% 146%
Net assets at end of period (000s omitted) ............... $724,585 $735,971
</TABLE>
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------
Per share data (for shares outstanding 1995 1994 1993
throughout each period): -------------- --------------- -----------
<S> <C> <C> <C>
Net asset value - beginning of period ..................... $ 9.60 $ 10.68 $ 10.23
--------- ---------- ---------
Income from investment operations:# -
Net investment income .................................... $ 0.79 $ 0.76 $ 0.85
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................... 0.88 (1.07) 0.55
--------- ---------- ---------
Total from investment operations ........................ $ 1.67 $ (0.31) $ 1.40
--------- ---------- ---------
Less distributions declared to shareholders -
From net investment income ............................... $ (0.77) $ (0.35) $ (0.72)
From net realized gain on investments and foreign currency
transactions ............................................ -- (0.03) (0.23)
In excess of net investment income ....................... -- -- --
From paid-in capital ..................................... -- (0.39) --
---------- ---------- ----------
Total distributions declared to shareholders ............ $ (0.77) $ (0.77) $ (0.95)
---------- ---------- ----------
Net asset value - end of period .......................... $ 10.50 $ 9.60 $ 10.68
========== ========== ==========
Per share market value - end of period ................... $ 9.125 $ 8.719 $ 9.625
========== ========== ==========
Total return ............................................. 13.84% (1.35)% 6.92%
Ratios (to average net assets)/Supplemental data:
Expenses## .............................................. 0.92% 0.86% 0.90%
Net investment income ................................... 7.84% 7.50% 8.04%
Portfolio turnover ....................................... 183% 153% 397%
Net assets at end of period (000s omitted) ............... $ 786,256 $ 804,390 $ 919,480
</TABLE>
#Per share data for the periods subsequent to November 30, 1993, are 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>
Year Ended November 30,
---------------------------------------------------------------
Per share data (for shares outstanding 1992 1991 1990 1989*
throughout each period): ------------------ ------------------ -------------- ----------
<S> <C> <C> <C> <C>
Net asset value - beginning of period ..................... $ 10.59 $ 9.93 $ 11.00 $ 11.16
Income from investment operations: -
Net investment incomes[sec] .............................. $ 0.95 $ 1.06 $ 1.17 $ 0.43
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ........................... (0.15) 1.10 (0.73) (0.21)
-------- ------- --------- --------
Total from investment operations ........................ $ 0.80 $ 2.16 $ 0.44 $ 0.22
-------- ------- --------- --------
Less distributions declared to shareholders -
From net investment income ............................... $ (0.90) $ (1.06) $ (1.22) $ (0.38)
From net realized gain on investments and foreign currency
transactions ............................................ (0.15) -- (0.07) --
From paid-in capital ..................................... (0.11) (0.44) (0.22) --
-------- -------- --------- --------
Total distributions declared to shareholders ............ $ (1.16) $ (1.50) $ (1.51) $ (0.38)
-------- -------- --------- --------
Net asset value - end of period .......................... $ 10.23 $ 10.59 $ 9.93 $ 11.00
======== ======== ========= ========
Per share market value - end of period ................... $ 9.875 $ 10.875 $ 9.125 $ 11.000
======== ======== ========= ========
Total return ............................................. 1.39% 37.96% (3.32)% (14.15)%+
Ratios (to average net assets)/Supplemental data:[sec]
Expenses ................................................ 0.98% 1.02% 1.08% 0.74%+
Net investment income ................................... 9.27% 10.34% 11.32% 11.32%+
Portfolio turnover ....................................... 198% 416% 184% 480%
Net assets at end of period (000s omitted) ............... $898,756 $923,287 $864,254 $977,875
+Annualized
*For the period from the commencement of the Trust's investment operations, July 20, 1989, through November 30, 1989.
[sec]The investment advisor did not impose a portion of its management fee for the periods indicated. If this fee had been
incurred by the Trust, the net investment income per share and the ratios would have been:
Net investment income .................................. $ -- $ -- $ 1.17 $ 0.42
Ratios (to average net assets):
Expenses .............................................. -- -- 1.10% 1.02%+
Net investment income ................................. -- -- 11.30% 11.04%+
</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 - Equity securities listed on securities exchanges or
reported through the NASDAQ system are reported at market value using last sale
prices. Unlisted equity securities or listed equit securities for which last
sale prices are not available are reported at market value using last quoted bid
prices. Debt securities (other than short-term obligations which mature in 60
days or less), including listed issues, forward contracts, and interest rate
swaps, 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 foreign 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 reported at
market value using closing settlement prices. Over-the-counter options on
securities are valued by brokers. Over-the-counter currency options are valued
through the use of a pricing model which takes into account foreign currency
exchange spot and forward rates, implied volatility, and short-term repurchase
rates. 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 which the Trusts' investment adviser has determined to be
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
of the securities (including accrued interest) 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
Services Company (MFS), may utilize a joint trading account for the purpose of
entering into one or more repurchase agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements
15
<PAGE>
Notes to Financial Statements - continued
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 result from fluctuations in
foreign currency exchange rates is not separately disclosed.
Written Options - The Trust may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, the Trust realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written put option is exercised, the premium reduces the cost basis of the
security purchased by the 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 a 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 financial futures contracts for the
delayed delivery of securities, currency, or contracts based on financial
indices at a fixed price on a future date. The Trust may also enter into futures
contracts on currencies. In entering such contracts, the Trust is required to
deposit, or segregate 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, dependent on the daily fluctuations in the value of the
underlying security, and are recorded for financial statement purposes as
unrealized gains or losses by the Trust. The Trusts' investment in financial
futures contracts is designed to hedge against anticipated future changes in
interest rates, exchange rates or security prices. Investments in interest rate
futures for purposes other than hedging may be made to modify the duration of
the portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Investments in currency futures
for purposes other than hedging may be made to change the Trusts' relative
position in one or more currencies without buying and selling portfolio assets.
Investments in equity index contracts, or contracts on related options, for
purposes other than hedging may be made when the Trust has cash on hand and
wishes to participate in anticipated market appreciation while the cash is being
invested. Should interest rates, exchange rates or security prices move
unexpectedly, the Trust may not achieve the anticipated benefits of the
financial 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. The Trust 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 as unrealized until the contract
16
<PAGE>
settlement date. On contract settlement date, the gains or losses are recorded
as realized gains or losses on foreign currency transactions.
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.
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 is amortized or accreted for financial statement and tax
reporting purposes as required by federal income tax regulations. Dividends
received in cash are recorded on the ex-dividend date. Dividend and interest
payments received in additional securities are recorded on the ex-dividend or
ex-interest date in an amount equal to the value of the security on such date.
Some government securities may be purchased on a "when issued" or "forward
delivery" basis, which means that the securities will be delivered to the Trust
at a future date, usually beyond customary settlement time.
The Trust uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. 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 additions 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 expensed.
Fees Paid Indirectly - The Trust's custody fee is calculated as a percentage of
the Trust's average daily net assets. The fee is reduced according to an
arrangement which measures the value of cash deposited with the custodian by the
Trust. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Trust files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Trust's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV.
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
17
<PAGE>
Notes to Financial Statements - continued
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,
1997, $3,254,441 was reclassified from accumulated net realized loss on
investments and foreign currency transactions to accumulated distributions in
excess of net investment income 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, 1997, the Trust, for federal income tax purposes, had a capital
loss carryforward of $12,934,976, 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, ($7,501,515) and November 30, 2003,
($5,433,461).
(3) Transactions with Affiliates
Investment Adviser - The Trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. 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.
Administrator - Effective March 1, 1997, the Trust has an administrative
services agreement with MFS to provide the Trust with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Trust pays
MFS an administrative fee at the following annual percentages of the Trust's
average daily net assets, provided that the administrative fee is not assessed
on Trust assets that exceed $3 billion:
First $1 billion................ 0.0150%
Next $1 billion................. 0.0125%
Next $1 billion................. 0.0100%
In excess of $3 billion......... 0.0000%
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 $33,055 for the period year November 30, 1997.
Transfer Agent - MFS Service Center, Inc. (MFSC) acts as registrar and dividend
disbursing agent for the Trust. The agreement provides that the Trust will pay
MFSC an account maintenance fee of no more than $9.00 and a dividend services
fee of $0.75 per reinvestment and will reimburse MFSC for reasonable
out-of-pocket expenses.
(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 ............................ $288,767,584 $306,525,235
============ ============
Investments (non-U.S. government securities) .......... $921,172,062 $915,005,880
============ ============
</TABLE>
18
<PAGE>
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 ........................ $ 717,787,336
=============
Gross unrealized appreciation ......... $ 25,283,594
Gross unrealized depreciation ......... (10,721,264)
-------------
Net unrealized appreciation .......... $ 14,562,330
=============
(5) Shares of Beneficial Interest
The Trust's 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, 1997 November 30, 1996
----------------------------------- -----------------------------------
Shares Amount Shares Amount
--------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Treasury shares acquired ......... (1,857,400) $ (18,048,728) (5,222,300) $ (49,544,782)
---------- ------------- ---------- -------------
Net decrease .................... (1,857,400) $ (18,048,728) (5,222,300) $ (49,544,782)
========== ============= ========== =============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 1,857,400 shares of
beneficial interest were purchased by the Trust during the year ended November
30, 1997, at an average price per share of $9.72 and a weighted average discount
of 7.94% 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 $9.49 and a weighted average discount of 7.47% per share.
(6) Line of Credit
The Trust and other affiliated Trusts participate in a $400 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the acquisition of
Treasury shares. Interest is charged to each Trust, 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 Trusts at the end of each quarter. The commitment fee allocated to
the Trust for the year ended November 30, 1997, was $6,516.
(7) 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, interest rate swap contracts, and futures contracts. The notional or
contractual amounts of these instruments represent the investment the Trust has
in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
19
<PAGE>
Notes to Financial Statements - continued
Written Option Transactions
<TABLE>
<CAPTION>
1997 Calls 1997 Puts
---------------------------------- ---------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
------------------- ------------ ------------------ ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period - -- $ -- -- $ --
Options written -
Australian Dollar ................................... 15,572 $ 77,915 -- --
Deutsche Marks/British Pounds ....................... 19,832 $41,722
Swiss Francs/Deutsche Marks ......................... 49,028 329,836
U.S. ................................................ 36,000 241,875
Options terminated in closing transactions -
Australian Dollars .................................. (15,572) (77,915)
Deutsche Marks/British Pounds ....................... (19,832) (41,722)
Swiss Francs/Deutsche Marks ......................... (14,005) (85,598)
Options expired -
U.S. ................................................ (36,000) (241,875) -- --
------- ----------- ------- -------
Outstanding, end of period 35,023 $ 244,238 -- $ --
======= =========== ======= =======
Options outstanding, end of period consist of:
Swiss Francs/Deutsche Marks ......................... 35,023 244,238 -- --
------- ----------- ------- -------
Outstanding, end of period 35,023 $ 244,238 -- $ --
======= =========== ======= =======
</TABLE>
At November 30, 1997, the Trust had sufficient cash and/or securities at least
equal to the value of the written options.
20
<PAGE>
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 1/07/98 CAD 5,209,821 $ 3,823,722 $ 3,669,027 $ 154,695
1/07/98 DEM 38,929,817 22,924,165 22,117,975 806,190
1/07/98 DKK 1,848,169 275,743 275,721 22
1/07/98 ESP 1,806,033,163 12,330,787 12,122,095 208,692
----------- ----------- ----------
$39,354,417 $38,184,818 $1,169,599
=========== =========== ==========
Purchases 1/07/98 CHF 32,333,829 $23,016,678 $22,776,596 $ (240,082)
1/07/98 DKK 54,520,000 8,406,834 8,133,621 (273,213)
1/07/98 ESP 4,612,766,830 30,783,709 30,960,891 177,182
1/07/98 .......... GBP 9,580,305 16,021,623 16,107,032 85,409
1/07/98 ITL 36,308,347,546 20,963,540 21,022,533 58,993
----------- ----------- ----------
$99,192,384 $99,000,673 $ (191,711)
=========== =========== ==========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $5,475,996 with Bankers' Trust,
$363,517 with C.S. First Boston, $2,541,093 with Merrill Lynch, $223,863 with
Swiss Bank, and a net payable of $2,044,927 with Deutsche Bank at November 30,
1997.
At November 30, 1997, the Trust had sufficient cash and/or securities to cover
any commitments under these contracts.
Cross Currency Swaps
<TABLE>
<CAPTION>
Notional Cash Flows Cash Flows Unrealized
Principal Amount Paid by Received by Appreciation
Expiration of Contract the Trust the Trust (Depreciation)
- ------------ -------------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
ITL 29,630,000,000 DEM Fixed 4.565% ITL Fixed 5.685% $228,283
========
9/18/00 DEM (30,402,216)
</TABLE>
(8) 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, 1997,
the Trust owned the following restricted securities (constituting 1.06% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933. The Trust does not have the right to demand that such securities by
registered. The value of these securities is determined by valuations supplied
by a pricing service of brokers, or if not available, in good faith by of at the
direction of the Trustees.
<TABLE>
<CAPTION>
Description Acquisition Shares/Principal Cost Value
- ---------------------------------------- ------------- ------------------ ------------ ------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. 9/25/95 244 $ -- $ 1,067
CSFB Moscow Note, Floating
Rate, 12/30/97 6/27/97 5,000,000 4,737,676 4,955,771
Merrill Lynch Mortgage Investors Inc., 1,039,687 1,408,125
Floating Rate, 4/15/23 6/22/94 1,500,000
Russia Interest Notes, Floating
Rate, 12/29/49 3/18/97 2,000,000 1,417,500 1,308,750
----------
$7,673,713
==========
</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, 1997, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the four 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 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 November 30, 1997, 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, 1997, 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 four years in
the period then ended, in conformity with generally accepted accounting
principles.
[Ernst & Young LLP]
Boston, Massachusetts
January 9, 1998
22
<PAGE>
[BACK COVER]
MFS[RegTM] Charter Income Trust
Trustees
A. Keith Brodkin*
Chairman and President;
Chairman and Director,
Massachusetts Financial Services
Company
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), Massachusetts
Financial Services 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.
Abby M. O'Neill (2)
Private Investor
Walter E. Robb, III (1)
President and Treasurer,
Benchmark Advisors, Inc.
(corporate financial consultants);
President, Benchmark Consulting
Group, Inc. (office services)
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 (holding company)
Portfolio Manager
James T. Swanson*
Treasurer
W. Thomas London*
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar, Dividend
Disbursing Agent,
and Plan Agent
State Street Bank
and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Independent Auditors
Ernst & Young LLP
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
* Affiliated with the Investment Adviser.
(1) Member of Audit Committee.
(2) Member of Portfolio Trading Committee.
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