[logo] M F S(R)
INVESTMENT MANAGEMENT
MFS(R) CHARTER
INCOME TRUST
SEMIANNUAL REPORT o MAY 31, 2002
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 22
Trustees and Officers ..................................................... 30
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MFS(R) PRIVACY POLICY
At MFS(R), we are committed to protecting your privacy.
On behalf of the MFS Family of Funds(R), the MFS(R) Institutional Trusts, the
Vertex(SM) Funds, Massachusetts Financial Services Company, and certain
affiliates(1) (collectively, "MFS," "we," "us" or "our"), this privacy policy
outlines certain of our policies designed to maintain the privacy of your
nonpublic personal information.
Nonpublic personal information includes much of the information you provide to
us and the related information about you and your transactions involving your
MFS investment product or service. Examples of nonpublic personal information
include the information you provide on new account applications for MFS
investment products or services, your share balance or transactional history,
and the fact that you are a customer of MFS.
We may collect nonpublic personal information about you from the following
sources:
o information we receive from you on applications or other forms
o information about your transactions with us, our affiliates, or others, and
o information we receive from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may disclose all of
the information we collect, as described above, to companies that perform
marketing services on our behalf or to other financial institutions with whom
we have joint marketing arrangements.
We restrict access to nonpublic personal information about you to personnel
who are necessary or appropriate to provide products or services to you. We
maintain physical, electronic, and procedural safeguards that comply with
federal regulations to guard your nonpublic personal information.
Our privacy policy applies only to individual MFS investors who have a direct
relationship with us. If you own MFS products or receive MFS investment
services in the name of a third-party broker-dealer, bank, investment adviser
or other financial service provider, that third-party's privacy policies may
apply to you and our privacy policy may not.
If you have any questions with respect to MFS' privacy policy, please call
1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time.
(1) MFS Institutional Advisors, Inc., Vertex Investment Management, Inc., MFS
Original Research Advisors, LLC, MFS Original Research Partners, LLC, and
MFS(R) Heritage Trust Company(SM).
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
Despite a fourth-quarter rally in 2001, the market volatility we witnessed
over the past two years has continued into 2002. As I write this in mid-June,
most U.S. equity indices have retreated since December; bond performance has
been decidedly mixed year to date; and many international equity indices have
outperformed the U.S. market this year. Federal Reserve Board (Fed) Chairman
Alan Greenspan has declared that, in fact, the recession is over, and many
financial experts have agreed with him. We think the questions on many
investors' minds are:
o Is the recession genuinely over?
o If it is, should I change my portfolio to prepare for a recovery?
THE WORST SEEMS TO BE OVER
According to many economists, the recession is technically over. We are
beginning to see growth again in the U.S. economy and in economies around the
globe. But we would qualify that with a caution that the exciting growth rates
of the 1990s are not coming back any time soon.
Our view of the situation is that corporate profits still look weak, despite
the recession being over. We think the markets may be bumping along the bottom
for a bit longer before a recovery gathers steam. Firms in many industries are
still dogged by excess capacity built up in the 1990s, and we think that may
slow the growth of corporate profits for a while longer. Our analysts and fund
managers talk frequently with corporate managements; a common theme they have
seen lately is a wait-and-see attitude. Corporations are postponing spending
decisions until their own business improves.
SHOULD I CHANGE MY PORTFOLIO?
Should you be adjusting your portfolio to anticipate an eventual recovery?
This is a question best discussed with your investment professional. However,
we would contend that changing one's portfolio in response to short-term
events, known as market timing, is a strategy that few investors have been
able to execute successfully over the long term. Our experience has been that
a long-term financial plan, developed with the help of an investment
professional, may offer a better chance of riding out economic cycles and
working toward your long-term investment goals.
Recent events, we think, offer evidence to support that view. For example, two
traditional elements of a long-term financial plan are setting reasonable
expectations and diversifying among asset classes -- such as growth stocks,
value stocks, and bonds.
In the late 1990s, it was tempting to raise our long-term expectations as we
experienced several years of over-20% growth in equity markets. News stories
often suggested this was the new norm, declaring that a "new economy" had
vanquished the "old economy" -- and its historical average annual returns that
had been closer to 10% for stocks.
Adjusting one's financial plan to agree with that view, however, could have
proven disastrous over the past few years. Yes, the Standard & Poor's 500 Stock
Index (the S&P 500), a commonly used measure of the broad stock market, returned
an average of 28.6% per year for the years 1995 through 1999. But the same index
returned -10.5% annually for the years 2000 through 2001.(1) A look at history
might have prepared an investor for more realistic long-term returns. For
example, for the 50-year period ended May 31, 2002, which includes the up and
down periods just mentioned, the average annual return for the S&P 500 was
11.8%.(2)
In addition to unrealistic expectations, another investment trap of the 1990s
was believing that growth stocks would always reign supreme. A financial plan
that included a range of asset classes, however -- recognizing that individual
asset classes frequently go in and out of favor -- could have helped an
investor over the past two difficult years, when both bonds and value stocks
significantly outperformed growth stocks.(3)
We should, however, note that if your personal situation or financial goals
change, your financial plan may need to change as well. For that reason, we
suggest that you and your investment professional revisit your long-term plan
regularly to assess your progress and make course corrections as necessary.
DEJA VU
The points we've just made, of course, are familiar to most investors. As
baseball great Yogi Berra said, "This is like deja vu all over again." What's
new, however, is the historical context that validates the old familiar
strategies.
This spring marked the second anniversary of the start of a severe market
downturn that generally is recognized as the worst time for investors since
the 1970s. But the downturn also demonstrated, in our opinion, that short-term
events are significantly less important for investors than tried-and-true
strategies, including sticking to a long-term plan, setting realistic
expectations, and diversifying among asset classes.
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 17, 2002
(1) Source: Lipper Inc.
(2) Source: Thomson Wealth Management.
(3) For the two-year period ended May 31, 2002, bonds, as represented by the
Lehman Brothers Aggregate Bond Index, delivered an average annual return of
10.58%; value stocks, as represented by the Russell 1000 Value Index,
delivered an average annual return of 0.85%; and growth stocks, as
represented by the Russell 1000 Growth Index, delivered an average annual
return of -25.42%. Source: Lipper Inc.
The Lehman Brothers Aggregate Bond Index is unmanaged and is composed of all
publicly issued obligations of the U.S. Treasury and government agencies,
all corporate debt guaranteed by the U.S. government, all fixed-rate
nonconvertible investment-grade domestic corporate debt, and all fixed-rate
securities backed by mortgage pools of the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and
the Federal National Mortgage Association (FNMA). The Russell 1000 Value
Index measures the performance of large-cap U.S. value stocks. The Russell
1000 Growth Index measures the performance of large-cap U.S. growth stocks.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
It is not possible to invest directly in an index.
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Stephen C. Bryant]
Stephen C. Bryant
Dear Shareholders,
For the six months ended May 31, 2002, the trust provided a total return of
3.74% based on its beginning and ending stock market prices and assuming the
reinvestment of any dividends and capital gains distributions paid during the
period. The trust's total return based on its net asset value (NAV) was 1.81%.
During the same period, the trust's benchmarks, the J.P. Morgan Non-dollar
Government Bond Index, the Lehman Brothers Government Bond Index, and the
Lehman Brothers High Yield Bond Index, returned 2.33%, 1.45%, and 2.31%,
respectively. The J.P. Morgan Non-dollar Government Bond Index is an unmanaged
aggregate of actively traded government bonds issued by 12 countries,
excluding the United States, with remaining maturities of at least one year.
The Lehman Brothers Government Bond Index is unmanaged and comprises all
publicly issued debt obligations of the U.S. Treasury, U.S. government
agencies, quasi-federal corporations, and corporate debt guaranteed by the
U.S. government. The Lehman Brothers High Yield Bond Index includes all fixed-
income securities having a maximum quality rating from Moody's Investors
Service of "Ba1," a minimum amount outstanding of $150 million, and at least
one year to maturity. Defaulted bonds are excluded from the index.
At the beginning of the period, short-term interest rates were the lowest they
had been in 40 years, following a series of Federal Reserve Board (Fed) interest
rate cuts designed to stimulate the economy in the face of a recession and the
tragic events of September 11. Since then, a global recovery has started to
unfold, but the recovery has been slower than expected. In the United States,
signals have been mixed. On the one hand, we've seen weak corporate profits,
relatively high unemployment, a growing budget deficit, and a weaker dollar. On
the other hand, retail sales have held up, housing sales have increased, and the
manufacturing sector has been showing signs of strength.
Outside the United States, economies have been rebounding, but growth has still
been slow. Some central banks have begun to tighten monetary policy, and
commodity-based economies have done well. Japan, the world's second-largest
economy, however, has continued to wallow in recession for over a decade,
although many export-driven Japanese companies have started to improve their
performance.
While interest rates were fairly stable over the period, we slightly reduced
the trust's duration (a measure of interest rate sensitivity) in anticipation
of eventual Fed rate hikes. We also increased our allocation to the mortgage-
backed sector. Our over-weighted position in mortgages helped performance over
the period; with the Fed apparently finished lowering rates, mortgage-backed
securities performed well as fewer homeowners prepaid their mortgages in order
to refinance at a lower rate. (Prepayments are generally bad for mortgage
bonds because they force investors to take their proceeds and reinvest them at
lower prevailing interest rates.) In addition, mortgages are considered to be
a high-quality asset in an uncertain environment and thus, there has been
strong demand from banks and other financial institutions.
At the beginning of 2002, we believed the recovery would be slightly stronger
than it has actually been. That belief led us to increase our allocation to
high-grade corporate bonds, favoring companies for which our research had
uncovered improving fundamentals -- particularly firms that were paying down
debt and looked to us like candidates for a credit upgrade. We saw this as an
opportunity to try to increase the yield of the portfolio and to potentially
capture some capital appreciation. However, as investors became more concerned
about the pace of future economic growth and the impact on earnings,
investment-grade corporate bonds as a group underperformed other fixed-income
securities.
During the period, our holdings in the manufacturing sector helped performance,
while some of our high-yield securities in the cable industry underperformed.
There has been a heightened awareness of the need for stronger corporate
governance, and this trend has impacted companies viewed as less diligent.
Although high-grade corporate bonds lagged over the period, we still view them
as very attractive going forward. In an economy that is showing signs of
strength, we think their high yield spreads relative to Treasuries mean that
investors are being paid well to take on the additional risk of corporate debt.
(The principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) That said, we recognize the sector may
experience near-term volatility until corporate earnings in general improve.
Therefore, we remain selective regarding our corporate holdings, favoring very
liquid securities.
Throughout the period, most of our international holdings were hedged back to
dollars and invested mainly in the dollar-bloc countries, including Australia,
New Zealand, and Canada. After a long run, the U.S. dollar began to look
overvalued to us, and indeed the dollar started to slide over the period; in
response, we began to build up our foreign currency holdings. Our currency
positions in Europe, Australia, New Zealand, and Canada appreciated over the
period.
Our emerging market holdings were strong performers, particularly Russian and
Mexican bonds. We believe emerging markets performed well because their geo-
political situations were improving and, as a result, some of these countries
became upgrade candidates. In fact, Mexico's bond rating was upgraded in 2001,
crossing over from below-investment grade to investment grade. (When a bond is
upgraded, it is considered less risky and therefore its price often rises.)
Looking ahead, we believe the Fed is unlikely to raise interest rates while
questions about the recovery continue and inflation around the globe remains
relatively contained. We also feel that the market has priced in more Fed
tightening than we think will eventually occur.
Given these factors, as the period ended we were planning to reduce our
exposure to U.S. Treasuries and maintain our position in mortgage-backed
securities. Although we have already seen significant price appreciation in
the sector, we see mortgages as a defensive play should the Fed begin to raise
interest rates. We also expect to increase our European bond exposure because
we believe the Fed will ultimately be more aggressive in raising rates than
the European Central Bank.
Respectfully,
/s/ Stephen C. Bryant
Stephen C. Bryant
Portfolio Manager
The opinions expressed in this report are those of MFS and are current only
through the end of the period of the report as stated on the cover. These
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.
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PORTFOLIO MANAGER'S PROFILE
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STEPHEN C. BRYANT IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R) (MFS(R)) AND PORTFOLIO MANAGER OF OUR GLOBAL FIXED-INCOME
INSTITUTIONAL PRODUCTS AND THE GLOBAL GOVERNMENTS PORTFOLIOS OF OUR
MUTUAL FUNDS, VARIABLE ANNUITY PRODUCTS, AND CLOSED-END FUNDS. HE IS A
MEMBER OF THE MFS FIXED INCOME STRATEGY GROUP.
HE JOINED MFS IN 1987 AS ASSISTANT VICE PRESIDENT. HE WAS NAMED VICE
PRESIDENT IN 1989, PORTFOLIO MANAGER IN 1992, AND SENIOR VICE PRESIDENT
IN 1993. STEVE IS A GRADUATE OF WESLEYAN UNIVERSITY.
ALL PORTFOLIO MANAGERS AT MFS ARE SUPPORTED BY AN INVESTMENT STAFF OF
OVER 160 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A GLOBAL,
ISSUER-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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NUMBER OF SHAREHOLDERS
As of May 31, 2002, our records indicate that there are 5,384 registered
shareholders and approximately 38,000 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
ADDRESS CHANGE
Please use our new mailing address, effective immediately.
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
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.
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, 2002)
NET ASSET VALUE PER SHARE
November 30, 2001 $9.17
May 31, 2002 $9.02
NEW YORK STOCK EXCHANGE PRICE
November 30, 2001 $8.35
January 22, 2002 (high)* $8.55
March 26, 2002 (low)* $8.04
May 31, 2002 $8.36
*For the period December 1, 2001, through May 31, 2002.
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RISK CONSIDERATIONS
Investments in foreign securities may be unfavorably affected by interest-rate
and currency-exchange-rate changes as well as by market, economic, and
political conditions of the countries where investments are made. There may be
greater returns but also greater risk than with U.S. investments.
The portfolio may invest in derivative securities which may include futures
and options. These types of instruments can increase price fluctuation.
Because the portfolio focuses its investments on companies in a limited number
of sectors, the portfolio is more susceptible to adverse economic, political
or regulatory developments affecting those sectors than is a portfolio that
invests more broadly.
Investments in lower-rated securities may provide greater returns but may have
greater-than-average risk.
As a nondiversified portfolio, the portfolio invests in a limited number of
companies and may have more risk because a change in one security's value may
have a more significant effect on the portfolio's net asset value. An investment
in the portfolio is not a complete investment program.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
These risks may increase share price volatility. Please see the prospectus
for details.
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 $2,500 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. 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.
PORTFOLIO OF INVESTMENTS (Unaudited) -- May 31, 2002
Bonds - 92.4%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Bonds - 63.9%
Advertising & Broadcasting - 0.3%
Paxson Communications Corp., 0s to 2006, 12.25s to 2009 $ 2,305 $ 1,665,363
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Aerospace - 0.3%
Argo Tech Corp., 8.625s, 2007 $ 220 $ 204,600
K & F Industries, Inc., 9.25s, 2007 1,200 1,254,000
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$ 1,458,600
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Airlines
Airplane Pass-Through Trust, 10.875s, 2019 $ 222 $ 89,555
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Apparel & Textiles - 0.2%
Westpoint Stevens, Inc., 7.875s, 2008 $ 1,650 $ 940,500
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Automotive - 0.6%
Ford Motor Credit Co., 7.375s, 2011 $ 3,322 $ 3,439,333
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Banks & Credit Cos. - 2.8%
Credit Suisse First Boston USA, Inc., 6.5s, 2012 $ 1,907 $ 1,924,849
DBS Capital Funding Corp., 7.657s, 2049## 2,334 2,412,740
European Investment Bank, 4s, 2005 5,000 4,969,770
GS Escrow Corp., 7s, 2003 4,942 5,121,197
Midland Cogeneration Venture Corp., 10.33s, 2002 664 662,053
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$ 15,090,609
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Building - 0.9%
AAF-McQuay, Inc., 8.875s, 2003 $ 1,550 $ 1,550,000
American Standard, Inc., 7.375s, 2008 1,050 1,072,312
Nortek, Inc., 8.875s, 2008 1,145 1,160,744
Williams Scotsman, Inc., 9.875s, 2007 1,000 1,000,000
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$ 4,783,056
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Building Materials - 0.2%
CRH America, Inc., 6.95s, 2012 $ 1,057 $ 1,092,674
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Business Services - 1.2%
Iron Mountain, Inc., 8.75s, 2009 $ 1,800 $ 1,827,000
Pierce Leahy Corp., 9.125s, 2007 1,100 1,146,750
Unisystem Corp., 7.875s, 2008 3,300 3,316,500
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$ 6,290,250
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Chemicals
Sterling Chemicals, Inc., 11.25s, 2007** $ 125 $ 17,656
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Consumer Goods & Services - 0.3%
Kindercare Learning Centers, Inc., 9.5s, 2009 $ 855 $ 856,069
Samsonite Corp., 10.75s, 2008 925 786,250
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$ 1,642,319
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Container, Forest & Paper Products - 1.6%
Ball Corp., 8.25s, 2008 $ 2,975 $ 3,094,000
Buckeye Cellulose Corp., 8.5s, 2005 1,010 945,613
Meadwestvaco Corp., 6.85s, 2012 1,010 1,046,592
Silgan Holdings, Inc., 9s, 2009 2,020 2,105,850
Weyerhaeuser Co., 6.75s, 2012## 1,468 1,506,975
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$ 8,699,030
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Corporate Asset-Backed - 2.5%
Commercial Mortgage Acceptance Corp., 5.44s, 2030 $ 3,535 $ 2,596,653
Commercial Mortgage Asset Trust, 6.25s, 2013## 2,500 1,828,711
Morgan Stanley Capital I, Inc., 6.12s, 2031 1,000 834,400
Morgan Stanley Capital I, Inc., 7.756s, 2039 2,000 1,746,344
TIAA Retail Commercial Mortgage Trust, 7.17s, 2032## 6,333 6,683,266
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$ 13,689,374
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Energy - 2.1%
AmeriGas Partners LP, 10.125s, 2007 $ 510 $ 522,750
AmeriGas Partners LP, 8.875s, 2011 2,500 2,612,500
Devon Financing Corp. ULC, 6.875s, 2011 3,037 3,147,371
P&L Coal Holdings Corp., 9.625s, 2008 2,015 2,135,900
Valero Energy Corp., 6.875s, 2012 2,686 2,761,127
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$ 11,179,648
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Financial Institutions - 0.9%
Americo Life, Inc., 9.25s, 2005 $ 300 $ 298,500
General Motors Acceptance Corp., 7s, 2012 4,599 4,724,875
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$ 5,023,375
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Gaming & Hotels - 1.2%
MGM Mirage, 8.375s, 2011 $ 2,775 $ 2,865,187
Park Place Entertainment, Corp., 8.875s, 2008 2,500 2,590,625
Prime Hospitality Corp., 8.375s, 2012## 200 200,500
Starwood Hotels & Resorts, 7.875s, 2012## 800 808,000
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$ 6,464,312
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Internet
Exodus Communications, Inc., 11.625s, 2010** $ 180 $ 30,600
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Machinery - 0.6%
AGCO Corp., 9.5s, 2008 $ 1,750 $ 1,872,500
Terex Corp., 9.25s, 2011 1,405 1,475,250
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$ 3,347,750
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Media - 3.8%
Allbritton Communications Co., 9.75s, 2007 $ 1,500 $ 1,563,750
Chancellor Media Corp., 8.75s, 2007 1,220 1,274,900
Chancellor Media Corp., 8s, 2008 2,000 2,085,000
Echostar DBS Corp., 9.375s, 2009 1,400 1,421,000
Jones Intercable, Inc., 8.875s, 2007 3,150 3,290,049
Lenfest Communications, Inc., 10.5s, 2006 1,900 2,150,629
LIN Televison Corp., 8.375s, 2008 1,000 1,015,000
Time Warner Entertainment, 8.875s, 2012 4,422 4,892,872
Young Broadcasting, Inc., 8.5s, 2008## 2,600 2,626,000
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$ 20,319,200
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Media - Cable - 0.4%
Panamsat Corp., 8.5s, 2012## $ 2,340 $ 2,345,850
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Medical & Health Technology Services - 1.2%
Fisher Scientific International, Inc., 8.125s, 2012## $ 1,320 $ 1,320,000
Tenet Healthcare Corp., 6.375s, 2011 5,048 5,024,850
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$ 6,344,850
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Oil Services - 0.6%
Chesapeake Energy Corp., 8.125s, 2011## $ 1,645 $ 1,645,000
Pemex Project, 9.125s, 2010 1,014 1,116,951
Pemex Project, 8.625s, 2022## 620 630,075
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$ 3,392,026
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Pollution Control - 0.5%
Allied Waste North America, Inc., 10s, 2009 $ 2,500 $ 2,525,000
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Printing & Publishing
Day International Group, Inc., 11.125s, 2005 $ 100 $ 101,125
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Special Products & Services
Thermadyne Manufacturing/Capital Corp., 9.875s, 2008** $ 225 $ 84,375
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Steel - 1.1%
Alaska Steel Corp., 9.125s, 2006 $ 2,725 $ 2,837,406
Commonwealth Aluminum Corp., 10.75s, 2006 750 758,438
Kaiser Aluminum & Chemical Corp., 9.875s, 2049 1,925 1,530,375
WCI Steel, Inc., 10s, 2004 1,260 655,200
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$ 5,781,419
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Supermarkets
Jitney-Jungle Stores of America, Inc., 12s, 2006** $ 260 $ 312
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Telecommunications - 1.9%
Adelphia Communications Corp., 9.875s, 2007 $ 2,400 $ 1,740,000
Fox/Liberty Networks LLC, Inc., 8.875s, 2007 1,700 1,776,500
FrontierVision Holdings LP, 11.875s, 2007 200 166,000
FrontierVision Operating Partnership LP, 11s, 2006 1,200 1,086,000
Granite Broadcasting Corp., 10.375s, 2005 1,537 1,467,835
Granite Broadcasting Corp., 8.875s, 2008 675 607,500
ICG Holdings, Inc., 0s to 2001, 12.5s to 2006** 875 35,000
ITC Deltacom, Inc., 9.75s, 2008 1,330 392,350
Nextel Communications, Inc., 0s to 2002, 9.75s to 2007 350 224,000
Nextlink Communications, Inc., 10.75s, 2009** 1,240 117,800
Triton PCS, Inc., 0s to 2003, 11s to 2008 1,615 1,360,637
WorldCom, Inc., 7.75s, 2027 2,031 974,880
WorldCom, Inc., 6.95s, 2028 1,419 560,505
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$ 10,509,007
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Telecommunications - Wireless - 0.1%
Crown Castle International Corp., 10.75s, 2011 $ 500 $ 430,000
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Telecommunications - Wireline - 1.2%
Charter Communications Holdings, 8.25s, 2007 $ 3,000 $ 2,595,000
Sprint Capital Corp., 6s, 2007 4,277 3,930,135
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$ 6,525,135
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Transportation
Eastern Airlines, Inc., 12.75s, 1996**(+) $ 3,000 $ 30,000
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U.S. Government Agencies - 24.7%
Federal National Mortgage Assn., 6s, 2008 - 2016 $ 5,000 $ 5,252,100
Federal National Mortgage Assn., 6.262s, 2020 7 7,034
Federal National Mortgage Assn., 6.5s, 2014 - 2099 43,089 39,972,949
Financing Corp., 0s, 2014 13,519 6,469,653
Financing Corp., 10.35s, 2018 15,100 21,677,711
Government National Mortgage Assn., 6.5s, 2028 - 2032 23,178 23,617,687
Government National Mortgage Assn., 7s, 2031 - 2032 35,875 37,158,424
------------
$134,155,558
---------------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 9.2%
U.S. Treasury Bonds, 10.75s, 2005 $ 8,000 $ 9,659,360
U.S. Treasury Bonds, 12s, 2013 7,500 10,382,475
U.S. Treasury Bonds, 9.875s, 2015 5,025 7,107,209
U.S. Treasury Bonds, 6.875s, 2025 3,000 3,412,380
U.S. Treasury Bonds, 6.25s, 2030 2,271 2,430,765
U.S. Treasury Notes, 4.625s, 2006 1,671 1,704,938
U.S. Treasury Notes, 6.875s, 2006 8,000 8,809,680
U.S. Treasury Notes, 5s, 2011 6,122 6,110,001
U.S. Treasury Notes, 4.875s, 2012 415 409,680
------------
$ 50,026,488
---------------------------------------------------------------------------------------------------------------
Utilities - Electric - 2.7%
Allegheny Energy Supply, 8.25s, 2012## $ 583 $ 602,845
Firstenegy Corp., 5.5s, 2006 4,620 4,468,557
Niagara Mohawk Power Corp., 5.375s, 2004 2,800 2,828,168
Northwestern Corp., 7.875s, 2007## 1,385 1,378,075
Progress Energy Inc., 5.85s, 2008 5,600 5,546,744
------------
$ 14,824,389
---------------------------------------------------------------------------------------------------------------
Utilities - Telephone - 0.8%
Verizon New York, Inc., 6.875s, 2012 $ 3,907 $ 4,026,750
---------------------------------------------------------------------------------------------------------------
Total U.S. Bonds $346,365,488
---------------------------------------------------------------------------------------------------------------
Foreign Bonds - 28.5%
Algeria
Republic of Algeria, 2.875s, 2004 - 2010 $ 238 $ 217,314
---------------------------------------------------------------------------------------------------------------
Brazil - 1.3%
Banco Nacional de Desenvolvi, 12.262s, 2008 (Banks
and Credit Cos.) $ 2,285 $ 2,088,556
Federal Republic of Brazil, 8s, 2014 3,799 2,844,427
Federal Republic of Brazil, 3.063s, 2024 925 632,469
Federal Republic of Brazil, 8.875s, 2024 1,280 803,200
Federal Republic of Brazil, 10.125s, 2027 110 75,735
Federal Republic of Brazil, 12.25s, 2030 386 314,204
Federal Republic of Brazil, 11s, 2040 545 399,485
------------
$ 7,158,076
---------------------------------------------------------------------------------------------------------------
Bulgaria - 0.7%
National Republic of Bulgaria, 7.5s, 2013## EUR 4,341 $ 3,915,963
---------------------------------------------------------------------------------------------------------------
Canada - 7.8%
Abitibi Consolidated Inc., 8.55s, 2010 (Forest &
Paper Products) $ 1,398 $ 1,469,004
Government of Canada, 5.75s, 2006 CAD 13,009 8,782,843
Government of Canada, 5.25s, 2008 20,173 20,647,146
Government of Canada, 5.5s, 2009 8,800 5,814,016
Government of Canada, 5.5s, 2010 8,618 5,653,422
------------
$ 42,366,431
---------------------------------------------------------------------------------------------------------------
Denmark - 1.6%
Kingdom of Denmark, 6s, 2009 DKK 65,059 $ 8,537,216
---------------------------------------------------------------------------------------------------------------
Dominican Republic - 0.2%
Dominican Republic, 9.5s, 2006## $ 1,072 $ 1,143,020
---------------------------------------------------------------------------------------------------------------
Germany - 4.5%
Federal Republic of Germany, 4.75s, 2008 EUR 26,493 $ 24,427,674
---------------------------------------------------------------------------------------------------------------
Grand Cayman Islands - 0.2%
Pemex Finance Ltd., 9.69s, 2009 (Financial Services) $ 915 $ 1,040,767
---------------------------------------------------------------------------------------------------------------
Italy - 1.0%
Republic of Italy, 5.5s, 2010 EUR 5,746 $ 5,457,741
---------------------------------------------------------------------------------------------------------------
Kazakhstan - 0.2%
Kaztransoil Co., 8.5s, 2006 (Industrial)## $ 1,002 $ 981,960
---------------------------------------------------------------------------------------------------------------
Luxembourg - 0.3%
Mobile Telesystems Finance, 10.95s, 2004 (Financial
Institutions)## $ 1,086 $ 1,110,435
PTC International Finance II S.A., 11.25s, 2009
(Telecommunications) 676 719,940
------------
$ 1,830,375
---------------------------------------------------------------------------------------------------------------
Malaysia - 0.3%
Petroliam Nasional Berhd, 7.75s, 2015 (Oils) $ 970 $ 1,028,408
Petronas Capital Ltd., 7.875s, 2022 (Oils)## 800 805,421
------------
$ 1,833,829
---------------------------------------------------------------------------------------------------------------
Mexico - 0.6%
BBVA Bancomer, 10.5s, 2011 (Banks & Credit Cos.)## $ 800 $ 876,000
Petroleos Mexicanos, 9.5s, 2027 (Oils) 1,408 1,549,797
United Mexican States, 11.5s, 2026 653 848,247
------------
$ 3,274,044
---------------------------------------------------------------------------------------------------------------
Netherlands - 0.1%
PTC International Finance BV, 0s to 2002, 10.75s to
2007 (Telecommunications) $ 392 $ 395,920
---------------------------------------------------------------------------------------------------------------
New Zealand - 3.3%
Government of New Zealand, 8s, 2006 NZD 18,940 $ 9,517,104
Government of New Zealand, 7s, 2009 17,528 8,493,261
------------
$ 18,010,365
---------------------------------------------------------------------------------------------------------------
Panama - 0.4%
Republic of Panama, 9.625s, 2011 $ 1,153 $ 1,178,942
Republic of Panama, 9.375s, 2029 1,091 1,137,368
------------
$ 2,316,310
---------------------------------------------------------------------------------------------------------------
Philippines - 0.2%
Republic of Philippines, 10.625s, 2025 $ 937 $ 1,026,015
---------------------------------------------------------------------------------------------------------------
Russia - 2.0%
Government of Russia, 3s, 2006 $ 390 $ 312,000
Ministry of Finance Russia, 12.75s, 2028+ 3,834 4,715,820
Russian Federation, 3s, 2008 2,524 1,766,800
Russian Federation, 5s, 2030## 5,845 4,199,453
------------
$ 10,994,073
---------------------------------------------------------------------------------------------------------------
South Africa - 0.2%
Republic of South Africa, 7.375s, 2012 $ 915 $ 917,288
---------------------------------------------------------------------------------------------------------------
South Korea - 0.6%
Hanvit Bank, 12.75s, 2010 (Banks and Credit Cos.)## $ 2,500 $ 2,930,910
---------------------------------------------------------------------------------------------------------------
Spain - 1.2%
Kingdom of Spain, 7s, 2005 $ 5,930 $ 6,428,630
---------------------------------------------------------------------------------------------------------------
United Kingdom - 1.8%
Colt Telecom Group PLC, 0s to 2001, 12s to 2006
(Telecommunications) $ 1,000 $ 590,000
Dolphin Telecom PLC, 0s to 2003, 11.50s to 2008
(Telecommunications) 2,350 235
Global Telesystem, Inc., 10.875s, 2008
(Telecommunications) 165 619
Ono Finance PLC, 14s, 2011 (Media) 1,000 380,000
U.K. Treasury, 7.25s, 2007 GBP 5,352 8,564,406
------------
$ 9,535,260
---------------------------------------------------------------------------------------------------------------
Total Foreign Bonds $154,739,181
---------------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $498,863,834) $501,104,669
---------------------------------------------------------------------------------------------------------------
Stocks - 0.1%
---------------------------------------------------------------------------------------------------------------
SHARES
---------------------------------------------------------------------------------------------------------------
U.S. Stocks - 0.1%
Apparel & Textiles - 0.1%
Sind Holdings, Inc.* 5,720 $ 371,800
---------------------------------------------------------------------------------------------------------------
Manufacturing
IKS Corp.* 2,499 $ 3,948
---------------------------------------------------------------------------------------------------------------
Metals & Minerals
Metal Management, Inc.* 93,507 $ 327,275
---------------------------------------------------------------------------------------------------------------
Printing & Publishing
Golden Books Family Entertainment, Inc.* 3,683 $ 74
---------------------------------------------------------------------------------------------------------------
Real Estate
Atlantic Gulf Communities Corp.+* 244 $ 1
---------------------------------------------------------------------------------------------------------------
Total U.S. Stocks $ 703,098
---------------------------------------------------------------------------------------------------------------
Foreign Stocks
United Kingdom
Colt Telecom Group PLC (Telecommunications)* 1,256 $ 3,466
---------------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $4,668,987) $ 706,564
---------------------------------------------------------------------------------------------------------------
Preferred Stock - 0.6%
---------------------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 11.125s (Media) 29,828 $ 2,684,520
Primedia, Inc., 8.625s (Printing and Publishing) 15,000 571,875
---------------------------------------------------------------------------------------------------------------
Total Preferred Stock (Identified Cost, $3,506,146) $ 3,256,395
---------------------------------------------------------------------------------------------------------------
Warrants
---------------------------------------------------------------------------------------------------------------
Loral Orion Network Systems, Inc., Expire 1/15/07
(Telecommunications)* 1,625 $ 4,875
Loral Orion Network Systems, Inc., Expire 1/15/07
(Telecommunications)* 750 3,750
Ono Finance PLC (Media)* 1,000 125
---------------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $167,394) $ 8,750
---------------------------------------------------------------------------------------------------------------
Repurchase Agreement - 7.3%
---------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
---------------------------------------------------------------------------------------------------------------
Merrill Lynch Repo Treasury, dated 05/31/02, due 06/
03/02, total to be received $39,546,964 (secured by
various U.S. Treasury and Federal Agency
obligations in a jointly traded account), at Cost $ 39,541 $ 39,541,000
---------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $546,747,361) $544,617,378
Other Assets, Less Liabilities - (0.4)% (2,214,223)
---------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $542,403,155
---------------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
(+) Security valued by or at the direction of the management company.
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 EUR = Euro
CAD = Canadian Dollars GBP = British Pounds
CHF = Swiss Francs NZD = New Zealand Dollars
DKK = Danish Kronor
See notes to financial statements.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
-------------------------------------------------------------------------------
MAY 31, 2002
-------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $546,747,361) $544,617,378
Cash 263
Investment of cash collateral for securities loaned, at
identified cost and value 41,488,476
Net receivable for forward foreign currency exchange
contracts 1,566,657
Net receivable for forward foreign currency exchange
contracts subject to master netting agreements 694,261
Receivable for investments sold 658,853
Interest receivable 8,487,950
Other assets 4,752
------------
Total assets $597,518,590
------------
Liabilities:
Collateral for securities loaned, at value $ 41,488,476
Payable to dividend disbursing agent 239,698
Payable for investments purchased 6,522,732
Net payable for forward foreign currency exchange
contracts 4,208,858
Net payable for forward foreign currency exchange
contracts subject to master netting agreements 2,167,405
Payable to affiliates -
Management fee 9,465
Transfer and dividend disbursing agent fee 8,718
Administrative fee 262
Accrued expenses and other liabilities 469,821
------------
Total liabilities $ 55,115,435
------------
Net assets $542,403,155
============
Net assets consist of:
Paid-in capital $634,528,644
Unrealized depreciation on investments and translation of
assets and liabilities in foreign currencies (6,148,536)
Accumulated net realized loss on investments and foreign
currency transactions (78,092,027)
Accumulated distributions in excess of net investment
income (7,884,926)
------------
Total $542,403,155
============
Shares of beneficial interest outstanding
(64,755,283 shares authorized less 4,601,344 treasury
shares) 60,153,939
==========
Net asset value per share
(net assets of $542,403,155 / 60,153,939 shares of
beneficial interest outstanding) $9.02
=====
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
-------------------------------------------------------------------------------
SIX MONTHS ENDED MAY 31, 2002
-------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 18,716,492
Dividends 492,420
------------
Total investment income $ 19,208,912
------------
Expenses -
Management fee $ 1,785,880
Trustees' compensation 88,840
Transfer and dividend disbursing agent fee 50,624
Administrative fee 39,534
Custodian fee 186,296
Investor communication expense 166,200
Auditing fees 19,200
Printing 17,153
Postage 14,177
Legal fees 1,019
Miscellaneous 52,026
------------
Total expenses $ 2,420,949
Fees paid indirectly (26,667)
------------
Net expenses $ 2,394,282
------------
Net investment income $ 16,814,630
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(19,703,385)
Written option transactions 4,756
Foreign currency transactions 1,987,643
------------
Net realized loss on investments and foreign currency
transactions $(17,710,986)
------------
Change in unrealized appreciation (depreciation) -
Investments $ 15,265,784
Translation of assets and liabilities in foreign
currencies (6,353,122)
------------
Net unrealized gain on investments and foreign
currency translation $ 8,912,662
------------
Net realized and unrealized loss on investments and
foreign currency $ (8,798,324)
------------
Increase in net assets from operations $ 8,016,306
============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2002 NOVEMBER 30, 2001
(UNAUDITED)
----------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 16,814,630 $ 40,604,777
Net realized loss on investments and foreign currency
transactions (17,710,986) (27,452,873)
Net unrealized gain on investments and foreign currency
translation 8,912,662 27,235,691
------------ ------------
Increase in net assets from operations $ 8,016,306 $ 40,387,595
------------ ------------
Distributions declared to shareholders -
From net investment income $(17,960,730) $(39,103,342)
From paid-in capital -- (3,061,532)
------------ ------------
Total distributions declared to shareholders $(17,960,730) $(42,164,874)
------------ ------------
Net decrease in net assets from trust share
transactions $ (4,266,557) $ (2,713,656)
------------ ------------
Total decrease in net assets $(14,210,981) $ (4,490,935)
Net assets:
At beginning of period 556,614,136 561,105,071
------------ ------------
At end of period (including accumulated distributions in
excess of net investment income of $7,884,926 and
$6,738,826, respectively) $542,403,155 $556,614,136
============ ============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Financial Highlights
-------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30,
SIX MONTHS ENDED -------------------------------------------------------------------------
MAY 31, 2002 2001 2000 1999 1998 1997
(UNAUDITED)
-------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 9.17 $ 9.20 $ 9.71 $ 10.39 $ 10.69 $ 10.57
------- ------- ------- ------- ------- -------
Income from investment
operations#(S)(S) -
Net investment income $ 0.28 $ 0.67 $ 0.72 $ 0.72 $ 0.77 $ 0.78
Net realized and unrealized
gain (loss) on investments
and foreign currency (0.13) (0.01) (0.45) (0.65) (0.25) 0.14
------- ------- ------- ------- ------- -------
Total from investment
operations $ 0.15 $ 0.66 $ 0.27 $ 0.07 $ 0.52 $ 0.92
------- ------- ------- ------- ------- -------
Less distributions declared to
shareholders -
From net investment income $ (0.30) $ (0.64) $ (0.61) $ (0.68) $ (0.77) $ (0.78)
In excess of net investment
income -- -- -- -- (0.05) (0.02)
From paid-in capital -- (0.05) (0.17) (0.07) -- --
------- ------- ------- ------- ------- -------
Total distributions
declared to shareholders $ (0.30) $ (0.69) $ (0.78) $ (0.75) $ (0.82) $ (0.80)
------- ------- ------- ------- ------- -------
Net asset value - end of period $ 9.02 $ 9.17 $ 9.20 $ 9.71 $ 10.39 $ 10.69
------- ------- ------- ------- ------- -------
Per share market value - end of
period $8.3600 $8.3500 $8.4375 $8.0625 $9.9375 $9.6875
======= ======= ======= ======= ======= =======
Total return 3.74%++ 6.92% 14.66% (11.88)% 11.30% 9.25%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.89%+ 0.91% 0.93% 0.88% 0.87% 0.87%
Net investment income 6.20%+ 7.18% 7.53% 7.17% 7.25% 7.41%
Portfolio turnover 57% 98% 113% 121% 174% 180%
Net assets at end of period
(000 Omitted) $542,403 $556,614 $561,105 $632,594 $697,881 $724,585
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(S)(S) As required, effective December 1, 2001, the trust has adopted the provisions of the AICPA Audit and Accounting Guide
for Investment Companies and began amortizing premium on debt securities. The effect of this change for the period
ended May 31, 2002 was to decrease net investment income per share by $0.01, increase net realized gains and losses
per share by $0.01, and decrease the ratio of net investment income to average net assets by 0.25%. Per share, ratios,
and supplemental data for the periods prior to December 1, 2001 have not been restated to reflect this change in
presentation.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Charter Income Trust (the trust) is a non-diversified Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a 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, and forward foreign
currency exchange contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data, without exclusive reliance upon exchange or over-the-counter
prices. 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. 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 in
good faith 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 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 - 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 trust 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.
Security Loans - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash and U.S. Treasury securities in an amount
at least equal to the market value of the securities loaned. State Street
provides the trust with indemnification against Borrower default. The trust
bears the risk of loss with respect to the investment of cash collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
At May 31, 2002, the value of securities loaned was $40,659,028. These loans
were collateralized by cash of $41,488,476, which was invested in the
following short-term obligations:
PRINCIPAL AMORTIZED COST
AMOUNT AND VALUE
--------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio $41,488,476 $41,488,476
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 foreign currency exchange 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.
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 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 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 only distributions in excess of tax basis earnings and profits are
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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, mortgage-backed securities, derivatives,
real estate investment trusts, defaulted bonds, capital losses, and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended November 30,
2001 and November 30, 2000 was as follows:
NOVEMBER 30, 2001 NOVEMBER 30, 2000
------------------------------------------------------------------------------
Distributions declared from:
Ordinary income $39,103,342 $37,986,926
Tax return of capital 3,061,532 10,263,801
----------- -----------
Total distributions declared $42,164,874 $48,250,727
=========== ===========
As of November 30, 2001, the components of accumulated losses on a tax basis
were as follows:
Undistributed ordinary income $ --
Undistributed long-term capital gain --
Capital loss carryforward (56,160,258)
Unrealized loss (23,722,255)
Other temporary differences (2,298,552)
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on:
EXPIRATION DATE
-------------------------------------------------------------
November 30, 2003 $ (862,425)
November 30, 2007 (18,771,920)
November 30, 2008 (14,734,304)
November 30, 2009 (21,791,609)
------------
Total $(56,160,258)
============
(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 the compensation of the Independent Trustees in the form of
both a retainer and attendance fees and 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). On January 1, 2002, the Trustees
terminated the Independent Trustee unfunded defined benefit plan for active
Trustees and converted it to an unfunded retirement benefit deferral plan for
active Trustees. Under the new plan, the unfunded pension liability was
converted into an equivalent value of notional shares of the trust that will
fluctuate with the performance of the trust.
Administrator - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder communications,
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:
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 $108,507,262 $103,259,247
------------ ------------
Investments (non-U.S. government securities) $186,257,193 $215,864,949
------------ ------------
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 $551,403,316
------------
Gross unrealized depreciation $(21,387,567)
Gross unrealized appreciation 14,601,629
------------
Net unrealized depreciation $ (6,785,938)
============
(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. The Trustees have
authorized 64,755,283 full and fractional shares of beneficial interest.
Transactions in trust shares were as follows:
SIX MONTHS ENDED YEAR ENDED
MAY 31, 2002 NOVEMBER 30, 2001
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
--------------------------------------------------------------------------------------------------------
Treasury shares required (518,500) $(4,266,557) (316,600) $(2,713,656)
-------- ----------- - ------ -----------
Net decrease (518,500) $(4,266,557) (316,600) $(2,713,656)
======== =========== ======== ===========
In accordance with the provisions of the trust's prospectus, 518,500 shares of
beneficial interest were purchased by the trust during period ended May 31,
2002 at an average price per share of $8.23 and a weighted average discount of
9.01% per share. The trust repurchased 316,600 shares of beneficial interest
during the year ended November 30, 2001, at an average price per shares of
$8.57 and a weighted average discount of 7.84% per share.
(6) Line of Credit
The trust and other affiliated funds participate in an $800 million 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 period
ended May 31, 2002, was $2,905. 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, 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
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------------------------------------------------------------
Outstanding, beginning of period -- $ --
Options written 1 4,756
Options expired (1) (4,756)
-- ------
Outstanding, end of period -- $ --
== ======
Forward Foreign Currency Exchange Contracts
NET UNREALIZED
CONTRACTS TO IN EXCHANGE CONTRACTS AT APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE FOR VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
SALES 6/18/02 AUD 10,502,429 $ 5,433,585 $ 5,931,153 $ (497,568)
6/18/02 CAD 38,644,623 24,495,965 25,296,447 (800,482)
6/18/02 CHF 15,575,948 9,852,271 9,932,665 (80,394)
6/18/02 DKK 65,191,845 7,658,367 8,188,099 (529,732)
6/18/02 GBP 5,918,145 8,374,175 8,643,002 (268,827)
6/18/02 NZD 40,490,516 17,310,911 19,342,766 (2,031,855)
----------- ----------- -----------
$73,125,274 $77,334,132 $(4,208,858)
=========== =========== ===========
PURCHASES 6/18/02 AUD 10,694,132 $ 5,734,835 $ 6,039,416 $ 304,581
6/18/02 CAD 29,946,700 18,845,688 19,602,860 757,172
6/18/02 EUR 17,219,384 15,707,383 16,062,954 355,571
6/18/02 NZD 7,700,000 3,529,042 3,678,375 149,333
----------- ----------- -----------
$43,816,948 $45,383,605 $ 1,566,657
=========== =========== ===========
At May 31, 2002, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $694,261 with
UBS Warburg and net payables of $320,864 with Merrill Lynch, and $1,846,541 with
DB Clearing Services.
At May 31, 2002, 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 total assets in securities which
are subject to legal or contractual restrictions on resale. At May 31, 2002,
the trust owned the following restricted securities, excluding securities
issued under Rule 144A, constituting 0.87% 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 the direction of
the Trustees.
DATE OF SHARE
DESCRIPTION ACQUISITION AMOUNT COST VALUE
-----------------------------------------------------------------------------------------------------------------
Atlantic Gulf Communities Corp. 9/25/1995 244 $ 0 $ 1
Ministry of Finance Russia, 12.75s, 2028 3/05/2002 3,834,000 4,542,222 4,715,820
----------
$4,715,821
==========
(9) Change in Accounting Principle
As required, effective December 1, 2001, the fund adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium and accreting market discount on debt securities. Prior to
December 1, 2001, the fund did not amortize premium nor accrete market
discount on debt securities. The cumulative effect of this accounting change
had no impact on total net assets of the fund, but resulted in a $3,800,930
reduction in cost of securities and a corresponding $3,800,930 increase in net
unrealized depreciation, based on securities held by the fund on December 1,
2001.
The effect of this change for the six months ended May 31, 2002 was to
decrease net investment income by $688,255, increase net unrealized
appreciation by $435,171, and increase net realized gains by $253,084. The
Statement of Changes in Net Assets and Financial Highlights for prior periods
have not been restated to reflect this change in presentation.
MFS(R) CHARTER INCOME TRUST
The following tables present certain information regarding the Trustees and
officers of the trust, including their principal occupations, which, unless
specific dates are shown, are of more than five years duration, although the
titles may not have been the same throughout.
NAME, POSITION WITH THE TRUST, AGE, PRINCIPAL OCCUPATION, AND OTHER DIRECTORSHIPS(1)
TRUSTEES
JEFFREY L. SHAMES* (born 06/02/55) Trustee, ABBY M. O'NEILL (born 04/27/28)Trustee
Chairman and President Massachusetts Financial Private investor; Rockefeller Financial Services,
Services Company, Chairman and Chief Executive Inc. (investment advisers), Chairman and Chief
Officer Executive Officer
JOHN W. BALLEN* (born 09/12/59) Trustee LAWRENCE T. PERERA (born 06/23/35) Trustee
Massachusetts Financial Services Company, Hemenway & Barnes (attorneys), Partner
President and Director
WILLIAM J. POORVU (born 04/10/35) Trustee
KEVIN J. PARKE* (born 12/14/59) Trustee Harvard University Graduate School of Business
Massachusetts Financial Services Company, Chief Administration, Adjunct Professor; CBL &
Investment Officer, Executive Vice President and Associates Properties, Inc. (real estate
Director investment trust), Director; The Baupost Fund (a
mutual fund), Vice Chairman and Trustee
LAWRENCE H. COHN, M.D. (born 03/11/37) Trustee
Brigham and Women's Hospital, Chief of Cardiac J. DALE SHERRATT (born 09/23/38) Trustee
Surgery; Harvard Medical School, Professor of Insight Resources, Inc. (acquisition planning
Surgery specialists), President; Wellfleet Investments
(investor in health care companies), Managing
THE HON. SIR J. DAVID GIBBONS, KBE (born 06/15/27) General Partner (since 1993); Paragon Trade
Trustee Brands, Inc. (disposable consumer products),
Edmund Gibbons Limited (diversified holding Director; Cambridge Nutraceuticals (professional
company), Chief Executive Officer; Colonial nutritional products), Chief Executive Officer
Insurance Company Ltd., Director and Chairman; (until May 2001)
Bank of Butterfield, Chairman (until 1997)
ELAINE R. SMITH (born 04/25/46) Trustee
WILLIAM R. GUTOW (born 09/27/41) Trustee Independent health care industry consultant
Private investor and real estate consultant;
Capitol Entertainment Management Company (video WARD SMITH (born 09/13/30) Trustee
franchise), Vice Chairman Private investor; Sundstrand Corporation
(manufacturer of highly engineered products for
J. ATWOOD IVES (born 05/01/36) Trustee industrial and aerospace applications), Director
Private investor; KeySpan Corporation (energy (until June 1999)
related services), Director; Eastern Enterprises
(diversified services company), Chairman, Trustee
and Chief Executive Officer (until November 2000)
(1) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
* "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as
the 1940 Act) which is the principal federal law governing investment companies like the Trust. The
address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
OFFICERS
JEFFREY L. SHAMES (born 06/02/55) Trustee, ROBERT R. FLAHERTY (born 09/18/63) Assistant
Chairman and President Massachusetts Financial Treasurer
Services Company, Chairman and Chief Executive Massachusetts Financial Services Company, Vice
Officer President (since August 2000); UAM Fund Services,
Senior Vice President (prior to August 2000)
JAMES R. BORDEWICK, JR. (born 03/06/59) Assistant
Secretary and Assistant Clerk ELLEN MOYNIHAN (born 11/13/57) Assistant
Massachusetts Financial Services Company, Senior Treasurer
Vice President and Associate General Counsel Massachusetts Financial Services Company, Vice
President (since September 1996)
MARK E. BRADLEY (born 11/23/59) Assistant
Treasurer JAMES O. YOST (born 06/12/60) Assistant Treasurer
Massachusetts Financial Services Company, Vice Massachusetts Financial Services Company, Senior
President (since March 1997) Vice President
STEPHEN E. CAVAN (born 11/06/53) Secretary and
Clerk
Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Secretary
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are
not elected for fixed terms. This means that each Trustee will be elected to hold office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Each officer will hold office until his or her successor is chosen and qualified, or until he or she
retires, resigns or is removed from office.
Messrs. Shames, Cohn, Gibbons, Sherratt and Smith, and Ms. O'Neill have served in their capacity as
Trustee of the Trust continuously since originally elected or appointed. Messrs. Ballen, Gutow, Ives,
Perera and Poorvu, and Ms. Smith were elected by shareholders and have served as Trustees of the Trust
since January 1, 2002. Mr. Parke has served as a Trustee of the Trust since January 1, 2002.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS
or a subsidiary is the investment adviser or distributor and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 117 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request, by calling 1-800-225-2606.
INVESTMENT ADVISER TRANSFER AGENT, REGISTRAR AND
DIVIDEND DISBURSING AGENT
Massachusetts Financial Services Company
500 Boylston Street State Street Bank and Trust Company
Boston, MA 02116-3741 c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-8016
PORTFOLIO MANAGER 1-800-637-2304
Stephen C. Bryant+
CUSTODIAN
State Street Bank and Trust Company
+MFS Investment Management
MFS(R) CHARTER INCOME TRUST ------------
PRSRT STD
[logo] M F S(R) U.S. Postage
INVESTMENT MANAGEMENT Paid
MFS
------------
500 Boylston Street
Boston, MA 02116-3741
(C)2002 MFS Investment Management(R).
500 Boylston Street, Boston, MA 02116.
MCICE-3 7/02 50.5M