[MFS LOGO] MFS[registration mark]
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
MFS(R) Charter Income Trust
Annual Report
for Year Ended
November 30, 1998
[Silhouette of man and woman in front of large window]
<PAGE>
Letter from the Chairman
Dear Shareholders,
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund --
our Massachusetts Investors Trust (MIT) -- was introduced to the public on March
21, 1924. Since then, MFS Investment Management(R), the company that grew out of
that original fund, has helped guide shareholders through many economic and
investment cycles, primarily by focusing on the long-term opportunities created
by an expanding global economy. As of November 30, 1998, MFS manages over $90
billion, and the firm's 2,000 people serve 3.9 million investors and their
financial advisers worldwide, while MIT's assets have grown to over $10 billion.
A major factor in our growth was the development of one of the industry's first
in-house research departments in 1932. Unlike many other companies that rely on
Wall Street research reports, which can be used by many investors at the same
time, MIT's managers built its long-term track record by visiting companies,
talking to managers and competitors, and "kicking the tires" so they could judge
the quality and potential of each company's products and services for
themselves. Today, MFS has more than 100 full-time portfolio managers, stock
analysts, and credit analysts who track the equity and bond markets. That number
includes over 35 equity analysts who specialize in industries such as aviation,
media, technology, automobiles, and utilities.
While MIT was the first mutual fund, it was not our only invention. We also
established the nation's first global bond fund, first high-yield municipal bond
fund, and first high-yield municipal closed-end bond fund.
We are proud of the record of MIT and of the funds offered by MFS, but we are
also proud of our long-standing relationship with financial advisers. Not only
do we believe investors can benefit from the advice of these experts but, as was
shown during the market volatility of 1998, people who work with financial
advisers are less likely to abandon their carefully designed, long-term
investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. Today, the MFS Service Center handles millions of transactions
and phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible investment
management and shareholder service, just as we have done for the past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead and
build on our 75 years of innovation and experience to help meet your investment
needs in the next century. We appreciate your confidence and welcome any
questions or comments you may have.
Respectfully,
[Signature of Jeffrey L. Shames]
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
December 15, 1998
1
<PAGE>
Management Review and Outlook
Dear Shareholders,
The Trust's stock market price, which stood at $9.69 on November 28, 1997,
increased to $9.94 on November 30, 1998, while its net asset value (NAV) price
decreased from $10.69 to $10.39, representing a total return, including the
reinvestment of all dividends and capital gains, of 11.30% based on market price
and 5.56% based on NAV. This compares to a 14.04% 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 10.75% return for the Lehman
Brothers Government Bond Index, an unmanaged index of U.S. Treasury and
government-agency obligations.
Much of the Trust's positive performance has been due to its sensitivity to
falling interest rates, a decline which has produced a healthy environment for
bonds. Our performance was particularly helped by the strong price appreciation
of U.S. Treasury bonds and good performance by high-quality international bonds.
(Principal value and interest on Treasury securities are guaranteed by the U.S.
government if held to maturity.) The Trust remains a low-risk, high-yield
investment tool that focuses on three key credit investments: U.S. government/
mortgage securities, U.S. high-yield corporate bonds, and international
government debt.
U.S. Government/Mortgage
This sector provided a healthy boost to the Trust's performance over the past 12
months. Strong price appreciation of Treasuries spurred by declining interest
rates and a continued flight to quality worked in the Trust's favor.
U.S. High-Yield Corporate
The corporate high-yield bond sector performed exceptionally well at the end of
1997 and through the first half of 1998. The economic crisis in Russia and the
stock market's downturn in the late summer and early fall hurt performance
somewhat, but the industries in which we have invested, such as media,
entertainment, communications, and business services, did not suffer as badly as
industries that are more exposed to economic cycles. Since fall, the market has
rebounded well, and yield spreads in relation to Treasuries have again narrowed,
which has pushed high-yield bond prices higher. Looking ahead, we feel that the
U.S. economy, while slowing, should avoid a recession, which should create a
favorable environment for high-yield corporate bonds. Additionally, we will use
Original Research(SM) to uncover what we feel are the best values in this market
and to create a diverse portfolio.
International
About 70% of the Trust's international segment is invested in "AA"-rated
sovereign bonds, which have benefited from price and currency gains as European
interest rates have declined. As a result, Europe has been one of the world's
best-performing bond markets. The remaining 30% of the international segment is
invested in U.S. dollar-denominated bonds in the emerging markets, with holdings
in Latin America, Eastern Europe, and a very small position in Asia. This
sector's sharp drop over the summer hurt performance, and though emerging
markets have stabilized somewhat, they have yet to recover fully.
Looking ahead, we feel that declining inflation in the world's economies may
turn to deflation in some of the major markets and that interest rates should
continue to fall while economic growth weakens. These signs point to a favorable
environment for bonds, especially when one considers the worldwide yield
shortage. The type of yield that the Trust can generate should remain attractive
to investors.
2
<PAGE>
The Trust remains committed to reducing volatility through a diversified
fixed-income approach underscored by MFS' tradition of in-depth research of the
credit markets. We appreciate your confidence and welcome any comments and
questions you may have.
Respectfully,
[Signature James T. Swanson]
James T. Swanson
Portfolio Manager
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.
The portfolio is actively managed, and current holdings may vary.
----------------------------------------------
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, 1998)
<TABLE>
<S> <C>
Net Asset Value Per Share
November 28, 1997 $ 10.69
November 30, 1998 $ 10.39
New York Stock Exchange Price
November 28, 1997 $ 9.6875
July 10, 1998 (high)* $10.3125
August 31, 1998 (low)* $ 8.7500
November 30, 1998 $ 9.9375
</TABLE>
*For the period December 1, 1997, through November 30, 1998.
- --------------------------------------------------------------------------------
Federal Tax Information
(For the year ended November 30, 1998)
In January 1999, shareholders were mailed a Form 1099 reporting the federal tax
status of all distributions paid during the calendar year 1998.
For the year ended November 30, 1998, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations came to
0.42%.
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, 1998, our records indicate that there are 7,979 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, 1998, the following actions were taken:
Item 1. The election of Sir J. David Gibbons, Walter E. Robb, III, and Arnold D.
Scott as Trustees of the Trust.
<TABLE>
<CAPTION>
Number of Shares
------------------------------------------
Withhold
Nominee For Authority
- ---------------------- -------------------- -------------------
<S> <C> <C>
Sir J. David Gibbons 61,882,797.6530 1,088,754.4230
Walter E. Robb, III 61,990,510.9540 981,041.1220
Arnold D. Scott 62,020,944.8780 950,607.1980
</TABLE>
3
<PAGE>
Trustees continuing in office who were not subject to re-election at this
meeting are Richard B. Bailey, Marshall N. Cohan, Lawrence H. Cohn, Abby M.
O'Neill, Jeffrey L. Shames, J. Dale Sherratt, and Ward Smith.
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, 1999.
<TABLE>
<CAPTION>
Number of Shares
-----------------
<S> <C>
For 61,904,754
Against 285,806
Abstain 780,990
</TABLE>
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
MFS offers a Dividend Reinvestment and Cash Purchase Plan which allows you to
reinvest either all of the distributions paid by the Trust or only the long-term
capital gains. Purchases are made at the market price unless that price exceeds
the net asset value (the shares are trading at a premium). If the 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. Twice each
year you can also buy shares. 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. 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, call 1-800-637-2304 any business day
from 8 a.m. to 8 p.m. Eastern time. 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. Please call for additional details. When you withdraw, 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.
If you have any questions or would like a brochure providing a complete
description of the Plan, please call 1-800-637-2304 any business day from 8 a.m.
to 8 p.m. Eastern time.
- --------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- --------------------------------------------------------------------------------
4
<PAGE>
Portfolio of Investments - November 30, 1998
Bonds - 97.7%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - 60.9%
Aerospace - 0.8%
B E Aerospace, Inc., 8s, 2008 ... $1,165 $1,141,700
B E Aerospace, Inc., 9.875s,
2006 .......................... 2,000 2,100,000
K & F Industries, Inc., 9.25s,
2007 .......................... 1,200 1,212,000
United Defense Industries, Inc.,
8.75s, 2007 ................... 1,350 1,351,687
----------
$5,805,387
----------
Airlines
Airplane Pass-Through Trust,
10.875s, 2019+ ................ $ 225 $ 238,896
----------
Automotive - 1.0%
Hayes Wheels International, Inc.,
9.125s, 2007 .................. $2,340 $2,445,300
Lear Corp., 9.5s, 2006 .......... 2,000 2,190,000
Titan Wheel International, Inc.,
8.75s, 2007 ................... 2,300 2,231,000
----------
$6,866,300
----------
Banks and Credit Companies - 0.1%
Midland Funding Corp. I, 10.33s,
2002 .......................... $ 546 $ 573,127
----------
Building - 1.0%
AAF-McQuay, Inc., 8.875s, 2003 $1,700 $1,678,750
Building Materials Corp., 8s,
2007 .......................... 1,000 990,000
Nortek, Inc., 9.25s, 2007 ....... 850 892,500
Nortek, Inc., 9.875s, 2004 ...... 2,225 2,269,500
UDC Homes, Inc., 14.5s, 2000 .... 13 7,368
Williams Scotsman, Inc., 9.875s,
2007 .......................... 1,000 1,052,500
----------
$6,890,618
----------
Business Services - 0.5%
Iron Mountain, Inc., 8.75s, 2009 $1,800 $1,836,000
Iron Mountain, Inc., 10.125s,
2006 .......................... 150 163,500
Pierce Leahy Corp., 9.125s, 2007 1,100 1,155,000
----------
$3,154,500
----------
Chemicals - 0.2%
NL Industries, Inc., 11.75s, 2003 $1,185 $1,262,025
Sterling Chemicals, Inc., 11.25s,
2007 .......................... 125 103,750
----------
$1,365,775
----------
Computer Software - Services - 0.5%
Unisystem Corp., 7.875s, 2008 ... $3,300 $3,465,000
----------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Computer Software - Systems - 0.3%
Anacomp, Inc., 10.875s, 2004 .... $2,225 $2,309,500
----------
Conglomerates - 0.5%
News America Holdings, Inc.,
10.125s, 2012 ................. $3,000 $3,513,000
----------
Consumer Goods and Services - 1.2%
Galey & Lord, Inc., 9.125s, 2008 $1,650 $1,509,750
Kindercare Learning Centers, Inc.,
9.5s, 2009 .................... 855 855,000
Polymer Group, Inc., 9s, 2007 ... 1,525 1,521,188
Reeves Industries, Inc., 11s,
2002 .......................... 402 381,729
Reeves, Inc., 13s, 2004 ......... 417 229,154
Revlon Consumer Products
Corp., 8.125s, 2006 ........... 750 738,750
Revlon Consumer Products
Corp., 8.625s, 2008 ........... 1,400 1,382,500
Samsonite Corporation New,
10.75s, 2008 ....................... 1,750 1,470,000
----------
$8,088,071
----------
Containers - 0.6%
Gaylord Container Corp., 9.75s,
2007 .......................... $1,870 $1,776,500
Gaylord Container Corp., 9.875s,
2008 .......................... 1,045 815,100
Silgan Holdings, Inc., 9s, 2009 . 1,500 1,515,000
----------
$4,106,600
----------
Corporate Asset Backed - 0.2%
Merrill Lynch Mortgage Investors,
Inc., 8.16s, 2022+ ............ $1,500 $1,482,422
----------
Entertainment - 0.6%
Allbritton Communications Co.,
9.75s, 2007 ........................$1,500 $1,590,000
AMC Entertainment, Inc., 9.5s,
2009 ............................... 1,025 1,050,625
American Skiing Co., 12s, 2006 .. 500 520,000
Cinemark USA, Inc., 9.625s,
2008 .......................... 700 735,000
----------
$3,895,625
----------
Financial Institutions - 0.2%
Americo Life, Inc., 9.25s, 2005 . $ 300 $ 304,875
Lehman Brothers Holdings, Inc.,
6.25s, 2003 ................... 1,000 990,050
----------
$1,294,925
----------
</TABLE>
5
<PAGE>
Portfolio of Investments - continued
Bonds - continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Food and Beverage Products - 0.3%
Friendly Ice Cream Corp., 10.5s,
2007 .......................... $ 600 $ 613,500
Specialty Foods Corp., 10.25s,
2001 .......................... 2,000 1,785,000
-----------
$ 2,398,500
-----------
Forest and Paper Products - 0.3%
U.S. Timberlands, 9.625s, 2007 .. $2,020 $ 2,050,300
-----------
Government National Mortgage
Association - 6.8%
GNMA, 7s, 2023 .................. $4,313 $ 4,418,171
GNMA, 7.5s, 2022-2024 ........... 9,195 9,499,776
GNMA TBA, 6.5s, 2028 ............ 2,454 2,478,940
GNMA TBA, 7s, 2012-2025 ......... 4,802 4,922,004
GNMA TBA, 7.5s, 2027 ............ 12,350 12,751,121
GNMA TBA, 8s, 2028 .............. 12,758 13,268,601
-----------
$47,338,613
-----------
Information, Paging and
Technology - 1.8%
GlobalStar LP / Capital, 11.375s,
2004 .......................... $ 475 $ 371,688
ICG Holdings, Inc., 0s to 2001,
12.5s to 2006 ................. 4,500 3,330,000
Orion Network Systems, Inc., 0s
to 2002, 12.5s to 2007 ........ 725 482,125
Orion Network Systems, Inc.,
11.25s, 2007 .................. 1,625 1,564,062
Paging Network, Inc., 8.875s,
2006 .......................... 3,185 3,089,450
Qwest Communications
International, Inc., 0s to 2003,
8.29s to 2008 ................. 3,500 2,633,750
Qwest Communications
International, Inc., 10.875s,
2007 .......................... 750 866,250
-----------
$12,337,325
-----------
Machinery - 0.9%
AGCO Corp., 8.5s, 2006 .......... $3,200 $ 3,152,000
Grove Worldwide LLC/Cap, Inc.,
9.25s, 2008## ................. 1,500 1,417,500
Numatics, Inc., 9.625s, 2008 .... 1,500 1,376,250
-----------
$ 5,945,750
-----------
Manufacturing - 0.2%
American Standard, Inc., 7.375s,
2008 .......................... $1,050 $ 1,050,000
Argo Tech Corp., 8.625s, 2007 ... 400 396,000
-----------
$ 1,446,000
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Media - 2.1%
American Radio Systems Corp.,
9s, 2006 ...................... $ 835 $ 905,975
Comcast Cellular Holdings, Inc.,
9.5s, 2007 .................... 1,560 1,684,800
Comcast Corp., 9.375s, 2005 ..... 4,385 4,693,660
Intermedia Capital Partners IV,
LP, 11.25s, 2006 .............. 2,025 2,222,438
Jones Intercable, Inc., 8.875s,
2007 .......................... 3,150 3,339,000
Outdoor Systems, Inc., 8.875s,
2007 .......................... 1,525 1,608,875
-----------
$14,454,748
-----------
Medical and Health Technology
and Services - 0.4%
Beverly Enterprises, Inc., 9s,
2006 .......................... $ 750 $ 753,750
Quorum Health Group, Inc.,
8.75s, 2005 ................... 1,900 1,881,000
Tenet Healthcare Corp., 8.625s,
2007 .......................... 458 485,480
-----------
$ 3,120,230
-----------
Metals and Minerals - 1.1%
Haynes International, Inc.,
11.625s, 2004 ................. $2,650 $ 2,530,750
Metal Management, Inc., 10s,
2008 .......................... 3,000 1,740,000
P & L Coal Holdings Corp.,
9.625s, 2008## ................ 1,500 1,541,250
Wheeling Pittsburgh Corp., 9.25s,
2007 .......................... 1,700 1,640,500
-----------
$ 7,452,500
-----------
Oil Services - 0.4%
AmeriGas Partners LP, 10.125s,
2007 .......................... $ 600 $ 582,000
Clark USA, Inc., 10.875s, 2005 .. 1,035 970,313
Noble Drilling Corp., 9.125s,
2006 .......................... 850 943,058
-----------
$ 2,495,371
-----------
Oils - 0.1%
Continental Resources, Inc.,
10.25s, 2008## ................ $1,000 $ 860,000
-----------
Printing and Publishing - 0.1%
Day International Group, Inc.,
11.125s, 2005 ................. $ 600 $ 643,500
Golden Books Publishing, Inc.,
7.65s, 2002** ................. 130 41,713
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Printing and Publishing - continued
Hollinger International Publishing,
Inc., 9.25s, 2007 .............. $ 150 $ 159,000
-----------
$ 844,213
-----------
Restaurants and Lodging - 0.5%
Prime Hospitality Corp., 9.75s,
2007 ........................... $1,000 $ 1,000,000
Red Roof Inns, Inc., 9.625s, 2003 2,800 2,800,000
-----------
$ 3,800,000
-----------
Retail - 0.2%
Cole National Group, Inc.,
8.625s, 2007 ................... $1,600 $ 1,584,000
-----------
Special Products and Services - 1.8%
Buckeye Cellulose Corp., 8.5s,
2005 ........................... $1,010 $ 1,040,300
Fairfield Manufacturing Corp.,
11.375s, 2001 .................. 500 507,500
IMO Industries, Inc., 11.75s,
2006 ........................... 2,000 2,040,000
Interlake Corp., 12s, 2001 ....... 1,750 1,863,750
Interlake Corp., 12.125s, 2002 ... 1,925 1,925,000
International Knife & Saw, Inc.,
11.375s, 2006 .................. 450 457,875
Synthetic Industries, Inc., 9.25s,
2007 ........................... 3,250 3,315,000
Thermadyne Manufacturing Llc /
Capital Corp., 9.875s, 2008 .... 1,500 1,406,250
-----------
$12,555,675
-----------
Steel - 1.5%
Alaska Steel Holdings Corp.,
9.125s, 2006 ................... $ 575 $ 603,750
Alaska Steel Holdings Corp.,
10.75s, 2004 ................... 1,460 1,533,000
Commonwealth Aluminum Corp.,
10.75s, 2006 ................... 750 727,500
Kaiser Aluminum & Chemical
Corp., 9.875s, 2002 ............ 2,550 2,575,500
UCAR Global Enterprises, Inc.,
12s, 2005 ...................... 1,400 1,470,000
WCI Steel, Inc., 10s, 2004 ....... 3,350 3,425,375
-----------
$10,335,125
-----------
Stores - 0.2%
Affinity Group Holding, Inc., 11s,
2007 ........................... $ 500 $ 509,375
Musicland Group, Inc., 9.875s,
2008 ........................... 1,150 1,155,750
-----------
$ 1,665,125
-----------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
Supermarkets - 0.1%
Pathmark Stores, Inc., 9.625s,
2003 ........................... $ 605 $ 598,950
-----------
Telecommunications - 7.3%
Adelphia Communications Corp.,
9.875s, 2007 ................... $1,250 $ 1,376,563
Allegiance Telecommunications,
Inc., 12.875s, 2008 ............ 2,200 2,200,000
Americian Cellular Corp., 10.5s,
2008## ......................... 1,400 1,386,000
Chancellor Media Corp., 8.75s,
2007 ........................... 1,220 1,253,550
CSC Holdings, Inc., 9.25s, 2005 .. 750 802,500
Dolphin Telecom PLC, 0s to
2003, 11.5s to 2008## .......... 1,600 480,000
EchoStar Communications Corp.,
0s to 1999, 12.875s to 2004 .... 2,350 2,361,750
EchoStar Satellite Broadcasting
Corp., Principal Stripped, 0s to
2000, 13.125s to 2004 .......... 1,320 1,280,400
Espirit Telecom Group PLC,
10.875s, 2008 .................. 700 686,000
Fox/Liberty Networks LLC, Inc.,
8.875s, 2007 ................... 1,700 1,751,000
Frontiervision Operating
Partnership LP, 11s, 2006 ...... 1,200 1,347,000
Global Crossings Holdings Ltd.,
9.625s, 2008## ................. 1,375 1,467,813
Granite Broadcasting Corp.,
8.875s, 2008 ................... 2,800 2,674,000
Intermedia Communications, Inc.,
0s to 2002, 11.25s to 2007 ..... 1,575 1,114,312
Intermedia Communications, Inc.,
8.875s, 2007 ................... 1,000 982,500
ITC Deltacom, Inc., 11s, 2007 .... 1,195 1,302,550
Lenfest Communications, Inc.,
10.5s, 2006 .................... 2,275 2,576,437
Level 3 Communications, Inc.,
9.125s, 2008 ................... 2,300 2,294,250
Mobile Telecommunication
Technologies Corp., 13.5s,
2002 ........................... 1,200 1,344,000
Nextel Communications, Inc., 0s
to 2003, 9.95s to 2008 ......... 1,450 899,000
Nextel Communications, Inc., 0s
to 1999, 9.75s to 2004 ......... 2,270 2,224,600
Nextel Communications, Inc., 0s
to 2002, 9.75s to 2007 ......... 350 221,375
</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
Nextel International, Inc., 0s to
2003, 12.125s to 2008 ........... $ 2,750 $ 1,292,500
Pagemart Wireless, Inc., 0s to
2003, 11.25s to 2008 ............ 1,250 587,500
RCN Corp., 0s to 2002, 11.125s
to 2007 ......................... 500 287,500
Rogers Cablesystems, Inc.,
10.125s, 2012 ................... 3,050 3,355,000
Spectrasite Holdings, Inc., 0s to
2003, 12s to 2008## ............. 2,750 1,457,500
Sprint Spectrum LP, 0s to 2001,
12.5s to 2006 ................... 1,600 1,456,000
Sprint Spectrum LP, 11s, 2006 ..... 2,125 2,443,750
Telesystem International Wireless,
Inc., 0s to 2002, 10.5s to
2007## .......................... 750 299,063
Time Warner
Telecommunications, Inc.,
9.75s, 2008 ..................... 500 530,000
Triton Pcs, Inc., 0s to 2003, 11s
to 2008 ......................... 2,850 1,339,500
United International Holdings,
Inc., 10.75s, 2008 .............. 3,000 1,755,000
Western Wireless Corp., 10.5s,
2007 ............................ 1,925 2,054,937
WorldCom, Inc., 8.875s, 2006 ...... 1,881 2,066,184
------------
$ 50,950,034
------------
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 .................... 700 757,750
------------
$ 787,750
------------
U.S. Federal Agencies - 4.9%
Financing Corp., 0s, 2014 ......... $13,519 $ 5,659,459
Financing Corp., 10.35s, 2018 ..... 15,100 23,475,819
Israel Aid, 5.89s, 2005 ........... 5,000 5,178,600
------------
$ 34,313,878
------------
U.S. Treasury Obligations - 19.6%
U.S. Treasury Bonds, 3.625s,
2028 ............................ $12,066 $ 11,991,064
U.S. Treasury Bonds, 6.125s,
2027 ............................ 3,500 3,946,810
U.S. Treasury Bonds, 6.375s,
2027 ............................ 10,000 11,579,700
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - continued
U.S. Treasury Obligations - continued
U.S. Treasury Bonds, 9.875s,
2015 ............................ $14,200 $ 21,661,674
U.S. Treasury Bonds, 10.75s,
2005 ............................ 8,000 10,703,760
U.S. Treasury Bonds, 13.375s,
2001 ............................ 20,000 24,393,800
U.S. Treasury Notes, 4s, 2000 ..... 23,000 22,766,320
U.S. Treasury Notes, 5.625s, 2008 28,000 29,785,000
------------
$136,828,128
------------
Utilities - Electric - 0.7%
El Paso Electric Co., 8.9s, 2006 .. $ 400 $ 441,440
Midland Cogeneration Venture
Corp., 10.33s, 2002 ............. 3,857 4,146,646
------------
$ 4,588,086
------------
Utilities - Telephone - 0.3%
Flag Ltd., 8.25s, 2008 ............ $ 2,350 $ 2,361,750
------------
Federal National Mortgage
Association - 1.5%
FNMA, 5s, 2023 .........................$ 3,875 $ 3,527,451
FNMA, 7.725s, 2020 ..................... 38 38,870
FNMA TBA, 6s, 2099 ................ 6,925 6,933,656
------------
10,499,977
------------
Total U.S. Bonds ................ $424,661,774
------------
Foreign Bonds - 36.8%
Argentina - 2.6%
Autopistas Del Sol SA, 10.25s,
2009 (Industrial)## ............. $ 2,500 $ 1,800,000
Republic of Argentina, 11s, 2005 1,800 1,809,000
Republic of Argentina, 11.375s,
2017 ............................ 3,500 3,548,300
Republic of Argentina, 11.75s,
2007## ............................... 2,500 2,175,000
Republic of Argentina, 6.188s,
2005 ................................. 1,880 1,626,200
Republic of Argentina, 9.75s,
2027 ............................ 701 625,642
Telefonica De Argentina SA, 9.125s,
2008 (Telecommunications)## ..... 7,000 6,650,000
------------
$ 18,234,142
------------
Australia - 1.1%
Commonwealth of Australia, 9.5s,
2003 ............................ AUD 10,080 $ 7,556,785
------------
Brazil - 1.8%
Bco Nacional Des, 10.8s, 2008 ..... $ 1,000 $ 857,500
Federal Republic of Brazil, 5s,
2014 ............................ 11,187 7,383,677
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds - continued
Brazil - continued
Federal Republic of Brazil,
6.125s, 2006-2024 ............ $ 5,164 $ 3,691,327
Federal Republic of Brazil, 6.75s,
2001 ......................... 308 287,513
Voto Votorantim Ovs, 8.5s, 2005
(Forest and Paper Products) .. 750 660,000
-----------
$12,880,017
-----------
Canada - 3.1%
PCI Chemicals Canada, Inc.,
9.25s, 2007 (Chemicals) ...... $ 1,200 $ 966,000
Repap New Brunswick, Inc.,
10.625s, 2005 (Forest and
Paper Products) .............. 515 401,700
Government of Canada, 5.25s,
2008 ......................... 13,700 13,741,648
Gulf Canada Resources, 9.25s,
2004 (Oils) .................. 2,590 2,660,008
Metronet Communications Corp.,
0s to 2003, 9.95s to 2008
(Telecommunications) ......... 4,025 2,495,500
Rogers Cantel, Inc., 9.375s, 2008
(Cellular Telephones) ........ 1,000 1,050,000
-----------
$21,314,856
-----------
Colombia - 0.4%
Republic of Colombia, 8.375s,
2027 ......................... $ 3,500 $ 2,546,250
-----------
Denmark - 1.4%
Kingdom of Denmark, 7s, 2007 ... DKK 53,727 $ 9,921,972
-----------
Greece - 0.9%
Hellenic Republic, 5.75s, 2008 . XEU 5,278 $ 6,491,115
-----------
Luxembourg - 0.4%
Millicom International Cellular
Communications Corp., 0s to
2001, 13.5s to 2006 (Cellular
Telephones) .................. $ 3,575 $ 2,511,438
-----------
Mexico - 2.6%
Satelites Mexicanos S.A. De C.V.,
10.125s, 2004
(Telecommunications)## ....... $ 900 $ 749,250
Empresas ICA Sociedad SA, 5s,
2004 (Construction Company) .. 500 310,000
Empresas ICA Sociedad SA,
11.875s, 2001 (Construction
Company) ..................... 2,500 2,543,750
Grupo Industrial Durango SA DE
CV, 12s, 2001 (Industrial) ... 500 467,500
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds - continued
Mexico - continued
Sanluis Corporation, 8.875s,
2008 ......................... $ 2,200 $ 1,782,000
United Mexican States, 6.25s,
2019 ......................... 1,500 1,155,000
United Mexican States, 6.602s,
2019 ......................... 1,000 805,000
United Mexican States, 6.78s,
2002## ........................ 2,000 1,835,000
United Mexican States, 8.625s,
2008 .......................... 4,000 3,760,000
United Mexican States, 11.375s,
2016 ......................... 1,000 1,051,000
United Mexican States, 11.5s,
2026 ......................... 3,250 3,477,500
-----------
$17,936,000
-----------
New Zealand - 5.7%
Government of New Zealand, 8s,
2001-2004 .................... NZD 68,960 $40,099,599
-----------
Panama - 0.7%
Republic of Panama, 7.875s,
2002 .......................... $ 1,500 $ 1,462,500
Republic of Panama, 8.25s, 2008 1,000 955,000
Republic of Panama, 8.875s,
2027 ......................... 2,630 2,459,050
-----------
$ 4,876,550
-----------
Philippines - 0.5%
National Power Corp., 9.625s,
2028 (Utilities-Electric) ..... $ 4,000 $ 3,360,000
-----------
Poland - 0.2%
Republic of Poland, 4s, 2024 .... $ 2,000 $ 1,410,000
-----------
Russia - 0.3%
Russia Principal Loans, 6.625s,
2020+** ....................... $23,500 $ 1,675,550
Vnesheconombank, 6.625s, 2015
(Banks and Credit Companies) 3,995 484,615
Vnesheconombank USSR,
6.625s, 2015 (Banks and
Credit Companies) ............ 1,446 175,418
-----------
$ 2,335,583
-----------
United Kingdom - 14.9%
Colt Telecom Group PLC, 8.875s,
2007 (Telecommunications) ..... DEM 1,000 $ 584,247
Colt Telecommunications Group
PLC, 0s to 2001, 12s to 2006
(Telecommunications) ......... 2,000 1,680,000
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
Bonds - continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds - continued
United Kingdom - continued
Diamond Cable Communications
Corp. PLC, 0s to 2000, 11.75s
to 2005 (Telecommunications) ... $ 2,090 $ 1,745,150
HMV Media Group PLC, 10.25s,
2008 (Retail)## ................ 1,250 1,218,750
Telewest PLC, 9.625s, 2006
(Telecommunications) ........... 1,000 1,045,000
U.K. Treasury, 6.75s, 2004 ....... GBP 5,318 9,689,856
U.K. Treasury, 7.25s, 2007 ....... GBP 4,517 8,859,461
U.K. Treasury, 8.5s, 2005 ........ GBP 26,008 52,275,598
U.K. Treasury, 9s, 2008 .......... GBP 11,887 26,214,323
Bank Of Ayudhya Public Co.
Light, 5.891s, 2006 ............ 1,500 641,250
------------
$103,953,635
------------
Venezuela - 0.2%
Republic of Venezuela - DCB,
6.625s, 2007 ................... $ 2,714 $ 1,560,711
------------
Total Foreign Bonds .................................. $256,988,653
------------
Total Bonds
(Identified Cost, $690,545,671) .................... $681,650,427
------------
Stocks
U.S. Stocks Shares
Real Estate
Atlantic Gulf Communities Corp.
(Identified Cost, $0)##*........ 244 $ 244
Preferred Stock - 1.4%
CSC Holdings, Inc., 11.125%,
(Media) ........................ 77,656 $ 8,775,128
Primedia Inc., 8.625%, (Printing &
Publishing)* ................... 15,000 1,455,015
------------
Total Preferred Stock
(Identified Cost, $7,559,500) $ 10,230,143
------------
Rights
United Mexican States, (Identified
Cost, $0)*...................... 1,538,000 $ 0
Warrants
Republic of Argentina, Expire
9/19/27* ....................... 1,800 $ 7,200
Colt Telecommunications Group
PLC, Expire 12/31/06,
(Telecommunications)##* ........ 500 183,836
Loral Orion Network Systems,
Inc., Expire 1/15/07,
(Telecommunications)* .......... 1,625 13,000
</TABLE>
<TABLE>
<CAPTION>
Issuer Shares Value
<S> <C> <C>
Warrants - continued
Loral Orion Network Systems,
Inc., Expire 1/15/07,
(Telecommunications)* .......... 750 $ 13,500
------------
Total Warrants
(Identified Cost, $131,112) $ 217,536
------------
Repurchase Agreement - 0.9%
<CAPTION>
Principal Amount
(000 Omitted)
Goldman Sachs, dated 11/30/98,
due 12/01/98, total to be
received $6,097,889.15
(secured by various U.S.
Treasury and Federal Agency
obligations in a jointly traded
account), at cost .............. $6,097 $ 6,097,000
------------
Total Investments
(Identified Cost, $704,333,283) $698,195,350
------------
Call Options Written
<CAPTION>
Principal Amount
of Contracts
Issuer/Expiration Month/Strike Price (000 Omitted)
Japanese Yen / U.S. Dollars /
February / 110 ................. JPY 2,665,055 $ (66,626)
------------
Total Call Options Written
(Premiums Received, $307,693) $ (66,626)
------------
Other Assets,
Less Liabilities (247,294)
------------
Net Assets - 100.0% $697,881,430
============
</TABLE>
*Non-income producing security.
**Non-income producing security-in-default.
##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.
<TABLE>
<S> <C>
AUD = Australian Dollars GBP = British Pounds
CAD = Canadian Dollars JPY = Japanese Yen
CHF = Swiss Francs NZD = New Zealand Dollars
DEM = Deutsche Marks XEU = European Currency Unit
DKK = Danish Kroner
</TABLE>
See notes to financial statements
10
<PAGE>
Statement of Assets and Liabilities - November 30, 1998
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $704,333,283) ................................... $698,195,350
Cash .................................................................................... 90,183
Foreign currency, at value (identified cost, $28,349) ................................... 28,321
Net receivable for forward foreign currency exchange contracts to purchase .............. 279,682
Net receivable for forward foreign currency exchange contracts closed or subject to 281,095
master netting agreements
Receivable for investments sold ......................................................... 7,248,376
Interest receivable ..................................................................... 11,453,065
Other assets ............................................................................ 4,752
-------------
Total assets .......................................................................... $717,580,824
-------------
Liabilities:
Payable to dividend disbursing agent .................................................... $ 415,438
Payable for investments purchased ....................................................... 16,157,485
Written options outstanding, at value (premiums received, $307,693) ..................... 66,626
Net payable for forward foreign currency exchange contracts to sell ..................... 2,732,883
Payable to affiliates -
Management fee ......................................................................... 38,819
Transfer and dividend disbursing agent fee ............................................. 12,104
Accrued expenses and other liabilities .................................................. 276,039
-------------
Total liabilities ..................................................................... $ 19,699,394
-------------
Net assets ............................................................................... $697,881,430
=============
Net assets consist of:
Paid-in capital ......................................................................... $710,535,878
Unrealized depreciation on investments and translation of assets and liabilities in (8,074,390)
foreign currencies
Accumulated net realized loss on investments and foreign currency transactions .......... (2,769,720)
Accumulated distributions in excess of net investment income ............................ (1,810,338)
-------------
Total ................................................................................. $697,881,430
=============
Shares of beneficial interest outstanding (90,358,639 shares authorized less 23,220,000 67,138,639
treasury shares) ==========
Net asset value per share (net assets of $697,881,430 [divided by] 67,138,639 shares of 10.39
beneficial interest outstanding) =====
</TABLE>
See notes to financial statements
11
<PAGE>
Statement of Operations - Year Ended November 30, 1998
<TABLE>
<S> <C>
Net investment income:
Income - ................................................................................
Interest ............................................................................... $ 57,427,509
Dividends .............................................................................. 267,873
-------------
Total investment income ............................................................... $ 57,695,382
-------------
Expenses -
Management fee ......................................................................... $ 4,911,486
Trustees' compensation ................................................................. 151,937
Transfer and dividend disbursing agent fee ............................................. 144,289
Administrative fee ..................................................................... 92,016
Custodian fee .......................................................................... 360,103
Auditing fees .......................................................................... 58,981
Printing ............................................................................... 48,974
Postage ................................................................................ 44,163
Legal fees ............................................................................. 8,775
Interest expense ....................................................................... 4,803
Miscellaneous .......................................................................... 359,249
-------------
Total expenses ........................................................................ $ 6,184,776
Fees paid indirectly ................................................................... (160,233)
-------------
Net expenses .......................................................................... $ 6,024,543
-------------
Net investment income ................................................................ $ 51,670,839
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions ............................................................... $ 5,222,954
Written option transactions ........................................................... (504,009)
Foreign currency transactions ......................................................... 8,549,577
Swap transactions ..................................................................... 127,793
-------------
Net realized gain on investments and foreign currency transactions ................... $ 13,396,315
-------------
Change in unrealized appreciation (depreciation) -
Investments ........................................................................... $ (21,645,324)
Written options ....................................................................... 1,248,062
Translation of assets and liabilities in foreign currencies ........................... (9,648,538)
Swap transactions ..................................................................... (228,283)
-------------
Net unrealized loss on investments and foreign currency translation .................. $ (30,274,083)
-------------
Net realized and unrealized loss on investments and foreign currency transactions ... $ (16,877,768)
-------------
Increase in net assets from operations ............................................. $ 34,793,071
=============
</TABLE>
See notes to financial statements
12
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended November 30,
----------------------------------
1998 1997
---------------- -----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income ................................................................... $ 51,670,839 $ 53,626,606
Net realized gain on investments and foreign currency transactions ...................... 13,396,315 6,415,557
Net unrealized gain (loss) on investments and foreign currency translation .............. (30,274,083) 1,589,541
------------- -------------
Increase in net assets from operations ................................................. $ 34,793,071 $ 61,631,704
------------- -------------
Distributions declared to shareholders -
From net investment income .............................................................. $ (51,670,839) $ (53,626,606)
In excess of net investment income ...................................................... (3,307,673) (1,342,926)
------------- -------------
Total distributions declared to shareholders .......................................... $ (54,978,512) $ (54,969,532)
------------- -------------
Net decrease in net assets from Trust share transactions ................................. (6,517,955) (18,048,728)
------------- -------------
Total decrease in net assets .......................................................... $ (26,703,396) $ (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 $(1,810,338) and $(1,319,804), respectively) ........................................ $ 697,881,430 $ 724,584,826
============= =============
</TABLE>
See notes to financial statements
13
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
-----------------------------
Per share data (for shares outstanding 1998 1997
throughout each period): -------------- --------------
<S> <C> <C>
Net asset value - beginning of period ......................... $ 10.69 $ 10.57
-------- --------
Income from investment operations# -
Net investment income ........................................ $ 0.77 $ 0.78
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ............................... (0.25) 0.14
-------- --------
Total from investment operations ............................ $ 0.52 $ 0.92
-------- --------
Less distributions declared to shareholders -
From net investment income ................................... $ (0.77) $ (0.78)
From net realized gain on investments and foreign currency
transactions ................................................ -- --
In excess of net investment income ........................... (0.05) (0.02)
From paid-in capital ......................................... -- --
-------- ----------
Total distributions declared to shareholders ................ $ (0.82) $ (0.80)
-------- ----------
Net asset value - end of period .............................. $ 10.39 $ 10.69
======== ==========
Per share market value - end of period ....................... $9.9375 $ 9.6875
======== ==========
Total return ................................................. 11.30% 9.25%
Ratios (to average net assets)/Supplemental data:
Expenses## .................................................. 0.87% 0.87%
Net investment income ....................................... 7.25% 7.41%
Portfolio turnover ........................................... 174% 180%
Net assets at end of period (000s omitted) ................... $697,881 $724,585
#Per share data for the periods subsequent to November 30, 1993, are based on average shares
outstanding.
##The Trust has an expense offset arrangement which reduces the Trust's custodian
fee based upon the amount of cash maintained by the fund with its custodian and
dividend disbursing agent. For fiscal years ending after September 1, 1995, the Trust's
expenses are calculated without reduction for this expense.
<CAPTION>
Year Ended November 30,
------------------------------------------
Per share data (for shares outstanding 1996 1995 1994
throughout each period): ------------- ------------ -------------
<S> <C> <C> <C>
Net asset value - beginning of period ......................... $ 10.50 $ 9.60 $ 10.68
------- -------- ---------
Income from investment operations# -
Net investment income ........................................ $ 0.76 $ 0.79 $ 0.76
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ............................... 0.14 0.88 (1.07)
-------- -------- ----------
Total from investment operations ............................ $ 0.90 $ 1.67 $ (0.31)
-------- -------- ----------
Less distributions declared to shareholders -
From net investment income ................................... $ (0.83) $ (0.77) $ (0.35)
From net realized gain on investments and foreign currency
transactions ................................................ -- -- (0.03)
In excess of net investment income ........................... -- -- --
From paid-in capital ......................................... -- -- (0.39)
-------- -------- ----------
Total distributions declared to shareholders ................ $ (0.83) $ (0.77) $ (0.77)
-------- -------- ----------
Net asset value - end of period .............................. $ 10.57 $ 10.50 $ 9.60
======== ======== ==========
Per share market value - end of period ....................... $ 9.625 $ 9.125 $ 8.719
======== ======== ==========
Total return ................................................. 15.09% 13.84% (1.35)%
Ratios (to average net assets)/Supplemental data:
Expenses## .................................................. 0.93% 0.92% 0.86%
Net investment income ....................................... 7.38% 7.84% 7.50%
Portfolio turnover ........................................... 146% 183% 153%
Net assets at end of period (000s omitted) ................... $735,971 $786,256 $804,390
</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 nondiversified, closed-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, 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. 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. 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 that the Trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Trust requires
that the securities collateral 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 collateral to ensure that its value, including
accrued interest, 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 on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and
15
<PAGE>
Notes to Financial Statements - continued
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 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 may 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 discount is
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
16
<PAGE>
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 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 accumulated net realized
gains. During the year ended November 30, 1998, $2,817,139 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, 1998, the Trust, for federal income tax purposes, had a capital
loss carryforward of $862,425 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, 2003.
(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
the Trust's average daily net assets and 4.57% of investment income.
The Trust pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain officers and
17
<PAGE>
Notes to Financial Statements - continued
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 $37,485 for the year ended November 30, 1998.
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>
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 ............................ $369,394,608 $391,216,896
============ ============
Investments (non-U.S. government securities) .......... $859,427,971 $805,274,750
============ ============
</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 ........................ $709,034,526
============
Gross unrealized depreciation ......... (35,170,948)
Gross unrealized appreciation ......... $ 24,331,772
------------
Net unrealized depreciation .......... $(10,839,176)
============
</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. Transactions in
Fund shares were as follows:
Class A Shares
- --------------
<TABLE>
<CAPTION>
Year Ended Year Ended
November 30, 1998 November 30, 1997
-------------------------------- -----------------------------------
Shares Amount Shares Amount
------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Treasury shares acquired ......... (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 year ended November
30, 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.
18
<PAGE>
(6) Line of Credit
The Trust and other affiliated Trusts participate in an $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 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, 1998, was $4,948.
(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, swap agreements, 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.
Written Option 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 ............................... 30,697 133,020 67,945 390,591
Japanese Government Bonds .................... 1,320,900 20,295 2,645,300 74,782
Japanese Yen ................................. 13,893,198 1,004,248 -- --
Options terminated in closing transactions -
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)
Swiss Francs/Deutsche Marks .................. (35,023) (244,238) -- --
Options exercised -
Deutsche Marks ............................... (30,697) (133,020) -- --
Japanese Yen ................................. (7,532,057) (651,923) -- --
Options expired -
Japanese Yen ................................. (3,696,086) (44,632) -- --
---------- ---------- ---------- --------
Outstanding, end of period $ 307,693 $ --
========== ========
Options outstanding at end of period consist of:
Japanese Yen ................................. 2,665,055 $ 307,693 -- $ --
---------- ---------- ---------- --------
Outstanding, end of period $ 307,693 $ --
========== ========
</TABLE>
At November 30, 1998, the Trust had sufficient cash and/or securities at least
equal to the value of the written options.
19
<PAGE>
Notes to Financial Statements - continued
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 12/15/98 .......... CAD 41,738,233 $ 27,577,293 $ 27,259,603 $ 317,690
12/15/98 .......... DEM 82,563,296 49,244,576 48,708,481 536,095
12/15/98 .......... DKK 166,535,851 25,799,112 25,844,901 (45,789)
12/15/98 .......... JPY 3,822,023,618 28,098,982 31,085,233 (2,986,251)
12/15/98 .......... NZD 52,798,781 27,183,452 27,738,080 (554,628)
------------ ------------ ------------
$157,903,415 $160,636,298 $ (2,732,883)
============ ============ ============
Purchases 12/15/98 .......... AUD 8,922,475 $ 5,307,088 $ 5,589,376 $ 282,288
12/15/98 .......... CAD 29,488,474 19,122,081 19,259,179 137,098
12/15/98 .......... CHF 34,868,478 25,250,673 24,996,220 (254,453)
12/15/98 .......... DEM 46,737,927 27,938,249 27,573,190 (365,059)
12/15/98 .......... DKK 90,749,788 14,585,777 14,083,570 (502,207)
12/15/98 .......... JPY 4,734,303,749 37,372,599 38,504,978 1,132,379
12/15/98 .......... NZD 12,911,837 6,933,656 6,783,292 (150,364)
------------ ------------ ------------
$136,510,123 $136,789,805 $ 279,682
============ ============ ============
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $2,147,017 with C.S. First
Boston, and a net payable of $487,101 with Deutsche Bank, $1,378,821 with
Merrill Lynch at November 30, 1998.
At November 30, 1998, the Trust had sufficient cash and/or securities to cover
any commitments under these contracts.
(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, 1998,
the Trust owned the following restricted securities (constituting 0.49% 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 Share/Par
Description Acquisition Amount Cost Value
- --------------------------------------- ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Airplane Pass-Through Trust, 3/15/96 3/13/96 225,000 $ 225,000 $ 238,896
Merrill Lynch Mortgage Investors Inc.,
Floating Rate, 6/25/22 6/22/94 1,500,000 1,039,688 1,482,422
Russia Principal Loans, Floating Rate,
12/15/20 12/12/97 23,500,000 14,455,060 1,675,550
----------
$3,396,868
==========
</TABLE>
20
<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, 1998, 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 five 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.
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, 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 November 30, 1998, 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 five years in
the period then ended, in conformity with generally accepted accounting
principles.
[Signature Ernst & Young LLP]
Boston, Massachusetts
January 8, 1999
21
<PAGE>
MFS Prepares for the Year 2000
[MFS Year 2000 graphic]
MFS Investment Management(R) is committed to the effective use of technology in
managing investments, delivering high-quality service to our fund shareholders,
and supporting the financial advisers who sell our products. With that in mind,
we created a separately funded Year 2000 Program Management Office in 1996
composed of a specialized staff reporting directly to MFS senior management.
The Year 2000 (Y2K) problem arose because date fields in computers and software
applications have traditionally used two-digit codes. Since the dawn of the
computer age, the implied first two digits have been "1" and "9." In the year
2000, that can no longer be the case because computer applications may assume
"00" refers to 1900. Our team of dedicated business and technology managers,
working with outside experts, is taking reasonable steps to ascertain the Y2K
compliance of MFS' internal systems. We are also working with our vendors to
seek reasonable assurances that their systems are or will be compliant.
MFS realizes that investors are also concerned about whether the companies in
the Funds' portfolios are addressing their internal Y2K issues. As MFS'
portfolio managers and research analysts meet with the managements of portfolio
companies as part of the MFS(R) Original Research(SM) process, one of the many
factors they may consider is a company's Y2K preparedness.
Year 2000 compliance is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K phenomenon.
While MFS is making an effort to ensure the integrity of its internal systems,
there are significant systems interdependencies in the domestic and foreign
securities markets, external vendor systems, and the internal business
environments of its portfolio companies. There can be no assurance that the
steps MFS has taken will be sufficient to avoid any adverse impact on the Funds.
However, MFS will continue to review and test its internal systems.
22
<PAGE>
MFS(R) 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)
* Affiliated with the Investment Adviser.
(1) Member of Audit Committee.
(2) Member of Portfolio Trading Committee.
[recycle symbol] Printed on recycled paper. MCICE-2-1/99 67M
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
