[MFS LOGO]
MFS [RegTM] Charter Income Trust
Semiannual Report
May 31, 1998
[ILLUSTRATION OF MAN AND WOMAN TALKING IN AN OFFICE]
<PAGE>
In Memoriam
A. Keith Brodkin
1935 - 1998
Chairman and Chief Executive Officer
MFS[RegTM] Investment Management(SM)
[PHOTOGRAPH OF A. KEITH BRODKIN]
On February 2, 1998, Keith Brodkin, a friend and leader
to everyone at MFS, died unexpectedly at age 62. His
thoughtful letters to shareholders on the markets and
economy have been an integral part of MFS shareholder
reports like this one for many years.
Keith joined MFS in 1970 as the firm's first
fixed-income manager, managing the bond portion of
MFS[RegTM] Total Return Fund. He went on to manage our
first pure bond fund, MFS[RegTM] Bond Fund, when it was
introduced in 1974, and he was considered a pioneer in
the art of active bond management.
Keith was named President and Chief Investment Officer of MFS in 1987 and four
years later became Chairman and Chief Executive Officer. During his stewardship,
MFS has achieved significant growth in total assets under management, rising
from some $25 billion in 1991 to the over $80 billion today entrusted to us by
three million individual and institutional investors worldwide. Under Keith's
leadership, MFS has carefully but steadily built its domestic and international
investment capabilities through the introduction of a range of new products and
a still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of charitable
endeavors. He is survived by his wife and three children. His leadership,
friendship, and wise counsel will be sorely missed.
<PAGE>
Dear Shareholders:
In the first portion of 1998, we have seen a continuation of economic themes
that began in 1997. The economic turmoil in Asia has worsened in some nations,
particularly in Japan and Indonesia, the movement to consolidate European
national economies into a single bloc has proceeded in an orderly fashion, and
the U.S. economy has seen continued growth. The Federal Reserve Board's decision
to maintain the status quo on U.S. interest rates fueled further the expansion
of U.S. equity markets.
Each of these critical global economic trends and events has had an impact on
the Trust's performance and management. The Trust remains an investment tool
that focuses on three key vehicles of credit investment: U.S. government
securities, U.S. high-yield corporate bonds, and international government debt.
U.S. Government/Mortgage
Over the past six months, we anticipated that prices would rise and yields would
fall in this asset class. This belief was predicated on the idea that the
economy might weaken and there would be a resulting flight to quality. In part,
this would be a reaction to the troubles of Asia. We continue to be prepared for
moderate declines in yields and some price appreciation. We are, therefore,
underrepresented in our mortgage weightings and overrepresented in long-term
U.S. government securities.
U.S. High-Yield Corporate
We have been excited about the performance of this sector over the past six
months. Among the reasons for this optimism are the improvement of U.S.
corporations' balance sheets and the continuing trend of higher-yielding
companies being bought by higher-credit-quality companies. This consolidation
has resulted in positive price appreciation for higher-yielding bonds. The
continued resiliency of the U.S. economy has provided additional impetus for the
success of this asset class. While we do see a slowing in the pace of U.S.
economic expansion, we are still optimistic about high-yield bonds and feel that
their status as a relatively high-yielding, low-volatility investment will
remain intact until the traditional economic cycle reasserts itself. At that
juncture, we expect to see a return of volatility to this class.
The Trust's biggest weightings in this asset class are in the debt of U.S.
telecommunications, media, entertainment, and noncyclical consumer goods
industries.
International
The Trust was once focused on investing in bonds of members of the Organization
of Economic Cooperation and Development (OECD), which is comprised of the
largest industrialized nations. However, the continued economic strength of
these nations and the movement to converge 11 European nations into one economic
bloc have dried up opportunities for yield and pushed bond prices higher. The
Trust has responded by seeking opportunities in emerging market debt, with
one-third of the sector, or about 9.9% of total assets, focused on emerging
market opportunities. To maximize opportunities while exercising an appropriate
amount of prudence in what can be a more volatile market, our fixed-income
analysts and managers employ in-depth credit research, currency analysis, and
extensive review of the global political and economic scene before making their
highly selective investment decisions. Currently, the Trust is finding
investments in Brazil, Mexico, Panama, and Russia particularly attractive.
The Trust's stock market price, which stood at $9.69 on November 28, 1997,
increased to $10.06 on May 29, 1998, while its net asset value (NAV) price
increased from $10.69 to $10.77, representing a total return of 8.08% based on
market price and 4.78% based on NAV. This compares to a 2.03% 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 4.09% return for the
Lehman Brothers Government Bond Index, an unmanaged index of U.S. Treasury and
government-agency obligations.
The Trust remains committed to reducing volatility through a diversified
fixed-income approach under-
2
<PAGE>
scored by MFS Investment Management's tradition of in-depth research in the
credit markets. We appreciate your support and welcome any comments and
questions you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
June 12, 1998
The opinions expressed in this report are those of the portfolio manager and are
only through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
---------------------------------
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 six months ended May 29, 1998)
<TABLE>
<S> <C>
Net Asset Value Per Share
November 30, 1997 $ 10.69
May 29, 1998 $ 10.77
New York Stock Exchange Price
November 28, 1997 $ 9.6875
April 3, 1998 (high)* $ 10.1875
April 27, 1998 (low)* $ 9.6875
May 29, 1998 $ 10.0625
</TABLE>
*For the period December 1, 1997, through May 29, 1998.
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 May 31, 1998, our records indicate that there are 8,406 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.
Investment Objective and Policies
MFS[RegTM] Charter Income Trust's investment objective is to maximize current
income.
The Trust will seek to achieve this objective by investing approximately
one-third of its assets in each of the following sectors of the fixed-income
securities markets: U.S. government securities and related options; debt
obligations of foreign governments and other foreign issuers; and high-yielding
corporate fixed-income securities, some of which may involve equity features.
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.
3
<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. If shares are trading at a
premium, 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.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
4
<PAGE>
Portfolio of Investments -- May 31, 1998
Bonds -- 91%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- 55.7%
Aerospace -- 0.7%
BE Aerospace, Inc., 9.875s,
2006 .............................................................. $2,000 $ 2,130,000
K + F Industries Inc., 9.25s,
2007 .............................................................. 1,200 1,230,000
United Defense Industries Inc.,
8.75s, 2007 ....................................................... 1,350 1,370,250
------------
$ 4,730,250
------------
Airlines
Airplane Pass-Through Trust,
10.875s, 2019+ .................................................... $ 225 $ 253,910
------------
Automotive -- 1.4%
Exide Corp., 10s, 2005 .............................................. $2,200 $ 2,266,000
Hayes Wheels International, Inc.,
9.125s, 2007 ...................................................... 2,340 2,451,150
Lear Corp., 9.5s, 2006 .............................................. 2,000 2,205,000
Titan Wheel International, Inc.,
8.75s, 2007 ....................................................... 3,150 3,244,500
------------
$ 10,166,650
------------
Building -- 1.0%
AAF- McQuay, Inc., 8.875s,
2003 .............................................................. $1,700 $ 1,678,750
Building Materials Corp.
America, 8s, 2007 ................................................. 1,000 1,000,000
Nortek, Inc., 9.25s, 2007 ........................................... 850 879,750
Nortek, Inc., 9.875s, 2004 .......................................... 2,225 2,291,750
UDC Homes, Inc., 14.5s, 2000......................................... 13 7,368
Williams Scotsman, Inc., 9.875s,
2007 .............................................................. 1,000 1,035,000
------------
$ 6,892,618
------------
Business Services -- 0.4%
Iron Mountain, Inc., 8.75s, 2009 .................................... $1,800 $ 1,840,500
Iron Mountain, Inc., 10.125s,
2006 .............................................................. 150 163,500
Pierce Leahy Corp., 9.125s,
2007 .............................................................. 1,000 1,025,000
------------
$ 3,029,000
------------
Chemicals -- 0.6%
Harris Chemical North America,
Inc., 10.25s, 2001 ................................................ $ 650 $ 676,000
NL Industries, Inc., 11.75s,
2003 .............................................................. 1,185 1,303,500
Sterling Chemicals, Inc., 11.25s,
2007 .............................................................. 125 125,000
UCC Investors Holdings, Inc.,
10.5s, 2002 ....................................................... 1,875 2,095,313
------------
$ 4,199,813
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- continued
Computer Software --
Services -- 0.4%
Unisystem Corp., 7.875s, 2008........................................ $2,800 $ 2,800,000
------------
Computer Software --
Systems -- 0.1%
Anacomp, Inc., 10.875s, 2004 ........................................ $ 975 $ 1,023,750
------------
Conglomerates -- 0.5%
News America Holdings, Inc.,
10.125s, 2012 ..................................................... $3,000 $ 3,496,050
------------
Consumer Goods and
Services -- 1.6%
Kindercare Learning Centers,
Inc., 9.5s, 2009## ................................................ $ 855 $ 874,237
Reeves Inc., 13s, 2004 .............................................. 375 187,484
Reeves Industries Inc. New,
11s, 2002** ....................................................... 402 401,820
Revlon Consumer Products
Corp., 8.125s, 2006## ............................................. 750 746,250
Revlon Consumer Products
Corp., 8.625s, 2008## ............................................. 1,400 1,389,500
Synthetic Industries, Inc., 9.25s,
2007 .............................................................. 2,250 2,340,000
Westpoint Stevens, Inc., 9.375s,
2005 .............................................................. 5,550 5,883,000
------------
$ 11,822,291
------------
Containers -- 0.8%
Gaylord Container Corp., 9.75s,
2007 .............................................................. $1,870 $ 1,916,750
Gaylord Container Corp.,
9.875s, 2008## .................................................... 2,045 2,060,338
Silgan Holdings, Inc., 9s, 2009 ..................................... 1,500 1,556,250
------------
$ 5,533,338
------------
Corporate Asset Backed -- 0.2%
Merrill Lynch Mortgage
Investors, Inc., 8.16s, 2023+ ..................................... $1,500 $ 1,449,609
------------
Defense Electronics -- 0.1%
Alliant Techsystem., Inc.,
11.75s, 2003 ...................................................... $ 600 $ 652,500
------------
Entertainment -- 0.5%
Allbritton Communications Co.,
9.75s, 2007 ....................................................... $1,500 $ 1,563,750
AMC Entertainment, Inc., 9.5s,
2009 .............................................................. 1,025 1,050,625
American Skiing Co., 12s, 2006....................................... 500 563,750
Cinemark USA, Inc., 9.625s,
2008 .............................................................. 700 728,000
------------
$ 3,906,125
------------
</TABLE>
5
<PAGE>
Portfolio of Investments - continued
Bonds -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- continued
Financial Institutions
Americo Life, Inc., 9.25s, 2005 ..... $ 300 $ 307,125
------------
Food and Beverage Products -- 0.7%
Coca-Cola Bottling Group, Inc.,
9s, 2003 .......................... $ 750 $ 791,250
Specialty Foods Corp., 10.25s,
2001 .............................. 2,000 1,960,000
Texas Bottling Group, Inc., 9s,
2003 .............................. 2,250 2,373,750
------------
$ 5,125,000
------------
Forest and Paper Products -- 0.6%
Calmar, Inc., 11.5s, 2005 ........... $1,500 $ 1,605,000
U.S. Timberlands, 9.625s, 2007....... 2,020 2,090,700
Voto Votorantim Ovs, 8.5s,
2005 .............................. 1,000 910,000
------------
$ 4,605,700
------------
Industrial -- 1.0%
AGCO Corp., 8.5s, 2006 .............. $4,200 $ 4,336,500
Keystone Consolidated Industries
Inc., 9.625s, 2007 ................ 775 796,312
UCAR Global Enterprises Inc.,
12s, 2005 ......................... 1,800 1,948,500
------------
$ 7,081,312
------------
Information, Paging, and
Technology -- 1.8%
GlobalStar LP / Capital,
11.375s, 2004 ..................... $ 575 $ 569,250
ICG Holdings, Inc., 0s to 2001,
12.5s, 2006 ....................... 4,500 3,555,000
Orion Network Systems, Inc.,
11.25s, 2007 ...................... 1,625 1,860,625
Orion Network Systems, Inc., 0s
to 2002, 12.5s, 2007 .............. 725 567,312
Paging Network, Inc., 8.875s,
2006 .............................. 3,185 3,105,375
Qwest Communications
International, Inc., 0s to 2003,
8.29s, 2008, ## ................... 3,500 2,467,500
Qwest Communications
International, Inc., 10.875s,
2007 .............................. 750 860,625
------------
$ 12,985,687
------------
Manufacturing -- 0.2%
American Standard, Inc.,
7.375s, 2008 ...................... $1,050 $ 1,013,250
Argo Tech Corp., 8.625s, 2007........ 400 407,000
------------
$ 1,420,250
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Media -- 2.0%
American Radio Systems Corp.,
9s, 2006 .......................... $ 835 $ 893,450
Comcast Cellular Holdings, Inc.,
9.5s, 2007 ........................ 1,560 1,606,800
Comcast Corp., 9.375s, 2005 ......... 4,385 4,679,540
Intermedia Capital Partners IV,
LP, 11.25s, 2006 .................. 2,025 2,262,937
Jones Intercable, Inc., 8.875s,
2007 .............................. 3,150 3,339,000
Outdoor Systems, Inc., 8.875s,
2007 .............................. 1,525 1,574,563
------------
$ 14,356,290
------------
Medical and Health Technology
and Services -- 0.4%
Beverly Enterprises, Inc., 9s,
2006 .............................. $ 750 $ 781,875
Quorum Health Group, Inc.,
8.75s, 2005 ....................... 1,900 1,947,500
Tenet Healthcare Corp., 8.625s,
2007 .............................. 458 469,450
------------
$ 3,198,825
------------
Metals and Minerals -- 1.4%
Haynes International, Inc.,
11.625s, 2004 ..................... $2,650 $ 2,994,500
Kaiser Aluminum & Chemical
Corp., 9.875s, 2002 ............... 2,550 2,626,500
Metal Management Inc., 10s,
2008 .............................. 3,000 2,970,000
Wheeling Pittsburgh Corp.,
9.25s, 2007## ..................... 1,700 1,742,500
------------
$ 10,333,500
------------
Oil Services -- 0.4%
AmeriGas Partners LP, 10.125s,
2007 .............................. $ 600 $ 642,000
Ferrell Gas LP, 10s, 2001 ........... 2,200 2,348,500
------------
$ 2,990,500
------------
Oils -- 0.7%
Clark USA, Inc., 10.875s, 2005....... $1,035 $ 1,138,500
Gulf Canada, 9.25s, 2004 ............ 2,590 2,713,155
Noble Drilling Corp., 9.125s,
2006 .............................. 850 939,267
------------
$ 4,790,922
------------
Printing and Publishing -- 0.1%
Day International Group, Inc.,
11.125s, 2005 ..................... $ 600 $ 654,000
Golden Books Publishing, Inc.,
7.65s, 2002 ....................... 130 119,600
------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- continued
$ 773,600
------------
Restaurants and Lodging -- 0.6%
Prime Hospitality Corp., 9.75s,
2007 ............................. $1,000 $ 1,070,000
Red Roof Inns, Inc., 9.625s,
2003 ............................. 2,800 2,898,000
------------
$ 3,968,000
------------
Retail -- 0.2%
Cole National Group, Inc.,
8.625s, 2007 ..................... $1,600 $ 1,612,000
------------
Special Products and Services -- 1.5%
Blount, Inc., 9s, 2003 ............. 1,250 1,287,500
Buckeye Cellulose Corp., 8.5s,
2005 ............................. 1,010 1,025,150
Fairfield Manufacturing Corp.,
11.375s, 2001 .................... 500 521,250
IMO Industries, Inc., 11.75s,
2006 ............................. 2,000 2,250,000
Interlake Corp., 12s, 2001 ......... 1,750 1,925,000
Interlake Corp., 12.125s, 2002 ..... 1,925 1,982,750
International Knife & Saw, Inc.,
11.375s, 2006 .................... 450 491,062
Polymer Group, Inc., 9s, 2007 ...... 1,525 1,570,750
------------
$ 11,053,462
------------
Steel -- 1.0%
Alaska Steel Holdings Corp.,
9.125s, 2006 ..................... $ 575 $ 605,188
Alaska Steel Holdings Corp.,
10.75s, 2004 ..................... 1,460 1,554,900
Armco, Inc., 9s, 2007 .............. 600 621,000
Commonwealth Aluminum
Corp., 10.75s, 2006 .............. 750 787,500
WCI Steel, Inc., 10s, 2004 ......... 3,350 3,433,750
------------
$ 7,002,338
------------
Stores -- 0.2%
Affinity Group Holding, Inc., 11s,
2007 ............................. $ 500 $ 533,125
Musicland Group Inc., 9.875s,
2008 ............................. 1,150 1,150,000
------------
$ 1,683,125
------------
Supermarkets -- 0.2%
Kroger Co., 8.5s, 2003 ............. $ 500 $ 521,515
Pathmark Stores, Inc., 9.625s,
2003 ............................. 605 615,588
------------
$ 1,137,103
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Telecommunications -- 6.6%
Adelphia Communications
Corp., 9.875s, 2007 .............. $1,250 $ 1,337,500
Chancellor Media Corp., 8.75s,
2007 ............................. 1,220 1,253,550
CSC Holdings Inc., 9.25s, 2005...... 1,500 1,586,250
Digital Teleport Holdings Inc., 0s
to 2003, 12.5s, 2008 ............. 3,850 2,194,500
EchoStar Communications Corp.,
0s to 1999, 12.875s, 2004 ........ 2,350 2,267,750
EchoStar Satellite Broadcasting
Corp., Principal Stripped, 0s
to 2000, 13.125s, 2004 ........... 1,320 1,211,100
Fox/Liberty Networks LLC, Inc.,
8.875s, 2007 ..................... 1,800 1,822,500
Global Crossing Holdings Ltd.,
9.625s, 2008 ..................... 1,375 1,416,250
Granite Broadcasting Corp.,
8.875s, 2008 ..................... 2,800 2,765,000
Intermedia Communications
Inc., 8.875s, 2007 ............... 1,000 1,025,000
Intermedia Communications,
Inc., 0s to 2002, 11.125s,
2007 ............................. 1,575 1,157,625
ITC Deltacom, Inc., 11s, 2007 ...... 195 222,300
Lenfest Communications, Inc.,
10.5s, 2006 ...................... 2,275 2,582,125
Level 3 Commerce Inc., 9.125s,
2008, ## ......................... 2,300 2,233,875
Mobile Telecommunication
Technologies Corp., 13.5s,
2002 ............................. 1,000 1,160,000
Nextel Communications, Inc., 0s
to 1999, 9.75s, 2004 ............. 2,270 2,196,225
Nextel Communications, Inc., 0s
to 2002, 9.75s, 2007 ............. 350 225,750
Nextel Communications Inc., 0s
to 2003, 9.95s, 2008, ## ......... 1,450 915,312
Nextel International Inc., 0s to
2003, 12.125s, 2008, ## .......... 2,000 1,195,000
Pagemart Wireless, Inc., 0s to
2003, 11.25s, 2008, ## ........... 1,250 775,000
RCN Corp., 0s to 2002,
11.125s, 2007 .................... 500 328,750
Rogers Cablesystems, Inc.,
10.125s, 2012 .................... 3,050 3,324,500
Satelites Mexicanos S A De C V,
10.125s, 2004 .................... 900 897,750
Sprint Spectrum LP, 11s, 2006....... 2,125 2,449,062
Sprint Spectrum LP, 0s to 2001,
12.5s, 2006 ...................... 1,600 1,352,000
</TABLE>
7
<PAGE>
Portfolio of Investments - continued
Bonds -- continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- continued
Telecommunications -- continued
Teleport Communications
Group, Inc., 0s to 2001,
11.125s, 2007 ..................................................... $ 1,595 $ 1,389,644
Telesystem International Wireless
Inc., 0s to 2002, 10.5s, 2007...................................... 1,500 913,125
Triton PCS Inc., 0s to 2003,
11s, 2008, ## ..................................................... 2,850 1,702,875
United International Holdings
Inc., 0s to 2003, 10.75s,
2008 .............................................................. 2,000 1,245,000
Western Wireless Corp., 10.5s,
2007 .............................................................. 1,925 2,083,813
WorldCom, Inc., 8.875s, 2006 ........................................ 1,881 2,053,732
------------
$ 47,282,863
------------
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 ...................................................... 700 779,625
------------
$ 809,625
------------
U.S. Federal Agencies -- 1.4%
Financing Corp., 0s, 2014 ........................................... $13,519 $ 5,101,665
Israel Aid, 5.89s, 2005 ............................................. 5,000 4,979,600
------------
$ 10,081,265
------------
Utilities -- Electric -- 0.8%
El Paso Electric Co., 8.9s, 2006..................................... $ 400 $ 448,732
Midland Cogeneration Venture
Corp., 10.33s, 2002 ............................................... 4,326 4,671,848
Midland Funding Corp. I,
10.33s, 2002 ...................................................... 613 661,818
------------
$ 5,782,398
------------
Utilities -- Telephone -- 0.1%
Flag Limited, 8.25s, 2008, ## ....................................... $ 850 $ 862,750
------------
Federal National Mortgage
Association -- 1.6%
FNMA, 5s, 2023 ...................................................... $ 3,875 $ 3,280,420
FNMA, 6.5s, 2013 .................................................... 7,811 7,854,647
FNMA, 6.889s, 2020 .................................................. 151 152,599
------------
$ 11,287,666
------------
Government National Mortgage
Association -- 9.9%
GNMA, 6.5s, 2028 .................................................... $ 2,468 $ 2,456,659
GNMA, 7s, 2012 ...................................................... 2,477 2,536,890
GNMA, 7s, 2022 ...................................................... 2,700 2,742,343
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Government National Mortgage
Association -- continued
GNMA, 7s, 2023 ...................................................... $ 4,722 $ 4,804,416
GNMA, 7.5s, 2022-2024 ............................................... 10,600 10,945,990
GNMA, 7.5s, 2026 .................................................... 14,588 15,034,738
GNMA, 8s, 2028 ...................................................... 31,454 32,702,599
------------
$ 71,223,635
------------
U.S. Treasury Obligations -- 13.9%
U.S. Treasury Bonds, 8.875s,
2017 .............................................................. $16,000 $ 21,471,984
U.S. Treasury Bonds, 10.375s,
2012 .............................................................. 7,200 9,582,768
U.S. Treasury Bonds, 10.75s,
2005 .............................................................. 10,000 12,965,600
U.S. Treasury Bonds, 11.25s,
2015 .............................................................. 13,465 21,249,386
U.S. Treasury Bonds, 13.375s,
2001 .............................................................. 20,000 24,506,200
U.S. Treasury Notes, 5.75s,
2000 .............................................................. 10,800 10,845,576
------------
$100,621,514
------------
Total U.S. Bonds ........................................................................ $402,332,359
------------
Foreign Bonds -- 35.3%
Argentina -- 2.4%
Autopistas Del Sol SA, 10.25s,
2009 (Industrial), ## ............................................. $ 2,500 $ 2,375,000
Republic of Argentina, 6.625s,
2005 .............................................................. 1,900 1,705,250
Republic of Argentina, 9.75s,
2027 .............................................................. 2,201 2,046,930
Republic of Argentina, 11.75s,
2007, ## .......................................................... 4,500 4,365,000
Telefonica De Argentina SA,
9.125s, 2008
(Telecommunications) .............................................. 7,000 6,790,000
------------
$ 17,282,180
------------
Brazil -- 0.6%
Federal Republic of Brazil, 5s,
2014 .............................................................. $ 4,351 $ 3,371,860
Federal Republic of Brazil,
6.688s, 2009 ...................................................... 1,000 795,000
Federal Republic of Brazil,
6.875s, 2001 ...................................................... 350 337,330
------------
$ 4,504,190
------------
Canada -- 0.5%
PCI Chemicals Canada Inc.,
9.25s, 2007 (Industrial) .......................................... $ 500 $ 500,000
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds -- continued
Canada -- continued
Repap New Brunswick, Inc.,
10.625s, 2005 (Forest and
Paper Products) ................................................. $ 1,800 $ 1,845,000
Rogers Cantel, Inc., 9.375s,
2008 (Telecommunications) ....................................... 1,000 $ 1,035,000
------------
$ 3,380,000
------------
Denmark -- 2.5%
Nykredit, 6s, 2026 ................................................ DKK 64,156 $ 9,348,556
Nykredit, 7s, 2024 ................................................ 57,277 8,552,514
------------
$ 17,901,070
------------
Germany -- 4.4%
Germany Federal Republic, 6s,
2007 ............................................................ DEM 23,334 $ 14,109,933
Germany Federal Republic,
6.25s, 2006 ..................................................... 17,391 10,657,492
Treuhandanstalt, 6.625s, 2003 ..................................... 11,672 7,146,256
------------
$ 31,913,681
------------
India -- 0.1%
Power Finance Corp. Ltd., 7.5s,
2009 (Financial Institution) ##.................................. $ 500 $ 410,000
------------
Italy -- 2.5%
Republic of Italy, 5.75s, 2002 .................................... ITL 15,680,000 $ 9,254,925
Republic of Italy, 7.75s, 2006 .................................... 13,450,000 9,053,796
------------
$ 18,308,721
------------
Luxembourg -- 0.4%
Millicom International Cellular
Communications Corp., 0s to
2001, 13.5s, 2006
(Telecommunications) ............................................ $ 3,575 $ 2,815,313
------------
Mexico -- 2.7%
Empresas ICA Sociedad SA,
11.875s, 2001 ................................................... $ 2,500 $ 2,687,500
Grupo Industrial Durango SA DE
CV (Industrial), 12s, 2001 ...................................... 1,500 1,605,000
United Mexican States, 6.25s,
2019 ............................................................ 4,000 3,340,000
United Mexican States, 6.25s,
2019 ............................................................ 5,500 4,585,625
United Mexican States, 6.75s,
2019 ............................................................ 1,000 912,500
United Mexican States, 8.625s,
2008 ............................................................ 2,500 2,465,625
United Mexican States, 11.5s,
2026 ............................................................ 3,250 3,789,500
------------
$ 19,385,750
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
New Zealand -- 6.0%
Government of New Zealand,
8s, 2001 .......................................................... NZD 65,520 $ 36,939,194
Government of New Zealand,
10s, 2002 ......................................................... 11,170 6,582,364
------------
$ 43,521,558
------------
Panama -- 0.9%
Republic of Panama, 7.875s,
2002 .............................................................. $ 1,500 $ 1,492,500
Republic of Panama, 8.25s,
2008 .............................................................. 1,000 983,750
Republic of Panama, 8.875s,
2027 .............................................................. 4,030 3,798,275
------------
$ 6,274,525
------------
Philippines -- 0.5%
National Power Corp., 9.625s,
2028 (Utilities-Electric) ......................................... $ 4,000 $ 3,748,160
------------
Poland -- 0.3%
Government of Poland, 6.688s,
2024 .............................................................. $ 2,000 $ 1,975,000
------------
Russia -- 2.4%
Russia Principal Loans, 3.359s,
2020+ ............................................................. $ 25,500 $ 14,376,900
Vnesheconombank, 6.719s,
2015 .............................................................. 4,000 2,590,000
Vnesheconombank USSR,
6.719s, 2015 ...................................................... 1,000 647,500
------------
$ 17,614,400
------------
United Kingdom -- 9.1%
Colt Telecom Group PLC,
8.875s, 2007 ...................................................... DEM 1,000 $ 610,576
Colt Telecommunications Group
PLC, 0s to 2001, 12s, 2006
(Telecommunications) .............................................. $ 500 500,000
Colt Telecom Group PLC, 0s to
2006, 12s, 2006 ................................................... 1,500 1,185,000
Diamond Cable
Communications Corp. PLC,
0s to 2000, 11.75s, 2005
(Telecommunications) .............................................. 2,090 1,677,225
United Kingdom Treasury, 8.5s,
2005 .............................................................. GBP 21,461 40,715,778
United Kingdom Treasury, 9.75s,
2002 .............................................................. GBP 11,446 21,220,107
------------
$ 65,908,686
------------
Total Foreign Bonds .................................................................... $254,943,234
------------
Total Bonds (Identified Cost, $652,409,225) ............................................ $657,275,593
------------
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
Stocks
<TABLE>
<CAPTION>
Issuer Shares Value
<S> <C> <C>
U.S. Stocks
Apparel and Textiles
Ithaca Industries, Inc., * ...... 26,000 $ 94,250
------------
Real Estate
Atlantic Gulf Communities
Corp., +* ..................... 244 $ 747
------------
Total U.S. Stocks ............................. $ 94,997
------------
Total Stocks (Identified Cost, $325,000)....... $ 94,997
------------
Preferred Stock -- 1.5%
CSC Holdings Inc. ............... 64,998 $ 7,491,020
Time Warner, Inc., 10.25, # ..... 3,220 3,606,400
------------
Total Preferred Stock
(Identified Cost, $8,102,175)................ $ 11,097,420
------------
Rights
United Mexican States,
(Identified Cost, $0), * ...... 1,538,000 $ 0
------------
Warrants
GlobalStar Telecommunications
Expire 2/15/04, ## * .......... 575 $ 80,500
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)...... $ 111,750
------------
Short-Term Obligations -- 5.0%
Principal Amount
(000 Omitted)
Federal Home Loan Mortgage,
due 6/01/98, at Amortized
Cost .................... $36,300 $ 36,300,000
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
of Contracts
Issuer/Expiration Month/Strike Price (000 Omitted) Value
<S> <C> <C>
Call Options Purchased
Japanese Government Bond/
June/102.121 (Premiums
Paid, $91,326)........................... JPY 1,320,900 $ 239,124
------------
Total Investments
(Identified Cost, $697,290,306)...................... $705,118,884
------------
Call Options Written
Japanese Government Bond/
June/104.247 ............................ JPY 1,320,900 $ (70,008)
------------
Total Call Options Written
(Premiums Received, $20,295)......................... $ (70,008)
------------
Put Options Written
Canadian Dollars/U.S. Dollars/
July/1.430 .............................. CAD 26,124 $ (334,281)
Japanese Government Bond/
August/101.801 .......................... JPY 662,200 (7,284)
Japanese Government Bond/
August/101.800 .......................... JPY 662,200 (7,946)
------------
Total Put Options Written
(Premiums Received, $127,870) ......................... $ (349,511)
------------
Other Assets,
Less Liabilities -- 2.5% 18,253,447
------------
Net Assets -- 100.0% ...................................... $722,952,812
============
*Non-income producing security.
**Non-income producing security-in-default.
#Payment-in-kind bond.
##SEC Rule 144A restriction.
+Restricted security.
</TABLE>
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
<TABLE>
<S> <C>
CAD = Canadian Dollars ITL = Italian Lira
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NZD = New Zealand Dollars
GBP = British Pounds
</TABLE>
See notes to financial statements
10
<PAGE>
Statement of Assets and Liabilities -- May 31, 1998
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $697,290,306).................................... $705,118,884
Cash .................................................................................... 27,162
Foreign currency, at value (Identified cost, $607,295)................................... 609,256
Net receivable for foreign currency exchange contracts closed or subject to master
netting agreements ..................................................................... 311,016
Receivable for investments sold ......................................................... 27,575,561
Interest receivable ..................................................................... 12,494,032
Other assets ............................................................................ 107,176
-------------
Total assets .......................................................................... $746,243,087
-------------
Liabilities:
Payable to dividend disbursing agent .................................................... $ 402,886
Payable for investments purchased ....................................................... 21,887,785
Written options outstanding, at value (premiums received $148,165)....................... 419,519
Net payable for forward foreign currency exchange contracts to purchase ................. 160,153
Net payable for forward foreign currency exchange contracts to sell ..................... 78,178
Payable to affiliates --
Management fee ......................................................................... 40,391
Administrative fee ..................................................................... 888
Transfer Agent fee ..................................................................... 12,048
Accrued expenses and other liabilities .................................................. 288,427
------------
Total liabilities ..................................................................... $ 23,290,275
------------
Net assets ............................................................................... $722,952,812
============
Net assets consist of:
Paid-in capital ......................................................................... $710,535,878
Unrealized appreciation on investments and translation of assets and liabillties in
foreign currencies ..................................................................... 7,609,538
Accumulated net realized gain on investments and foreign currency transactions .......... 6,870,525
Accumulated distributions in excess of net investment income ............................ (2,063,129)
------------
Total ................................................................................. $722,952,812
============
Shares of beneficial interest outstanding (90,358,639 shares authorized less 23,220,000
treasury shares) ....................................................................... 67,138,639
============
Net asset value per share (net assets of $722,952,812 [divided by] 67,138,639 shares of
beneficial interest outstanding) ....................................................... 10.77
============
</TABLE>
See notes to financial statements
11
<PAGE>
Statement of Operations -- Six Months Ended May 31, 1998
<TABLE>
<S> <C>
Net investment income:
Income --
Interest .................................................................. 29,097,583
Dividends ................................................................. 153,021
-------------
Total investment income .................................................. $ 29,250,604
-------------
Expenses --
Management fee ............................................................ 2,495,698
Trustees' compensation .................................................... 75,118
Transfer and dividend disbursing agent fee ................................ 71,761
Administrative fee ........................................................ 47,716
Custodian fee ............................................................. 179,820
Printing .................................................................. 24,626
Postage ................................................................... 21,782
Auditing fees ............................................................. 35,015
Legal fees ................................................................ 1,942
Miscellaneous ............................................................. 188,396
-------------
Total expenses ........................................................... $ 3,141,874
Fees paid indirectly ...................................................... (62,868)
-------------
Net expenses ............................................................. $ 3,079,006
-------------
Net investment income ................................................... $ 26,171,598
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions ................................................... 6,880,643
Written option transactions ............................................... (274,811)
Foreign currency transactions ............................................. 13,485,796
Swaps ..................................................................... 127,793
-------------
Net realized gain on investments and foreign currency transactions ...... $ 20,219,421
-------------
Change in unrealized appreciation (depreciation) --
Investments ............................................................... $ (7,678,813)
Written option ............................................................ 735,641
Translation of assets and liabillities in foreign currencies .............. (7,418,700)
Interest rate swap agreements ............................................. (228,283)
-------------
Net unrealized loss on investments ...................................... $ (14,590,155)
-------------
Net realized and unrealized gain on investments and foreign currency ... $ 5,629,266
-------------
Increase in net assets from operations ................................ $ 31,800,864
=============
</TABLE>
See notes to financial statements
12
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended
Six Months Ended November 30,
May 31, 1998 1997
------------------ -----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations --
Net investment income ................................................................... $ 26,171,598 $ 53,626,606
Net realized gain on investments and foreign currency transactions ...................... 20,219,421 6,415,557
Net unrealized gain (loss) on investments and foreign currency translation .............. (14,590,155) 1,589,541
------------- -------------
Increase in net assets from operations ................................................ $ 31,800,864 $ 61,631,704
------------- -------------
Distributions declared to shareholders --
From net investment income .............................................................. $ (26,175,393) $ (53,626,606)
In excess of net investment income ...................................................... (739,530) (1,342,926)
------------- -------------
Total distributions declared to shareholders .......................................... $ (26,914,923) $ (54,969,532)
------------- -------------
Net decrease in net assets from Trust share transactions ............................... (6,517,955) (18,048,728)
------------- -------------
Total decrease in net assets .......................................................... $ (1,632,014) $ (11,386,556)
------------- -------------
Net assets:
At beginning of period .................................................................. 724,584,826 735,971,382
------------- -------------
At end of period (including accumulated distributions in excess of net investment income
of $(2,063,129) and $(1,319,804), respectively)......................................... $ 722,952,812 $ 724,584,826
============= =============
</TABLE>
See notes to financial statements
13
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended
Per share data (for a May 31,
share outstanding 1998
throughout each period): ----------
<S> <C>
Net asset value -- beginning of period ............... $ 10.69
--------
Income from investment operations# --
Net investment income ............................... $ 0.39
Net realized and unrealized gain (loss) on
investments and foreign currency transactions ...... 0.09
--------
Total from investment operations ................... $ 0.48
--------
Less distributions declared to shareholders --
From net investment income .......................... $ (0.39)
From net realized gain on investments and foreign
currency transactions .............................. --
In excess of net investment income .................. (0.01)
From paid-in capital ................................ --
--------
Total distributions declared to shareholders ...... $ (0.40)
--------
Net asset value -- end of period ..................... $ 10.77
========
Per share market value -- end of period .............. $10.0625
========
Total return ......................................... 8.08%++
Ratios (to average net assets)/Supplemental data:
Expenses## .......................................... 0.87%+
Net investment income ............................... 7.23%+
Portfolio turnover ................................... 94%
Net assets at end of period (000 omitted) ............ $722,953
<CAPTION>
Year Ended November 30,
Per share data (for a -----------------------------------------------------------------------
share outstanding
throughout each period): 1997 1996 1995 1994 1993
---- ---- ---- ---- --------
<S> <C> <C> <C> <C> <C>
Net asset value -- beginning of period ............... $ 10.57 $ 10.50 $ 9.60 $ 10.68 $ 10.23
-------- -------- -------- -------- --------
Income from investment operations# --
Net investment income ............................... $ 0.78 $ 0.76 $ 0.79 $ 0.76 $ 0.85
Net realized and unrealized gain (loss) on
investments and foreign currency transactions ...... 0.14 0.14 0.88 (1.07) 0.55
-------- -------- -------- -------- --------
Total from investment operations ................... $ 0.92 $ 0.90 $ 1.67 $ (0.31) $ 1.40
-------- -------- -------- -------- --------
Less distributions declared to shareholders --
From net investment income .......................... $ (0.78) $ (0.83) $ (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 .................. (0.02) -- -- -- --
From paid-in capital ................................ -- -- -- (0.39) --
-------- -------- -------- -------- --------
Total distributions declared to shareholders ...... $ (0.80) $ (0.83) $ (0.77) $ (0.77) $ (0.95)
-------- -------- -------- -------- --------
Net asset value -- end of period ..................... $ 10.69 $ 10.57 $ 10.50 $ 9.60 $ 10.68
======== ======== ======== ======== ========
Per share market value -- end of period .............. $ 9.6875 $ 9.625 $ 9.125 $ 8.719 $ 9.625
======== ======== ======== ======== ========
Total return ......................................... 9.25% 15.09% 13.84% (1.35)% 6.92%
Ratios (to average net assets)/Supplemental data:
Expenses## .......................................... 0.87% 0.93% 0.92% 0.86% 0.90%
Net investment income ............................... 7.41% 7.38% 7.84% 7.50% 8.04%
Portfolio turnover ................................... 180% 146% 183% 153% 397%
Net assets at end of period (000 omitted) ............ $724,585 $735,971 $786,256 $804,390 $919,480
</TABLE>
+Annualized.
++Not annualized.
#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
14
<PAGE>
<TABLE>
<CAPTION>
Per share data (for a Year Ended November 30,
share outstanding ----------------------------------------------------------
throughout each period): 1992 1991 1990 1989*
----------------------------------------------------------
<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 income [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 (000 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 adviser did not impose a portion of its management fee for the periods indicated. If
this fee had been incurred by the Trust, the net investment income per share and the ratios would have been:
Net investment income ........................................ $ -- $ -- $ 1.17 $ 0.42
Ratios (to average net assets):
Expenses .................................................... -- -- 1.10% 1.02%+
Net investment income ....................................... -- -- 11.30% 11.04%+
</TABLE>
See notes to financial statements
15
<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 equity 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 swap agreements,
are valued on the basis of valuations furnished by dealers or by a pricing
service with consideration to factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data, without exclusive
reliance upon exchange or over-the-counter prices. Short-term obligations, which
mature in 60 days or less, are valued at amortized cost, which approximates
market value. 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. 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.
Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options -- The Trust may write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the 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
16
<PAGE>
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.
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 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 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
17
<PAGE>
Notes to Financial Statements -- continued
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 month end net assets. The fee is reduced according to an arrangement
that 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 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 recognition or classification of income between the financial
statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
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 annual rate of 0.32% of
average daily net assets and 4.57% of investment income.
Administrator -- 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:
<TABLE>
<S> <C>
First $1 billion................ 0.0150%
Next $1 billion................. 0.0125%
Next $1 billion................. 0.0100%
In excess of $3 billion......... 0.0000%
</TABLE>
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
renumeration for their services to the Trust from MFS. Certain 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 of its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a net
periodic pension expense of $18,492 for the period ended May 31, 1998.
18
<PAGE>
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 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 ............................ $227,829,593 $260,658,137
============ ============
Investments (non-U.S. government securities) .......... $423,454,731 $394,814,300
============ ============
</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:
<TABLE>
<S> <C>
Aggregate cost ........................ $ 697,290,306
=============
Gross unrealized appreciation ......... $ 21,109,515
Gross unrealized depreciation ......... (13,280,937)
-------------
Net unrealized appreciation .......... $ 7,828,578
=============
</TABLE>
(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 Fund shares were as follows:
Class A Shares
- -----------
<TABLE>
<CAPTION>
Period Ended Year Ended
May 31, 1998 November 30, 1997
----------------------------------------------------------------------
Shares Amount Shares Amount
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares reacquired ......... (658,900) $ (6,517,955) (1,857,400) $ (18,048,728)
======== ============ ========== =============
Net decrease ............. (658,900) $ (6,517,955) (1,857,400) $ (18,048,728)
======== ============ ========== =============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 658,900 shares of
beneficial interest were purchased by the Trust during the period ended May 31,
1998, at an average price per share of $9.89 and a weighted average discount of
7.93% per share. The Trust repurchased 1,857,400 shares of beneficial interest
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.
(6) Line of Credit
The Trust and other affiliated Trusts participate in a $805 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 purchase of
securities, the redemption of shares, or emergency expenses. 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 period ended May 31,
1998 was $675.
The Trust and other affiliated funds also participate in a $20 million
uncommitted, unsecured line of credit provided by State Street Bank and Trust
Company under a line of credit agreement. Borrowings may be made to temporarily
finance the acquisition of treasury shares. During the period ended May 31,
1998, the maximum amount outstanding was $5,002,390 million, and $0 million was
outstanding at May 31, 1998. Interest expense incurred on the borrowings
amounted to $4,802 for the period ended May 31, 1998, and the weighted average
interest rate on these borrowings was 7.35%.
19
<PAGE>
Notes to Financial Statements -- continued
(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, and swap agreements. The notional or contractual amounts of these
instruments represent the investment the Trust has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Written Options Transactions
- ---------------------
<TABLE>
<CAPTION>
1998 Calls 1998 Puts
------------------------------------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 omitted) Premiums (000 omitted) Premiums
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period --
Swiss Francs/Deutsche Marks ................... 35,023 $ 244,238
Options written --
Canadian Dollars .............................. 26,124 $ 97,736
Deutsche Marks ................................ 67,945 390,591
Japanese Government Bonds ..................... 1,320,900 20,295 2,645,300 74,782
Options terminated in closing transactions --
Deutsche Marks ................................ (67,945) (390,591)
Japanese Government Bonds ..................... (1,320,900) (44,648)
Swiss Francs/Deutsche Marks ................... (35,023) (244,238)
--------- ---------- ---------- ----------
Outstanding, end of period -- $ 20,295 $ 127,870
========== ==========
Options outstanding at end of period consist of:
Canadian Dollars .............................. 26,124 $ 97,736
Japanese Government Bonds ..................... 1,320,900 $ 20,295 1,324,400 30,134
--------- ---------- ---------- ----------
Outstanding, end of period -- $ 20,295 $ 127,870
========== ==========
</TABLE>
At May 31, 1998, the Trust had sufficient cash and/or securities at least equal
to the value of the written options.
Forward Foreign Currency Exchange Contracts
- -------------------------------------------
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts at Appreciation
Settlement Date Deliver/Receive In Exchange For Value (Depreciation)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 9/25/98 .......... DKK 128,331,015 $18,883,316 $18,961,494 $ (78,178)
----------- ----------- ---------
$18,883,316 $18,961,494 $ (78,178)
=========== =========== =========
Purchases 9/25/98 .......... CAD 15,413,538 $10,767,930 $10,608,664 $(159,266)
9/25/98 .......... JPY 2,567,138 19,715 18,828 (887)
----------- ----------- ---------
$10,787,645 $10,627,492 $(160,153)
=========== =========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $131,195 with Bankers' Trust,
$112,825 with Deutsche Bank, and $66,996 with Merrill Lynch at May 31, 1998.
At May 31, 1998, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
20
<PAGE>
(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 May 31, 1998, the
Trust owned the following restricted securities (constituting 2.22% 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 be
registered. The value of these securities is determined by valuations furnished
by dealers or by a pricing service, or if not available, are valued at fair
value as determined in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of
Description Acquisition Share Amount Cost Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Atlantic Gulf Communities Corp. .............. 9/25/95 244 $ -- $ 747
Merrill Lynch Mortgage Investors, Inc.,
Floating Rate, 4/15/23 ...................... 6/22/94 1,500,000 1,039,688 1,449,609
Airplane Pass-Through Trust, 3/15/19 ......... 3/13/96 225,000 225,000 253,910
Russia Principal Loans, 12/15/20 ............. 12/12/97 25,500,000 15,524,437 14,376,900
-----------
$16,081,166
===========
</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, 1998, and the related statement of operations for the six month period ended
May 31, 1998, the statement of changes in net assets for the six month period
ended May 31, 1998 and for the year ended November 30, 1997, and the financial
highlights for the six month period ended May 31, 1998 and for each of the four
years in the period ended November 30, 1997. 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, 1998, by correspondence with the custodian and
brokers or by other appropriate auditing procedures where replies from brokers
were not received. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Charter Income Trust at May 31, 1998, the results of its operations for the six
month period ended May 31, 1998, the changes in its net assets for the six month
period ended May 31, 1998 and for the year ended November 30, 1997 and the
financial highlights for the six month period ended May 31, 1998 and for each of
the four years in the period ended November 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
July 7, 1998
22
<PAGE>
MFS[RegTM] Charter Income Trust
Trustees
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), MFS Investment Management
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,
MFS Investment Management
Jeffrey L. Shames*
Chairman, Chief Executive Officer,
and Director, MFS Investment
Management
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, and Dividend
Disbursing 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. MCICE-3 7/98 73M
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