<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[Graphic Omitted]
MFS(R) CHARTER
INCOME TRUST
SEMIANNUAL REPORT o MAY 31, 2000
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 20
Notes to Financial Statements ............................................. 24
Trustees and Officers ..................................................... 31
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
I'm sure you've noticed that whenever financial markets suffer a large
decline, as they did very dramatically this past spring, there's a flurry of
information on "how to deal with market volatility" -- both in the popular
press and from those of us in the investment business. Our own thinking on
this is that, first, for long-term investors volatility is not necessarily
something to be feared; occasional volatility may in fact be healthy for the
markets.
Second, our experience has been that when markets begin to fall, it's often
too late to act. The best response may be to do nothing -- if you're properly
prepared with a long-term plan, created with the help of your investment
professional. To help you create or update that plan and take market
volatility in stride, here are some points you may want to consider the next
time you talk with your investment professional.
1. VOLATILITY CAN BE A GOOD THING
We would argue that the markets today are much healthier than they were before
the period of volatility this past spring, in the sense that stock prices have
returned to more reasonable levels and we have a stronger base for future
growth. Perhaps the worst of the market's wrath descended on companies with
very high stock prices, relative to their earnings, or with business concepts
that looked great in the euphoria of a booming market but in the end appeared
to have no fundamental backing. It has always been our view that one of the
best protections against market volatility is to invest in stocks and bonds of
fundamentally good companies selling at reasonable prices. When discussing
potential investments with your investment professional, you may want to ask
how they fared in previous periods of volatility, as well as in the good
times.
2. INVEST FOR THE LONG TERM
You've heard that before, but we think it's still probably the most important
concept in investing. Time is one of an investor's greatest allies. Over
nearly all long-term periods -- five, 10, 20 years, and more -- stock and bond
returns, as represented by most common indices, have been positive and
have considerably outpaced inflation. Investing is the best way we know of to
make your money work for you while you're doing something else.
Where investors can get into trouble is by confusing investing with trading.
In our view, traders who buy securities with the intention of selling them at
a profit in a matter of hours, days, or weeks are gambling. We believe this
seldom turns out to be a good strategy for increasing your wealth.
3. INVEST REGULARLY
Waiting for the "right time" to invest is almost always a poor strategy, because
only in retrospect do we know when that right time really was. Periods of
volatility are probably the worst times to make an investment decision. Faced
with turmoil in the markets, many investors have opted to simply stay on the
sidelines.
On the other hand, we think one of the best techniques for investing is
through automatic monthly or quarterly deductions from a checking or savings
account. This approach has at least three major benefits. First, you can
formulate a long-term plan -- how much to invest, how often, and
into which portfolios -- in a calm, rational manner, working with your
investment professional. Second, with this approach you invest regularly
without agonizing over the decision each time you buy shares. And, third,
if you invest equal amounts of money at regular intervals, you'll be taking
advantage of a strategy called dollar-cost averaging: by investing a fixed
amount while the share cost fluctuates, you end up with an average share cost
to you that is lower than the average share price over your investment
period.(1) If all this sounds familiar, it's probably because you're already
taking advantage of dollar-cost averaging by investing regularly for
retirement through a 401(k) or similar account at work.
4. DIVERSIFY
One of the dangers of not having an investment plan is that you may be tempted
to simply chase performance, by moving money into whatever asset class appears
to be outperforming at the moment -- small, mid, or large cap; growth or
value; United States or international; stocks or bonds. The problem with this
approach is that by the time a particular area is generally recognized as
"hot," you may have already missed some of the best performance.
International investing offers a case in point. In the 1980s, international
investments, as represented by the Morgan Stanley Capital International (MSCI)
Europe, Australia, Far East (EAFE) Index, outperformed U.S. investments, as
represented by the Standard & Poor's 500 Composite Index (S&P 500), in seven
out of 10 years.(2) For the decade, the MSCI EAFE's average annual performance
was 23%, compared to 18% for the S&P 500. Going into the 1990s, then, an
investor looking only at recent performance might have favored international
investments over U.S. investments.
But the 1990s turned out to be virtually a mirror image of the '80s. Domestic
investments outperformed international investments in seven out of 10 years,
with the S&P 500 returning an average of 18% annually for the decade and the
MSCI EAFE returning a 7% annual average. Looking ahead, however, we are
optimistic about international markets because we feel that many of the same
forces that propelled the current U.S. economic boom -- deregulation,
restructuring, and increased adoption of technology -- have taken root overseas.
The lesson to be learned is that nobody really knows what asset class will be
the next to outperform or how long that performance will be sustained. We
would suggest that one way to potentially profit from swings in the market --
to potentially be invested in various asset classes before the market shifts
in their favor -- is with a diversified portfolio covering several asset
classes.
If you haven't already done so, we encourage you to discuss these thoughts
with your investment professional and factor them into your long-range
financial planning. Hopefully, the next time the markets appear to be going
wild, you'll feel confident enough in your plan to view periods of volatility
as a time of potential opportunity -- or perhaps just a time to sit back and
do nothing.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
June 15, 2000
-------------
(1) For a more complete explanation of dollar-cost averaging and the math
involved, see "ABCs of Investing" in the Investor Education section of our
Web site (www.mfs.com).
(2) Source: Lipper Inc. Decade performance: '80s -- 12/31/79-12/31/89,
'90s -- 12/31/89- 12/31/99. The MSCI EAFE Index is an unmanaged,
market-capitalization- weighted total return index that measures the
performance of the same developed-country global stock markets included in
the MSCI World Index but excludes the United States, Canada, and the South
African mining component. The S&P 500 is a popular, unmanaged index of
common stock total return performance. It is not possible to invest directly
in an index. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
A prospectus containing more complete information on any MFS product,
including all charges and expenses, can be obtained from your investment
professional. Please read it carefully before you invest or send money.
Investments in mutual funds will fluctuate and may be worth more or less upon
redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James T. Swanson]
James T. Swanson
Dear Shareholders,
For the six months ended May 31, 2000, the trust provided a total return of
5.48% based on its beginning and ending stock market prices and assuming the
reinvestment of any distributions paid during the period. The trust's total
return based on its net asset value (NAV) was 2.08%. During the same period,
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, returned -4.61%. In
addition, the Lehman Brothers Government Bond Index, an unmanaged index of
U.S. Treasury and government-agency obligations, and the Lehman Brothers High
Yield Bond Index, an unmanaged index of noninvestment-grade corporate debt,
returned 2.46% and -2.09%, respectively.
Two factors were particularly helpful to the trust during the period. First,
the trust benefited from maintaining a relatively long duration in its U.S.
government security holdings. Duration is a measure of interest-rate
sensitivity; the longer the duration, the more sensitive the trust is to
changes in interest rates. During the period, the U.S. Treasury instituted a
program of using the federal budget surplus to buy back 30-year bonds. Reduced
supply and increased demand helped push bond prices higher and yields lower.
Improvements in productivity also seemed to help reassure investors that
inflation should not be a major problem going forward, another factor that
moved yields on most government bonds lower despite the fact that the Federal
Reserve Board (the Fed) continued to raise short-term interest rates in an
attempt to control growth and inflation.
In addition, the emerging-market debt holdings chosen by our research staff --
about 5% of the portfolio at the end of May -- performed very well. Virtually
all of these investments were U.S. dollar denominated and involved a
combination of Asian and Latin American countries such as South Korea,
Argentina, and Brazil. This sector produced better total returns for the trust
than any other segment of the fixed-income market.
In the U.S. government portion of the trust, Treasury securities predominated,
although we maintained a significant weighting in mortgage-backed securities.
We favored Treasuries over mortgages because we felt that declining interest
rates for Treasury securities would lead to better price appreciation.
(Principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) That strategy worked. Part of our
Treasury allocation included Treasury inflation-protected securities (TIPS).
The principal values of these bonds are indexed to the Consumer Price Index
(CPI). For example, a TIP may initially be worth $1,000 and provide an
interest payment of 4%. After one year, if the CPI rises 3%, the TIP is then
worth $1,030, and the interest payment changes to 4% of $1,030. We felt that
these securities would provide better long-term performance if inflation
picked up and, as it turned out, TIPS performed very well during the period.
The trust's mortgage-backed holdings were focused on those issued by the
Government National Mortgage Association, the Federal Home Loan Corporation,
and by the Federal National Mortgage Association (Fannie Mae). While Fannie
Mae securities were hurt somewhat by questions in the U.S. Congress over the
agency's implied government backing, they rebounded toward the end of the
period.
High-yield bonds encountered difficulties during the period, but our strong
research team selected bonds that did not decline as much as those of the
overall market. We largely avoided cyclical companies -- those whose prospects
rise and fall with the economy -- and instead targeted well-known names in the
telecommunications industry. These bonds held up much better than the rest of
that sector when it struggled late in the first quarter and early in the
second quarter. We also focused some of the trust's high-yield investments in
the media and cable television industries, each of which performed better than
the high-yield market as a whole.
On the international front, in March and April our research led us to believe
that international developed-country markets would not perform as well as U.S.
markets. As a result, we lowered the trust's international weighting and
increased investments in U.S. government bonds, mainly Treasuries. At one
point, about 40% of the trust's assets were invested in "AAA"-rated U.S.
bonds, and the international stake dropped to about 25%. Since that point,
we've shifted the portfolio closer to its neutral weighting of about one-third
in U.S. government securities and one-third in international bonds.
Beyond emerging markets, we concentrated our international investments in
European countries that are expected to join European monetary union (EMU) but
have not yet done so. We chose countries such as the United Kingdom, Denmark,
Greece, and Sweden, all of which we believe have put their economic houses in
order, in terms of fiscal prudence and debt control. The trust was not
invested in Japan because we found yields there to be too low. Overall, we
found that international bonds in developed countries performed poorly due to
the perception that growth is strong and will cause interest rates to rise.
Looking ahead, we believe yields on long-term Treasury bonds will continue to
decline. With no major signs of inflation on the horizon, we think the Fed is
nearing the end of its program of interest-rate hikes. When that program ends,
we believe interest rates should trend downward, so we plan to maintain a
relatively long duration in that portion of the portfolio. In the high-income
area, we intend to avoid cyclical companies because it appears to us that the
U.S. economy is slowing. Instead, we'll rely on our research staff to find
higher-quality companies with solid balance sheets. Finally, our international
developed-country strategy will be to keep duration relatively short because
we believe overseas interest rates will rise, particularly in EMU countries.
At the same time, we think the dollar will begin to weaken against foreign
currencies, a trend from which we hope to benefit. We believe the outlook for
emerging markets is not as uniformly rosy as it was at the beginning of the
period. As a result, it's our intention to pick and choose investments from
countries whose economies are improving, such as Mexico, Brazil, Russia, South
Korea, and the Philippines, and to avoid those like Argentina and Indonesia
whose economies are not.
Respectfully,
/s/ James T. Swanson
James T. Swanson
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current 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.
It is not possible to invest directly in an index.
The portfolio is actively managed, and current holdings may be different.
<PAGE>
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PORTFOLIO MANAGER'S PROFILE
--------------------------------------------------------------------------------
JAMES T. SWANSON IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R). HE IS PORTFOLIO MANAGER OF MFS(R) STRATEGIC INCOME FUND,
MFS(R) GLOBAL GOVERNMENTS SERIES (PART OF MFS(R) VARIABLE INSURANCE
TRUST(SM)), THE STRATEGIC INCOME SERIES OFFERED THROUGH MFS(R)/SUN LIFE
ANNUITY PRODUCTS, AND TWO CLOSED-END FUNDS, MFS(R) CHARTER INCOME TRUST
AND MFS(R) MULTIMARKET INCOME TRUST.
MR. SWANSON JOINED MFS IN 1985 AS VICE PRESIDENT AND WAS NAMED SENIOR
VICE PRESIDENT IN 1989. HE IS A GRADUATE OF COLGATE UNIVERSITY AND THE
HARVARD UNIVERSITY GRADUATE SCHOOL OF BUSINESS ADMINISTRATION. MR.
SWANSON IS A CHARTERED
FINANCIAL ANALYST.
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY
AN INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL
RESEARCH(R), A GLOBAL, SECURITY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING
SECURITIES.
--------------------------------------------------------------------------------
NUMBER OF SHAREHOLDERS
As of May 31, 2000, our records indicate that there are 6,611 registered
shareholders and approximately 39,000 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
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.
<PAGE>
OBJECTIVE: Seeks to maximize current income
NEW YORK STOCK EXCHANGE SYMBOL: MCR
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PERFORMANCE SUMMARY
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(For the six months ended May 31, 2000)
NET ASSET VALUE PER SHARE
November 30, 1999 $9.71
May 31, 2000 $9.48
NEW YORK STOCK EXCHANGE PRICE
November 30, 1999 $8.0625
February 2, 2000 (high)* $8.4375
January 20, 2000 (low)* $7.75
May 31, 2000 $8.125
*For the period December 1, 1999, through May 31, 2000.
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<PAGE>
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
MFS offers a Dividend Reinvestment and Cash Purchase Plan that 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, or if you have any questions, 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.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- May 31, 2000
Bonds - 92.6%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 60.4%
Advertising - 0.3%
World Color Press, Inc., 7.75s, 2009 $ 2,000 $ 1,840,700
------------------------------------------------------------------------------------------------------
Aerospace - 0.9%
Argo Tech Corp., 8.625s, 2007 $ 400 $ 272,000
BE Aerospace, Inc., 9.875s, 2006 2,000 1,795,000
BE Aerospace, Inc., 8s, 2008 1,165 920,350
K & F Industries, Inc., 9.25s, 2007 1,200 1,098,000
United Defense Industries, Inc., 8.75s, 2007 1,350 1,242,000
------------
$ 5,327,350
------------------------------------------------------------------------------------------------------
Airlines
Airplane Pass-Through Trust, 10.875s, 2019+ $ 222 $ 198,718
------------------------------------------------------------------------------------------------------
Automotive - 0.7%
Hayes Wheels International, Inc., 9.125s, 2007 $ 2,340 $ 2,094,300
Lear Corp., 9.5s, 2006 2,000 1,926,420
------------
$ 4,020,720
------------------------------------------------------------------------------------------------------
Banks and Credit Companies - 0.7%
Midland Cogeneration Venture Corp., 10.33s, 2002 $ 2,888 $ 2,943,282
Midland Funding Corp. II, "A", 11.75s, 2005 1,000 1,072,630
------------
$ 4,015,912
------------------------------------------------------------------------------------------------------
Building - 1.1%
AAF - McQuay, Inc., 8.875s, 2003 $ 1,550 $ 1,364,000
American Standard, Inc., 7.375s, 2008 1,050 950,250
Building Materials Corp., 8s, 2007 1,000 855,000
Nortek, Inc., 9.875s, 2004 2,550 2,422,500
UDC Homes, Inc., 14.5s, 2000* 13 7,368
Williams Scotsman, Inc., 9.875s, 2007 1,000 896,250
------------
$ 6,495,368
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Business Services - 1.0%
Iron Mountain, Inc., 10.125s, 2006 $ 375 $ 364,687
Iron Mountain, Inc., 8.75s, 2009 1,800 1,615,500
Pierce Leahy Corp., 9.125s, 2007 1,100 1,028,500
Unisystem Corp., 7.875s, 2008 3,300 3,093,750
------------
$ 6,102,437
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Chemicals - 0.5%
Huntsman ICI Chemicals, 10.125s, 2009 $ 1,250 $ 1,218,750
NL Industries, Inc., 11.75s, 2003 1,185 1,220,550
Sterling Chemicals, Inc., 12.375s, 2006 250 262,500
Sterling Chemicals, Inc., 11.25s, 2007 125 98,750
------------
$ 2,800,550
------------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.3%
Anacomp, Inc., 10.875s, 2004 $ 2,225 $ 1,467,500
------------------------------------------------------------------------------------------------------
Conglomerates - 0.5%
News America Holdings, Inc., 10.125s, 2012 $ 3,000 $ 3,160,020
------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 0.6%
Kindercare Learning Centers, Inc., 9.5s, 2009 $ 855 $ 778,050
Polymer Group, Inc., 9s, 2007 1,525 1,235,250
Samsonite Corp. New, 10.75s, 2008 1,750 1,452,500
------------
$ 3,465,800
------------------------------------------------------------------------------------------------------
Container, Forest and Paper Products - 2.2%
Ball Corp., 8.25s, 2008 $ 2,975 $ 2,737,000
Buckeye Cellulose Corp., 8.5s, 2005 1,010 964,550
Gaylord Container Corp., 9.75s, 2007 1,870 1,514,700
Gaylord Container Corp., 9.875s, 2008 1,045 773,300
Riverwood International Corp., 10.25s, 2006 3,090 2,966,400
Silgan Holdings, Inc., 9s, 2009 2,575 2,446,250
U.S. Timberlands, 9.625s, 2007 2,020 1,747,300
------------
$ 13,149,500
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Corporate Asset Backed - 0.6%
Commercial Mortgage Asset Trust, 7.839s, 2020
(Interest only) $ 60,649 $ 1,959,259
Morgan Stanley Capital I, Inc., 7.776s, 2010 2,000 1,462,579
------------
$ 3,421,838
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Energy - 0.7%
AmeriGas Partners LP, 10.125s, 2007 $ 600 $ 606,000
Clark USA, Inc., 10.875s, 2005 1,035 548,550
Continental Resources, Inc., 10.25s, 2008 1,000 890,000
P&L Coal Holdings Corp., 9.625s, 2008 2,500 2,225,000
------------
$ 4,269,550
------------------------------------------------------------------------------------------------------
Entertainment - 0.1%
American Skiing Co., 12s, 2006 $ 500 $ 421,250
------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 4.1%
FNMA, 6.765s, 2020 $ 8 $ 8,343
FNMA, 7s, 2029 18,979 18,017,726
FNMA, 7s, 2030 1,463 1,388,855
FNMA TBA, 7s, 2029 4,679 4,441,499
------------
$ 23,856,423
------------------------------------------------------------------------------------------------------
Financial Institutions - 0.3%
Americo Life, Inc., 9.25s, 2005 $ 300 $ 270,000
Merrill Lynch Mortgage Investors, Inc., 8.434s, 2022+ 1,500 1,422,188
------------
$ 1,692,188
------------------------------------------------------------------------------------------------------
Gaming and Hotels - 0.2%
Prime Hospitality Corp., 9.75s, 2007 $ 1,000 $ 965,000
------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 4.8%
GNMA, 7.5s, 2022 - 2025 $ 7,027 $ 6,930,491
GNMA, 8s, 2026 - 2030 5,216 5,228,750
GNMA TBA, 7.5s, 2025 - 2027 8,258 8,111,826
GNMA TBA, 8s, 2024 - 2029 7,620 7,643,248
------------
$ 27,914,315
------------------------------------------------------------------------------------------------------
Information, Paging and Technology - 0.4%
Qwest Communications International, Inc., 10.875s, 2007 $ 487 $ 521,066
Qwest Communications International, Inc., 0s to 2003,
8.29s to 2008 2,250 1,725,727
------------
$ 2,246,793
------------------------------------------------------------------------------------------------------
Machinery - 0.3%
Grove Worldwide LLC/Capital, Inc., 9.25s, 2008 $ 1,250 $ 487,500
Numatics, Inc., 9.625s, 2008 1,500 1,140,000
------------
$ 1,627,500
------------------------------------------------------------------------------------------------------
Media - 2.6%
Allbritton Communications Co., 9.75s, 2007 $ 1,500 $ 1,387,500
American Radio Systems Corp., 9s, 2006 835 843,066
Chancellor Media Corp., 8.75s, 2007 1,220 1,220,000
Chancellor Media Corp., 8s, 2008 2,000 1,995,000
Comcast Corp., 9.375s, 2005 3,125 3,273,687
Jones Intercable, Inc., 8.875s, 2007 3,150 3,122,627
Lenfest Communications, Inc., 10.5s, 2006 1,900 2,099,500
Outdoor Systems, Inc., 8.875s, 2007 1,525 1,494,317
------------
$ 15,435,697
------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 0.3%
Quorum Health Group, Inc., 8.75s, 2005 $ 1,900 $ 1,767,000
------------------------------------------------------------------------------------------------------
Metals and Minerals - 0.9%
Haynes International, Inc., 11.625s, 2004 $ 2,650 $ 1,590,000
Metal Management, Inc., 10s, 2008 3,000 2,010,000
Wheeling Pittsburgh Corp., 9.25s, 2007 1,700 1,496,000
------------
$ 5,096,000
------------------------------------------------------------------------------------------------------
Oil Services - 0.1%
Cheasapeake Energy Corp., 9.625s, 2005 $ 375 $ 358,125
------------------------------------------------------------------------------------------------------
Oils - 0.2%
Ocean Energy, Inc., 8.875s, 2007 $ 1,050 $ 1,013,250
------------------------------------------------------------------------------------------------------
Pollution Control - 0.2%
Allied Waste North America, Inc., 10s, 2009 $ 1,500 $ 1,185,000
------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.1%
Day International Group, Inc., 11.125s, 2005 $ 600 $ 588,000
Golden Books Publishing, Inc., 10.75s, 2004 75 37,700
Hollinger International Publishing, 9.25s, 2007 250 242,500
------------
$ 868,200
------------------------------------------------------------------------------------------------------
Retail - 0.3%
J. Crew Operating Corp., 10.375s, 2007 $ 1,000 $ 880,000
Musicland Group, Inc., 9.875s, 2008 1,150 957,375
------------
$ 1,837,375
------------------------------------------------------------------------------------------------------
Special Products and Services - 1.0%
IMO Industries, Inc., 11.75s, 2006 $ 2,000 $ 2,020,000
International Knife & Saw, Inc., 11.375s, 2006 450 269,437
Synthetic Industries, Inc., 13s, 2000 2,600 2,561,000
Thermadyne Manufacturing LLC/Capital Corp., 9.875s, 2008 1,500 1,237,500
------------
$ 6,087,937
------------------------------------------------------------------------------------------------------
Steel - 0.9%
Alaska Steel Holdings Corp., 9.125s, 2006 $ 630 $ 593,775
Commonwealth Aluminum Corp., 10.75s, 2006 750 740,625
Kaiser Aluminum & Chemical Corp., 9.875s, 2002 1,925 1,843,188
Kaiser Aluminum & Chemical Corp., 10.875s, 2006 625 587,500
WCI Steel, Inc., 10s, 2004 1,525 1,433,500
------------
$ 5,198,588
------------------------------------------------------------------------------------------------------
Supermarkets
Jitney-Jungle Stores of America, Inc., 12s, 2006** $ 260 $ 56,875
------------------------------------------------------------------------------------------------------
Telecommunications - 8.0%
Adelphia Communications Corp., 9.875s, 2007 $ 2,400 $ 2,268,000
Allegiance Telecommunications, Inc., 12.875s, 2008 2,200 2,376,000
CSC Holdings, Inc., 9.25s, 2005 750 735,000
Focal Communications Corp., 0s to 2003, 12.125s to 2008 1,175 752,000
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,700 1,632,000
FrontierVision Holdings LP, 0s to 2001, 11.875s to 2007 200 169,500
FrontierVision Operating Partnership LP, 11s, 2006 1,200 1,191,000
Global Crossing Holdings Ltd., 9.625s, 2008 3,375 3,206,250
Global Tele-Systems Ltd., 10.875s, 2008 700 546,000
Granite Broadcasting Corp., 10.375s, 2005 1,680 1,608,600
Granite Broadcasting Corp., 8.875s, 2008 675 575,437
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006 4,100 3,362,000
Intermedia Communications, Inc., 8.875s, 2007 1,000 900,000
Intermedia Communications, Inc., 0s to 2002, 11.25s to 2007 1,575 1,165,500
ITC Deltacom, Inc., 11s, 2007 1,435 1,435,000
ITC Deltacom, Inc., 9.75s, 2008 750 716,250
Level 3 Communications, Inc., 9.125s, 2008 2,300 1,978,000
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 350 248,500
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 1,450 1,000,500
Nextel International, Inc., 0s to 2003, 12.125s to 2008 2,750 1,705,000
Nextlink Communications, Inc., 10.75s, 2009 3,000 2,880,000
NTL Communications Corp., 0s to 2003, 12.375s to 2006 5,275 3,376,000
PSINET, Inc., 11s, 2009 490 443,450
Spectrasite Holdings, Inc., 0s to 2003, 12s to 2008 2,550 1,606,500
Sprint Spectrum LP, 11s, 2006 725 783,471
Sprint Spectrum LP, 0s to 2001, 12.5s to 2006 1,600 1,539,013
Time Warner Telecommunications LLC, 9.75s, 2008 500 465,000
Triton PCS, Inc., 0s to 2003, 11s to 2008 2,690 1,943,525
United International Holdings, Inc., 0s to 2003,
10.75s to 2008 7,650 4,322,250
WorldCom, Inc., 8.875s, 2006 1,881 1,949,356
------------
$ 46,879,102
------------------------------------------------------------------------------------------------------
Telecom - Wire Less - 0.9%
Crown Castle International Corp., 9s, 2011 $ 500 $ 460,000
Voicestream Wire, 10.375s, 2009## 3,000 3,060,000
Western Wireless Corp., 10.5s, 2007 1,925 1,963,500
------------
$ 5,483,500
------------------------------------------------------------------------------------------------------
Telecom - Wire Line - 0.4%
Charter Communication Holdings LLC, 8.25s, 2007 $ 3,000 $ 2,520,000
------------------------------------------------------------------------------------------------------
Transportation
Eastern Airlines, Inc., 11.75s, 1993** $ 5,000 $ 0
Eastern Airlines, Inc., 12.75s, 1996** 3,000 30,000
------------
$ 30,000
------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 9.9%
Federal Home Loan Bank, 7.5s, 2029 $ 4,962 $ 4,831,439
Federal Home Loan Bank, 7.5s, 2030 4,989 4,857,257
Federal Home Loan Mortgage Corp., 6.875s, 2005 19,750 19,327,152
Financing Corp., 0s, 2014 13,519 4,831,826
Financing Corp., 10.35s, 2018 15,100 19,401,084
Israel Aid, 5.89s, 2005 5,000 4,739,500
------------
$ 57,988,258
------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 14.1%
U.S. Treasury Bonds, 13.375s, 2001 $ 20,000 $ 21,484,400
U.S. Treasury Bonds, 10.75s, 2005 8,000 9,418,720
U.S. Treasury Bonds, 9.875s, 2015 5,025 6,692,647
U.S. Treasury Bonds, 3.625s, 2028 6,330 5,952,448
U.S. Treasury Bonds, 6.125s, 2029 5,600 5,573,736
U.S. Treasury Notes, 5.875s, 2004 18,650 18,131,343
U.S. Treasury Notes, 4.25s, 2010 12,149 12,221,085
U.S. Treasury Notes, 6.5s, 2010 3,500 3,551,415
------------
$ 83,025,794
------------------------------------------------------------------------------------------------------
Utilities - Electric
El Paso Electric Co., 8.9s, 2006 $ 235 $ 238,539
------------------------------------------------------------------------------------------------------
Utilities - Telephone - 0.2%
Flag Ltd., 8.25s, 2008 $ 1,400 $ 1,204,000
------------------------------------------------------------------------------------------------------
Total U.S. Bonds $354,732,672
------------------------------------------------------------------------------------------------------
Foreign Bonds - 32.2%
Algeria - 0.6%
Algeria Chase Manhattan, 6.813s, 2004 $ 1,919 $ 1,563,985
Algeria Tranche, 6.813s, 2004+ 2,200 1,677,500
------------
$ 3,241,485
------------------------------------------------------------------------------------------------------
Argentina - 0.5%
Autopistas Del Sol S.A., 10.25s, 2009 (Industrial)## $ 2,500 $ 2,100,000
Republic of Argentina, 6s, 2023 850 566,107
------------
$ 2,666,107
------------------------------------------------------------------------------------------------------
Brazil - 1.1%
Banco Nacional de Desenvolvi, 12.693s, 2008 (Banks
and Credit Cos.)+ $ 1,350 $ 1,221,750
Federal Republic of Brazil, 14.5s, 2009 375 384,849
Federal Republic of Brazil, 7.438s, 2012 731 520,838
Federal Republic of Brazil, 5s, 2014 2,777 1,943,781
Federal Republic of Brazil, 6s, 2024 1,060 646,600
Federal Republic of Brazil, 7.375s, 2024 750 561,562
Federal Republic of Brazil, 12.25s, 2030 1,315 1,163,775
------------
$ 6,443,155
------------------------------------------------------------------------------------------------------
Bulgaria - 0.2%
National Republic of Bulgaria, 7.063s, 2024 $ 1,800 $ 1,359,963
------------------------------------------------------------------------------------------------------
Canada - 1.1%
Gulf Canada Resources Ltd., 9.25s, 2004 (Oils) $ 1,590 $ 1,581,891
Metronet Communications Corp., 0s to 2003, 9.95s to
2008 (Telecommunications) 4,025 3,212,996
PCI Chemicals Canada, Inc., 9.25s, 2007 (Chemicals) 1,200 840,000
Rogers Cantel, Inc., 9.375s, 2008
(Telecommunications) 1,000 1,015,000
------------
$ 6,649,887
------------------------------------------------------------------------------------------------------
Denmark - 1.1%
Kingdom of Denmark, 7s, 2007 DKK 46,531 $ 6,251,210
------------------------------------------------------------------------------------------------------
France - 1.6%
Republic of France, 3.5s, 2004 EUR 3,282 $ 2,884,832
Republic of France, 4s, 2009 8,079 6,811,505
------------
$ 9,696,337
------------------------------------------------------------------------------------------------------
Germany - 5.3%
Federal Republic of Germany, 4.75s, 2008 EUR 11,940 $ 10,795,018
Federal Republic of Germany, 4.5s, 2009 6,729 5,970,284
Federal Republic of Germany, 5.375s, 2010 15,290 14,430,191
------------
$ 31,195,493
------------------------------------------------------------------------------------------------------
Greece - 6.5%
Hellenic Republic, 5.75s, 2008 EUR 5,278 $ 4,912,946
Republic of Greece, 8.9s, 2003 GRD 3,241,000 9,596,214
Republic of Greece, 8.7s, 2005 4,976,000 15,218,243
Republic of Greece, 6s, 2006 3,020,000 8,301,715
------------
$ 38,029,118
------------------------------------------------------------------------------------------------------
Indonesia - 0.1%
Indah Kiat Finance Mauritius Ltd., 10s, 2007 (Paper
& Forest Products) $ 1,155 $ 635,250
------------------------------------------------------------------------------------------------------
Italy - 2.7%
Republic of Italy, 5.5s, 2010 EUR 17,177 $ 16,064,246
------------------------------------------------------------------------------------------------------
Luxembourg - 0.6%
Millicom International Cellular, 0s to 2001, 13.5s to
2006 (Cellular Telephones) $ 3,075 $ 2,613,750
PTC International Finance II S.A., 11.25s, 2009
(Telecommunications) 986 981,070
------------
$ 3,594,820
------------------------------------------------------------------------------------------------------
Mexico - 0.7%
Banco Nacional de Commerce, 7.25s, 2004 (Banks and
Credit Cos.) $ 1,265 $ 1,170,125
Empresas ICA Sociedad S.A., 11.875s, 2001
(Construction) 720 680,400
Empresas ICA Sociedad S.A., 5s, 2004 (Construction) 500 282,500
Nuevo Grupo Iusacell S.A., 14.25s, 2006
(Telecommunications)## 1,000 990,000
Satelites Mexicanos S.A. De CV, 10.125s, 2004
(Telecommunications) 900 581,625
United Mexican States, 11.5s, 2026 113 125,854
------------
$ 3,830,504
------------------------------------------------------------------------------------------------------
Netherlands - 0.2%
United Pan Europe Communication NV, 10.875s, 2009
(Cable Television) $ 1,350 $ 1,120,500
------------------------------------------------------------------------------------------------------
New Zealand - 2.6%
Government of New Zealand, 8s, 2006 NZD 14,820 $ 7,113,078
Government of New Zealand, 7s, 2009 17,528 8,020,020
------------
$ 15,133,098
------------------------------------------------------------------------------------------------------
Philippines - 0.2%
Philippines Republic, 9.875s, 2019 $ 963 $ 760,770
Philippines Republic, 10.625s, 2025 545 448,262
------------
$ 1,209,032
------------------------------------------------------------------------------------------------------
Russia - 0.6%
Russia Principal Loans, 7.938s, 2020+** $ 8,180 $ 2,208,600
Russian Federation, 12.75s, 2028## 1,610 1,239,700
------------
$ 3,448,300
------------------------------------------------------------------------------------------------------
South Korea - 0.1%
Hanvit Bank, 12.75s, 2010 (Banks and Credit Cos.)## $ 455 $ 416,325
------------------------------------------------------------------------------------------------------
Sweden - 0.3%
Kingdom of Sweden, 9s, 2009 SEK 14,000 $ 1,972,675
------------------------------------------------------------------------------------------------------
Turkey
Republic of Turkey, 11.875s, 2030 $ 232 $ 240,990
------------------------------------------------------------------------------------------------------
United Kingdom - 5.9%
Colt Telecommunications Group PLC, 8.875s, 2007
(Telecommunications) DEM 1,000 $ 452,165
Colt Telecommunications Group PLC, 0s to 2001, 12s to
2006 (Telecommunications) $ 2,000 1,715,000
Daiwa PB Ltd., 7.241s, 2049 (Banks and Credit Cos.) 500 430,000
Diamond Cable Communications Corp. PLC, 0s to 2000,
11.75s to 2005 (Telecommunications) 2,090 1,938,475
Dolphin Telecom PLC, 0s to 2003, 11.5s to 2008
(Telecommunications) 1,600 528,000
Dolphin Telecom PLC, 0s to 2004, 14s to 2009
(Telecommunications) 750 251,250
Energis PLC, 9.75s, 2009 (Telecommunications) 1,000 970,000
Telewest Communications PLC, 9.625s, 2006
(Telecommunications) 1,000 937,500
U.K. Treasury, 6.5s, 2003 GBP 2,095 3,180,782
U.K. Treasury, 6.75s, 2004 13,546 21,052,650
U.K. Treasury, 7.25s, 2007 1,809 2,987,094
------------
$ 34,442,916
------------------------------------------------------------------------------------------------------
Venezuela - 0.2%
Republic of Venezuela, 7s, 2007 $ 762 $ 598,092
Republic of Venezuela, 9.25s, 2027 785 488,663
------------
$ 1,086,755
------------------------------------------------------------------------------------------------------
Total Foreign Bonds $188,728,166
------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $589,259,425) $543,460,838
------------------------------------------------------------------------------------------------------
Stocks - 0.1%
------------------------------------------------------------------------------------------------------
SHARES
------------------------------------------------------------------------------------------------------
U.S. Stocks
Printing and Publishing
Golden Books Family Entertainment, Inc.* 3,683 $ 4,143
------------------------------------------------------------------------------------------------------
Real Estate
Atlantic Gulf Communities Corp.##* 244 $ 17
------------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 4,160
------------------------------------------------------------------------------------------------------
Foreign Stocks - 0.1%
United Kingdom - 0.1%
Colt Telecom Group PLC, ADR (Telecommunications)* 1,365 $ 193,830
------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $48,309) $ 197,990
------------------------------------------------------------------------------------------------------
Preferred Stock - 1.9%
------------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 11.125s (Media) 91,546 $ 9,703,876
Primedia, Inc., 8.625s (Printing & Publishing) 15,000 1,275,000
------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $7,559,500) $ 10,978,876
------------------------------------------------------------------------------------------------------
Warrants
------------------------------------------------------------------------------------------------------
Loral Orion Network Systems, Inc., Expire 1/15/07
(Telecommunications)* 1,625 $ 11,37
Loral Orion Network Systems, Inc., Expire 1/15/07
(Telecommunications)* 750 12,750
------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $29,434) $ 24,125
------------------------------------------------------------------------------------------------------
Rights
------------------------------------------------------------------------------------------------------
United Mexican States* (Identified Cost, $0) 3,999,000 $ 0
------------------------------------------------------------------------------------------------------
Call Options Purchased
------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED) VALUE
------------------------------------------------------------------------------------------------------
Japanese Yen/June/103 JPY 2,016,638 $ 0
------------------------------------------------------------------------------------------------------
Total Call Options Purchased (Premiums Paid, $54,821) $ 0
------------------------------------------------------------------------------------------------------
Repurchase Agreement - 3.9%
------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED)
------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 05/31/00, due 06/01/00, total to
be received $22,878,111 (secured by various U.S.
Treasury and Federal Agency obligations in a jointly
traded account), at Cost $ 22,874 $ 22,874,000
------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $619,825,489) $577,535,829
------------------------------------------------------------------------------------------------------
Call Options Written - (0.3)%
------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
------------------------------------------------------------------------------------------------------
Australian Dollars/June/0.6 $ (26,826) $ (1,295,189)
Australian Dollars/May/0.555 (8,808) (246,672)
Euro/August/0.88 (15,336) (42,896)
Japanese Yen/June/103 JPY (2,016,638) 0
Japanese Yen/July/103 (2,083,360) (72,917)
------------------------------------------------------------------------------------------------------
Total Call Options Written (Premiums Received, $1,179,771) $ (1,657,674)
------------------------------------------------------------------------------------------------------
Put Options Written - (0.1)%
------------------------------------------------------------------------------------------------------
Canadian Dollars/June/1.49 CAD (29,278) $ (163,020)
Euro/August/0.96 $ (18,749) (247,904)
------------------------------------------------------------------------------------------------------
Total Put Options Written (Premiums Received, $455,908) $ (410,924)
------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.9% $ 11,410,962
------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $586,878,193
------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
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:
AUD = Australian Dollars GBP = British Pounds
CAD = Canadian Dollars GRD = Greek Drachmas
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NZD = New Zealand Dollars
EUR = Euro SEK = Swedish Krona
See notes to financial statements.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
--------------------------------------------------------------------------------
MAY 31, 2000
--------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $619,825,489) $577,535,829
Cash 36,578
Foreign currency, at value (identified cost, $895,614) 900,086
Net receivable for forward foreign currency exchange
contracts to sell 3,127,615
Receivable for investments sold 179,702
Interest receivable 10,262,926
Receivable for swap agreements 45,805
Other assets 9,172
------------
Total assets $592,097,713
------------
Liabilities:
Payable to dividend disbursing agent $ 327,277
Payable for Fund shares reacquired 135,707
Written options outstanding, at value (premiums
received, $1,635,679) 2,068,598
Net payable for forward foreign currency exchange
contracts to purchase 711,105
Net payable for forward foreign currency exchange
contracts closed or subject to master netting
agreements 1,518,814
Payable to affiliates -
Management fee 12,130
Transfer and dividend disbursing agent fee 10,228
Administrative fee 278
Accrued expenses and other liabilities 435,383
------------
Total liabilities $ 5,219,520
------------
Net assets $586,878,193
============
Net assets consist of:
Paid-in capital $662,727,806
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (41,821,768)
Accumulated net realized loss on investments and
foreign currency transactions (29,063,726)
Accumulated distributions in excess of net investment
income (4,964,119)
------------
Total $586,878,193
============
Shares of beneficial interest outstanding (90,358,639
shares authorized less 28,444,800 treasury shares) 61,913,839
==========
Net asset value per share (net assets of
$586,878,193 / 61,913,839 shares of beneficial
interest outstanding) $9.48
=====
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
-------------------------------------------------------------------------------
SIX MONTHS ENDED MAY 31, 2000
-------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 25,292,141
Dividends 64,680
------------
Total investment income $ 25,356,821
------------
Expenses -
Management fee $ 2,095,538
Trustees' compensation 73,972
Transfer and dividend disbursing agent fee 61,383
Administrative fee 39,913
Custodian fee 238,990
Investor communication expense 101,902
Printing 20,146
Auditing fees 19,200
Postage 14,339
Legal fees 2,153
Miscellaneous 143,340
------------
Total expenses $ 2,810,876
Fees paid indirectly (38,288)
------------
Net expenses $ 2,772,588
------------
Net investment income $ 22,584,233
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(11,033,670)
Foreign currency transactions 3,856,180
------------
Net realized loss on investments and foreign currency
transactions $ (7,177,490)
------------
Change in unrealized appreciation (depreciation) -
Investments $(10,219,405)
Written options (432,919)
Swap transactions 170,832
Translation of assets and liabilities in foreign currencies (476,433)
------------
Net unrealized loss on investments and foreign currency
translation $(10,957,925)
------------
Net realized and unrealized loss on investments and
foreign currency $(18,135,415)
------------
Increase in net assets from operations $ 4,448,818
============
See notes to financial statements.
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
---------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2000 NOVEMBER 30, 1999
(UNAUDITED)
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 22,584,233 $ 48,042,291
Net realized loss on investments and foreign currency
transactions (7,177,490) (23,650,306)
Net unrealized loss on investments and foreign
currency translation (10,957,925) (22,789,453)
------------ ------------
Increase in net assets from operations $ 4,448,818 $ 1,602,532
------------ ------------
Distributions declared to shareholders -
From net investment income $(23,913,045) $(45,333,470)
From paid-in capital -- (4,809,221)
------------ ------------
Total distributions declared to shareholders $(23,913,045) $(50,142,691)
------------ ------------
Net decrease in net assets from Trust share
transactions $(26,251,760) $(16,747,091)
------------ ------------
Total decrease in net assets $(45,715,987) $(65,287,250)
Net assets:
At beginning of period 632,594,180 697,881,430
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income of $4,964,119 and
$3,635,307 respectively) $586,878,193 $632,594,180
============ ============
See notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
SIX MONTHS ENDED ---------------------------------------------------------------
MAY 31, 2000 1999 1998 1997 1996 1995
(UNAUDITED)
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 9.71 $ 10.39 $ 10.69 $ 10.57 $ 10.50 $ 9.60
------- ------- ------- ------- ------- -------
Income from investment
operations# -
Net investment income $ 0.36 $ 0.72 $ 0.77 $ 0.78 $ 0.76 $ 0.79
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.21) (0.65) (0.25) 0.14 0.14 0.88
------- ------- ------- ------- ------- -------
Total from investment
operations $ 0.15 $ 0.07 $ 0.52 $ 0.92 $ 0.90 $ 1.67
------- ------- ------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.38) $ (0.68) $ (0.77) $ (0.78) $ (0.83) $ (0.77)
In excess of net investment
income -- -- (0.05) (0.02) -- --
From paid in capital -- (0.07) -- -- -- --
------- ------- ------- ------- ------- -------
Total distributions
declared to shareholders $ (0.38) $ (0.75) $ (0.82) $ (0.80) $ (0.83) $ (0.77)
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 9.48 $ 9.71 $ 10.39 $ 10.69 $ 10.57 $ 10.50
======= ======= ======= ======= ======= =======
Per share market value - end of
period $8.1250 $8.0625 $9.9375 $9.6875 $ 9.625 $ 9.125
------- ------- ------- ------- ------- -------
Total return 5.48%++ (11.88)% 11.30% 9.25% 15.09% 13.84%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.92%+ 0.88% 0.87% 0.87% 0.93% 0.92%
Net investment income 7.40%+ 7.17% 7.25% 7.41% 7.38% 7.84%
Portfolio turnover 78% 121% 174% 180% 146% 183%
Net assets at end of period
(000 omitted) $586,878 $632,594 $697,881 $724,585 $735,971 $786,256
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
See notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(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 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. The Trust
can invest in foreign securities. 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 and options 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 in good faith, at fair value, by 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 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.
Deferred Trustee Compensation - Effective July 24, 1999, under a Deferred
Compensation Plan (the Plan) independent Trustees may elect to defer receipt
of all or a portion of their annual compensation. Deferred amounts are treated
as though equivalent dollar amounts had been invested in shares of the Trust
or other MFS funds selected by the Trustee. Deferred amounts represent an
unsecured obligation of the Trust until distributed in accordance with the
Plan.
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 option 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. The Trust uses the effective
interest method for reporting interest income on payment-in-kind (PIK) bonds.
Some 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.
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 made directly to the security issuer,
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 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 total expenses on the
Statement of Operations.
Tax Matters and Distributions - The Trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
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 be reported in the financial statements as distributions from paid-in
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, 1999, the Trust, for federal income tax purposes, had a
capital loss carryforward of $19,634,345 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, ($862,425) and November 30,
2007, ($18,771,920).
(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
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 $23,131 for the six months ended May 31, 2000.
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 incurs an administrative fee
at the following annual percentages of the Trust's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
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:
PURCHASES SALES
-------------------------------------------------------------------------------
U.S. government securities $329,231,783 $329,262,885
------------ ------------
Investments (non-U.S. government securities) $128,199,220 $167,874,825
------------ ------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the Trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $622,513,125
------------
Gross unrealized depreciation $(53,117,001)
Gross unrealized appreciation 8,139,705
------------
Net unrealized depreciation $(44,977,296)
============
(5) Shares of Beneficial Interest
The Trustees have authorized 90,358,639 full and fractional shares of
beneficial interest. Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED MAY 31, 2000 YEAR ENDED NOVEMBER 30, 1999
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C> <C>
Treasury shares acquired (3,231,400) $(26,251,760) (1,993,400) $(16,747,091)
---------- ------------ ---------- ------------
Net (decrease) (3,231,400) $(26,251,760) (1,993,400) $(16,747,091)
---------- ------------ ---------- ------------
</TABLE>
In accordance with the provisions of the Trust's prospectus, 3,231,400 shares
of beneficial interest were purchased by the Trust during the six months ended
May 31, 2000, at an average price per share of $8.12 and a weighted average
discount of 16.04% per share. The Trust repurchased 1,993,400 shares of
beneficial interest during the year ended November 30, 1999, at an average
price per share of $8.40 and a weighted average discount of 13.90% per share.
(6) Line of Credit
The Trust and other affiliated funds participate in a $1.1 billion unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. In addition, a commitment fee, based on the average daily unused
portion of the line of credit, is allocated among the participating funds at
the end of each quarter. The commitment fee allocated to the Trust for the six
months ended May 31, 2000, was $2,023. The Trust had no borrowings during the
period.
(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 Option Transactions
NUMBER OF
CONTRACTS PREMIUMS
--------------------------------------------------------------------------------
Outstanding, beginning of period -- $ --
Options written 8 1,635,679
-- ----------
Outstanding, end of period 8 $1,635,679
== ==========
At May 31, 2000, the Trust had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales
6/16/00 AUD 29,803,575 $ 18,145,929 $ 17,006,708 $ 1,139,221
6/16/00 CAD 30,291,002 20,746,478 20,236,509 509,969
6/16/00 DKK 53,884,404 7,036,961 6,741,343 295,618
6/16/00 EUR 40,534,576 37,749,071 37,841,014 (91,943)
6/16/00 JPY 3,962,939,742 37,368,987 36,897,484 471,503
6/16/00 NZD 14,198,656 7,014,136 6,493,238 520,898
6/16/00 SEK 78,735,000 9,060,414 8,778,065 282,349
------------ ------------ -----------
$137,121,976 $133,994,361 $ 3,127,615
------------ ------------ -----------
Purchases 6/16/00 EUR 19,724,106 $ 17,862,137 $ 18,413,420 $ 551,283
6/16/00 JPY 4,729,202,170 45,294,261 44,031,873 (1,262,388)
------------ ------------ -----------
$ 63,156,398 $ 62,445,293 $ (711,105)
------------ ------------ -----------
</TABLE>
At May 31, 2000, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $1,487,986
with C.S. First Boston, and a net payable of $1,559,456 with Merrill Lynch and
$1,447,344 with Deutsche Bank.
At May 31, 2000, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
<TABLE>
Swap Agreements Interest Rate Swaps
<CAPTION>
CASH FLOWS UNREALIZED
NOTIONAL PRINCIPAL CASH FLOWS PAID RECEIVED BY APPRECIATION
EXPIRATION AMOUNT OF CONTRACT BY THE TRUST THE TRUST (DEPRECIATION)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/22/03 SEK 108,800,000 Floating -3M STIBOR Fixed - 4.38% $(360,982)
3/22/03 EUR 11,780,000 Fixed - 3.76% Floating--6M EURIBOR 406,787
---------
$ 45,805
=========
</TABLE>
At May 31, 2000, 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 May 31, 2000,
the Trust owned the following restricted securities, excluding securities
issued under Rule 144A, constituting 1.15% 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, in good faith, at fair value, by
the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARE/PAR
DESCRIPTION ACQUISITION AMOUNT COST VALUE
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Airplane Pass-Through Trust,
10.875s, 3/15/2019 3/13/1996 222,232 $ 222,232 $ 198,718
Algeria Tranche, 6.813s, 10/3/2004 4/13/2000 2,200,000 1,635,778 1,677,500
Banco Nacional de Desenvolvi,
12.693s, 6/16/2008 11/13/1998 1,350,000 1,215,574 1,221,750
Merrill Lynch Mortgage Investors, Inc.,
8.434s, 6/25/2022 6/22/1994 1,500,000 1,039,687 1,422,188
Russia Principal Loans,
7.938s, 12/15/2020 12/12/1997 8,180,000 2,210,477 2,208,600
----------
$6,728,756
==========
</TABLE>
<PAGE>
<TABLE>
MFS(R) CHARTER INCOME TRUST
<S> <C>
TRUSTEES PORTFOLIO MANAGER
Richard B. Bailey+(2) - Private Investor; James T. Swanson*
Former Chairman and Director (until 1991),
MFS Investment Management TREASURER
W. Thomas London*
Marshall N. Cohan+(2) - Private Investor
ASSISTANT TREASURERS
Lawrence H. Cohn, M.D.+(2) - Chief of Cardiac Mark E. Bradley*
Surgery, Brigham and Women's Hospital; Ellen Moynihan*
Professor of Surgery, Harvard Medical School James O. Yost*
The Hon. Sir J. David Gibbons, KBE+(1) - Chief SECRETARY
Executive Officer, Edmund Gibbons Ltd.; Stephen E. Cavan*
Chairman, Colonial Insurance Company, Ltd.
ASSISTANT SECRETARY
Abby M. O'Neill+(2) - Private Investor James R. Bordewick, Jr.*
Walter E. Robb, III+(1) - President and TRANSFER AGENT, REGISTRAR, AND DIVIDEND
Treasurer, Benchmark Advisors, Inc. (corporate DISBURSING AGENT
financial consultants); President, Benchmark State Street Bank and Trust Company
Consulting Group, Inc. (office services) c/o MFS Service Center, Inc.
P.O. Box 9024
Arnold D. Scott* - Senior Executive Vice Boston, MA 02205-9824
President, Director, and Secretary, MFS 1-800-637-2304
Investment Management
CUSTODIAN
Jeffrey L. Shames* - Chairman and Chief State Street Bank and Trust Company
Executive Officer, 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)
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
+ Independent Trustee
* MFS Investment Management
(1) Member of Audit Committee
(2) Member of Portfolio Trading Committee
</TABLE>
<PAGE>
MFS(R) CHARTER INCOME TRUST ------------
BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)2000 MFS Investment Management(R).
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
MCICE-3 7/00 56.7M
