UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5262
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MFS SERIES TRUST VIII
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
James R. Bordewick, Jr.
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) STRATEGIC INCOME FUND 10/31/04
ANNUAL REPORT
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[logo] M F S(R)
INVESTMENT MANAGEMENT
THIS REPORT HAS BEEN PREPARED FOR THE GENERAL INFORMATION OF SHAREHOLDERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
ANNUAL REPORT
LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 5
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MANAGEMENT REVIEW 6
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PERFORMANCE SUMMARY 8
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EXPENSE TABLE 12
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PORTFOLIO OF INVESTMENTS 14
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FINANCIAL STATEMENTS 27
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NOTES TO FINANCIAL STATEMENTS 40
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 55
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TRUSTEES AND OFFICERS 56
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PROXY VOTING POLICIES AND
INFORMATION 60
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QUARTERLY PORTFOLIO DISCLOSURE 60
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FEDERAL TAX INFORMATION 61
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CONTACT INFORMATION BACK COVER
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
For most investors, the main factor in determining long-term success is asset
allocation - how they spread their money among stocks, bonds, and cash. In fact,
the total returns of investors may be more influenced by their asset allocation
strategy than by their security selection within each asset class. The principle
behind asset allocation is simple: by diversifying across a variety of types of
securities, investors reduce the overall risk of their portfolio because gains
in one area are likely to offset losses in another.
One of the dangers of not having an asset allocation plan is the temptation to
simply chase performance, by moving money into whichever asset class appears to
be outperforming at the moment. The problem with this approach is that by the
time a particular area of the market comes into favor, investors may have
already missed some of the best performance. We would suggest that one way to
benefit from swings in the market is to acquire a diversified portfolio so that
investors hold a range of asset classes before the market swings in their
direction.
UNDERSTAND YOUR EMOTIONS
It usually takes a bear market for people to appreciate the benefits of
diversification. At MFS, we believe proper asset allocation is important in all
market environments. But we understand that there are emotional components of
investment decisions that sometimes keep investors from achieving their long
term goals. The three common behaviors that negatively impact investment
decisions are overconfidence, looking backwards, and loss aversion.
o Overconfidence. After experiencing gains in the market, particularly
during a bull market, investors have a natural tendency to overestimate
their own abilities. During the global bull market of the late 1990s, for
example, a large number of investors traded their own stocks and made
significant profits. However, most of these same investors later handed
back those profits - and then some - because they focused more on
short-term blips in the market and less on the fundamental factors that
affect a company's long-term prospects.
o Looking backwards. Although security prices are determined by
expectations about the future, many investors make choices based on the
recent past. Investors who have achieved momentary success in the market
tend to take on too much risk, believing that better- than-average
returns can be easily duplicated. On the other hand, those who have had
negative experiences tend to become overly cautious and take on too
little risk. Recent historical experience tends to dictate an investor's
frame of reference and may lead to irrational decisions.
o Loss aversion. Simply put, investors would rather avoid the immediate
pain of losses than enjoy the future pleasure of gains. As a result, some
investors tend to overreact to short-term downturns in the market by
seeking to mitigate their losses, rather than remaining invested to
benefit from the long-term growth potential of the stock and bond
markets.
THINK LIKE A PROFESSIONAL INVESTOR
Asset allocation helps reduce the emotional factors that tend to affect the
long-term returns of investors. Professional investors - those who manage assets
for money management firms, pension funds, and endowments - have tended to
outperform the average retirement investor because they focus on asset
allocation. For example, the investment performance of the average 401(k)
participant has lagged these professional investors by more than two percentage
points a year, on average, over the past 10 years.(1)
We think asset allocation is one of the most important decisions for investors.
A study of the performance of 91 large U.S. corporate pension plans with assets
of more than $100 million over a 10-year period beginning in 1974 concluded that
asset allocation policies accounted for 93.6% of their returns, while individual
security selection and the timing of their investments accounted for only 6.4%
for their overall performance.(2)
Professional investors target a realistic level of return based on the amount of
risk they are willing to take, then set allocations to meet their goals. On
average, U.S. professional investors allocate 35% to 40% of their assets to
domestic equity stocks; 20% to 30% to fixed income issues; 10% to international
stocks; and between 10% and 20% to other investment classes such as real
estate.(3) And within those categories, they hold a broad range of styles and
asset classes.
In contrast, 401(k) participants who held company stock in their retirement
plans at the end of 2002 had roughly 42% of their retirement assets in company
stock while the rest was allocated to either growth or value stock funds.(4)
These participants virtually ignored the broad range of equity, fixed-income,
and international offerings provided by their retirement plans.
ALLOCATE, DIVERSIFY, REBALANCE
We recommend working with a professional adviser to find an optimal mix of
investments based on your individual goals. In our view, a disciplined asset
allocation strategy is composed of three simple steps: allocate, diversify and
rebalance.
o Allocate. Investors should work with their financial adviser to specify
their long-term goals and tolerance for risk. Then investors should
allocate their assets across the major asset classes - stocks, bonds, and
cash - to help them pursue an investment return that is consistent with
their risk tolerance level.
o Diversify. By diversifying their assets, investors trade some performance
in the top performing categories for a more predictable and stable
portfolio. At the same time, investors should include different
investment styles and market capitalizations of stocks and a range of
fixed-income investments, as well as U.S. and non-U.S. securities.
Because security subclasses tend to move in and out of favor during
various market and economic environments, a broad portfolio increases the
benefits of diversification.
o Rebalance. We suggest that investors consult with their professional
advisers periodically to rebalance their portfolios to maintain the
percentages that they have dedicated to each asset class. Allocations can
shift as markets rise and fall, making for a riskier or more conservative
portfolio than an investor originally intended. For example, a portfolio
of 50% stocks and 50% bonds at the start of 2000 would have shifted to
32% stocks and 68% bonds at the end of 2002 because of the weak stock
market.(5)
In short, these three simple concepts - allocate, diversify and rebalance - help
take emotion out of the investment process and help prevent investors from
trying to outguess the market. An asset allocation strategy cannot turn a down
market cycle into a good one, but it is an invaluable tool to manage risk and
keep investors on track toward reaching their long-term investment goals.
A DISCIPLINED INVESTMENT PROCESS IS PARAMOUNT
Disciplined diversification has helped investors pursue long-term, above-
average results through the years. Since 1924, when we invented the mutual fund,
MFS(R) has strived to give investors the products and tools they need to
maintain well-diversified portfolios. MFS provides a variety of products in each
asset class as well as a family of asset allocation funds. These asset
allocation portfolios cover a range from conservative to moderate, growth, and
aggressive growth allocations, each with a strategy based on a distinct level of
risk. We recommend developing a comprehensive financial plan with an investment
advisor who is familiar with your risk tolerance, your individual goals, and
your financial situation.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management
November 15, 2004
Asset allocation and diversification can not guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
(1) Source: Watson Wyatt
(2) "Determinants of Portfolio Performance," in Financial Analysts Journal,
January/February 1995, by Gary P. Brinson, L. Randolph Hood, and Gilbert L.
Beebower
(3) Source: Greenwich Associates
(4) Source: Hewitt Associates
(5) Source: Lipper Inc.
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PORTFOLIO COMPOSITION
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PORTFOLIO STRUCTURE*
Bonds 95.0%
Cash & Other Net Assets 4.4%
Stocks 0.6%
MARKET SECTORS*
High Yield Corporates 36.3%
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International Sovereigns 17.7%
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Emerging Markets Debt 13.8%
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High Grade Corporates 12.3%
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Commercial Mortgage Backed 7.9%
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Mortgage Backed 5.2%
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Cash & Other Net Assets 4.4%
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U.S. Government Agencies 1.4%
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Domestic Convertibles 0.6%
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Residential Mortgage Backed 0.4%
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PORTFOLIO FACTS
Average Duration 4.1
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Average Life 7.7 Yrs
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Average Maturity 10.3 Yrs
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Average Quality BBB
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Average Quality Short Term Bonds A-1
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CREDIT QUALITY**
AAA 29.3%
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AA 0.9%
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A 3.5%
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BBB 13.8%
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BB 20.2%
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B 26.5%
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CCC 4.4%
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CC 0.4%
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Not Rated 0.4%
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Equity 0.6%
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COUNTRY WEIGHTINGS
United States 63.3%
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Germany 4.2%
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Russia 3.1%
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Brazil 2.9%
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Mexico 2.7%
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United Kingdom 2.3%
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Ireland 2.1%
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Netherlands 2.0%
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France 1.8%
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Other 15.6%
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*For purposes of this graphical presentation, the bond component includes both
accrued interest on bonds and the equivalent exposure from any derivative
holdings, if applicable. The bond weight in this portfolio includes the
equivalent exposure of a short U.S. Treasury futures contract.
**Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a rating
by Standard & Poor's, it will be based on the ratings assigned by Fitch, Inc.
If not rated by any of the three agencies, the security is considered not
rated, except for U.S. Treasuries and mortgage-backed securities, which are
included in the "AAA"-rating category.
Percentages are based on net assets as of 10/31/04.
The portfolio is actively managed, and current holdings may be different.
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MANAGEMENT REVIEW
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SUMMARY OF RESULTS
For the year ended October 31, 2004, the MFS Strategic Income Fund Class A
shares, provided an average annual return of 9.57% not including sales charges,
outperforming two of the fund's four benchmarks.
MARKET ENVIRONMENT
In 2004, many measures of global economic growth, including employment,
corporate spending, and earnings growth continued to improve, through we feel
that near-record-high oil prices, concerns about rising interest rates, and an
unsettled geopolitical environment adversely affected global markets. The U.S.
Federal Reserve Board raised interest rates three times during the period, and
this appears to have set expectations for an ongoing series of modest rate
hikes.
CONTRIBUTORS TO RELATIVE PERFORMANCE
This is a broadly diversified bond fund. The fund's asset allocation is
actively managed across four broad fixed-income sectors: U.S. government
bonds, international bonds (including emerging market debt), high-grade
corporate bonds, and high-yield bonds.
A large portion of the fund's performance came from holding higher yielding
bonds compared with most of its benchmark indices. During the prior twelve
months the high yield market - as measured by the Lehman Brothers High Yield
Index, one of the fund's benchmarks - advanced 12.32%. Currency positioning was
also a major contributor to the fund's relative returns. In North America,
quality factors aided performance. In particular, our positioning in lower rated
domestic debt proved favorable. Among individual contributors to performance,
sovereign bonds from the nations of Spain, Germany, Finland, Brazil, the
Netherlands, and Ireland contributed to performance. In addition, a
collateralized mortgage obligation issued by Morgan Stanley Capital was a strong
overall performer.
DETRACTORS FROM RELATIVE PERFORMANCE
Despite overall success in the high yield area, there were a couple of
individual high yield holdings that detracted from relative performance. In
particular, our positions in MCI WorldCom and domestic textile manufacturer
WestPoint Stevens hindered returns. WorldCom took longer to turn around than we
had expected. We sold out of our WorldCom and WestPoint Stevens positions by the
end of the period.
The views expressed in this report are those of the portfolio manager only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
The portfolio is actively managed, and current holdings may be different.
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PERFORMANCE SUMMARY THROUGH 10/31/04
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The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results include
the deduction of the maximum applicable sales charge and reflect the percentage
change in net asset value, including reinvestment of dividends and capital gains
distributions. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Citigroup
J.P. Morgan World
Emerging Government Lehman Lehman
MFS Strategic Market Bond Brothers Brothers
Income Fund -- Bond Index Non-Dollar High Yield Aggregate
Class A Global Hedged Index Index Bond Index
10/94 $ 9,525 $10,000 $10,000 $10,000 $10,000
10/96 12,096 15,166 13,097 12,852 12,241
10/98 13,058 15,201 16,455 14,542 14,574
10/00 14,324 21,761 18,150 14,929 15,721
10/02 15,629 24,477 20,824 14,088 19,070
10/04 19,490 35,291 22,348 21,168 21,112
TOTAL RETURNS
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Average annual
without sales charge
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Class
Share class inception date 1-yr 3-yr 5-yr 10-yr
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A 10/29/87 9.57% 8.84% 6.35% 7.42%
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B 9/7/93 8.90% 8.19% 5.67% 6.73%
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C 9/1/94 8.91% 8.16% 5.65% 6.74%
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I 1/8/97 9.95% 9.21% 6.72% 7.70%
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Average annual
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Comparative benchmarks
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Average multisector income fund+ 9.06% 9.88% 7.02% 7.13%
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Citigroup World Government Bond Non-
Dollar Hedged Index## 4.62% 3.71% 5.78% 8.37%
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J.P. Morgan Emerging Market Bond
Index Global# 12.79% 15.41% 13.90% 13.44%
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Lehman Brothers Aggregate Bond
Index## 5.53% 5.44% 7.58% 7.76%
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Lehman Brothers High Yield Index## 12.32% 12.40% 6.89% 7.79%
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Average annual
with sales charge
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Share class
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A 4.36% 7.09% 5.32% 6.90%
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B 4.90% 7.33% 5.36% 6.73%
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C 7.91% 8.16% 5.65% 6.74%
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I Class shares do not have a sales charge. Please see Notes to Performance
Summary for more details.
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Cumulative
without sales charge
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Share class
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A 9.57% 28.93% 36.03% 104.62%
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B 8.90% 26.65% 31.73% 91.81%
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C 8.91% 26.53% 31.63% 91.90%
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I 9.95% 30.25% 38.43% 109.95%
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+ Source: Lipper Inc., an independent firm that reports mutual fund
performance.
# Source: Bloomberg.
## Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITIONS
Lehman Brothers Aggregate Bond Index - measures the U.S. bond market.
Lehman Brothers High Yield Index - measures the high-yield bond market.
Citigroup World Government Bond Non-Dollar Hedged Index - measures the
government bond markets around the world, ex-U.S.
J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) - tracks debt
instruments in the emerging markets (includes a broader array of countries than
the EMBI Plus).
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A results including sales charge reflect the deduction of the maximum
4.75% sales charge. Class B results including sales charge reflect the deduction
of the applicable contingent deferred sales charge (CDSC), which declines over
six years from 4% to 0%. Class C results including sales charge (assuming
redemption within one year from the end of the calendar month of purchase)
reflect the deduction of the 1% CDSC. Class I shares have no sales charges and
are available only to certain investors.
Performance for I shares includes the performance of the fund's Class A shares
for periods prior to their offering. This blended class performance has been
adjusted to take into account differences in sales loads, if any, applicable to
these share classes, but has not been adjusted to take into account differences
in class specific operating expenses (such as Rule 12b-1 fees). Compared to
performance these share classes would have experienced had they been offered for
the entire period, the use of blended performance generally results in higher
performance for share classes with higher operating expenses than the initial
share class to which it is blended, and lower performance for share classes with
lower operating expenses than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest in high yield or lower-rated securities, which may
provide greater returns but are subject to greater-than-average risk.
The portfolio may invest a relatively high percentage of its assets in a small
number of issuers or even in a single issuer. This makes the fund's value more
sensitive to developments associated with the issuer and the overall market.
The portfolio may invest in mortgage-backed securities, which during times of
fluctuating interest rates, may increase or decrease more than other fixed-
income securities.
The portfolio's value will fluctuate in response to market conditions and
issuer, regulatory, economic, or political developments. In general, fixed
income securities will decline when interest rates rise and will increase when
interest rates fall. Many fixed income securities also involve credit risk,
which is the risk that issuers may fail to make timely principal or interest
payments. In addition, fixed income securities with longer maturity dates will
be subject to greater price fluctuations than those with shorter maturity
periods. Please see the prospectus for further information on these and other
risk considerations.
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EXPENSE TABLE
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FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MAY 1, 2004, THROUGH
OCTOBER 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period, May 1, 2004 through October 31, 2004.
ACTUAL EXPENSES
The first line for each share class in the table on the next page provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to estimate the
expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first line under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table on the next page provides
information about hypothetical account values and hypothetical expenses based on
the fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
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Share Class
- ------------------------------------------------------------------------------
Expenses
Annualized Beginning Ending Paid During
Expense Account Value Account Value* Period**
Ratio 5/01/04 10/31/04 5/01/04-10/31/04
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Actual 0.83% $1,000 $1,061 $4.31
A ---------------------------------------------------------------------------
Hypothetical 0.83% $1,000 $1,021 $4.23
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Actual 1.48% $1,000 $1,058 $7.68
B ---------------------------------------------------------------------------
Hypothetical 1.48% $1,000 $1,018 $7.53
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Actual 1.48% $1,000 $1,058 $7.68
C ---------------------------------------------------------------------------
Hypothetical 1.48% $1,000 $1,018 $7.53
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Actual 0.48% $1,000 $1,063 $2.50
I ---------------------------------------------------------------------------
Hypothetical 0.48% $1,000 $1,023 $2.45
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* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
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PORTFOLIO OF INVESTMENTS - 10/31/04
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The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Bonds - 97.7%
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ISSUER SHARES $ VALUE
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Advertising & Broadcasting - 3.2%
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Allbritton Communications Co., 7.75%, 2012 $1,000,000 $1,042,500
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Echostar DBS Corp., 6.375%, 2011 870,000 901,537
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Emmis Operating Co., 6.875%, 2012 445,000 467,250
- -------------------------------------------------------------------------------------------------
Granite Broadcasting Corp., 9.75%, 2010 1,975,000 1,821,937
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Lamar Media Corp., 7.25%, 2013 965,000 1,047,025
- -------------------------------------------------------------------------------------------------
Muzak LLC, 10%, 2009 305,000 272,975
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News America Holdings, 8.5%, 2025 463,000 599,784
- -------------------------------------------------------------------------------------------------
Paxson Communications Corp., 0% to 2006, 12.25%, 2009 1,645,000 1,431,150
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Radio One, Inc., 8.875%, 2011 1,000,000 1,105,000
- -------------------------------------------------------------------------------------------------
Spanish Broadcasting System, Inc., 9.625%, 2009 1,820,000 1,913,275
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Young Broadcasting, Inc., 8.5%, 2008 1,175,000 1,257,250
- -------------------------------------------------------------------------------------------------
$11,859,683
- -------------------------------------------------------------------------------------------------
Aerospace - 0.9%
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Hexcel Corp., 9.875%, 2008 $885,000 $991,200
- -------------------------------------------------------------------------------------------------
Hexcel Corp., 9.75%, 2009 600,000 631,500
- -------------------------------------------------------------------------------------------------
K&F Industries, Inc., 9.25%, 2007 784,000 799,680
- -------------------------------------------------------------------------------------------------
TransDigm Holding Co., 8.375%, 2011 700,000 752,500
- -------------------------------------------------------------------------------------------------
$3,174,880
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Airlines - 0.2%
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Continental Airlines, Inc., 7.568%, 2006 $400,000 $285,896
- -------------------------------------------------------------------------------------------------
Continental Airlines, Inc., 7.566%, 2020 804,790 623,985
- -------------------------------------------------------------------------------------------------
$909,881
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Asset Backed & Securitized - 8.2%
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ARCap REIT, Inc., 6.0996%, 2045## $900,000 $758,095
- -------------------------------------------------------------------------------------------------
Anthracite CDO Ltd., 6%, 2037## 1,200,000 1,011,840
- -------------------------------------------------------------------------------------------------
Asset Securitization Corp., 8.0046%, 2026 1,485,000 1,579,798
- -------------------------------------------------------------------------------------------------
Chase Commercial Mortgage Securities Corp., 6.6%, 2012 3,640,000 3,849,821
- -------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp., 5.44%, 2013## 2,000,000 2,050,853
- -------------------------------------------------------------------------------------------------
Credit Suisse First Boston Mortgage, 6.78%, 2009 2,150,000 2,382,250
- -------------------------------------------------------------------------------------------------
Credit Suisse First Boston Mortgage, 6.38%, 2035 1,600,000 1,782,043
- -------------------------------------------------------------------------------------------------
Crest 2004 1 Ltd., 7%, 2040*## 400,000 388,102
- -------------------------------------------------------------------------------------------------
DLJ Commercial Mortgage Corp., 0.9064%, 2005^^ 58,000,000 205,790
- -------------------------------------------------------------------------------------------------
DLJ Commercial Mortgage Corp., 6.04%, 2031 550,000 559,565
- -------------------------------------------------------------------------------------------------
DLJ Commercial Mortgage Corp., 7.6133%, 2032 385,000 444,168
- -------------------------------------------------------------------------------------------------
DLJ Mortgage Acceptance Corp., 8%, 2004##+ 841,527 815,423
- -------------------------------------------------------------------------------------------------
Deutsche Mortgage & Asset Receiving Corp., 7.5%, 2031 1,050,000 901,556
- -------------------------------------------------------------------------------------------------
Falcon Auto Dealership LLC, 3.8379%, 2025^^ 4,894,960 891,750
- -------------------------------------------------------------------------------------------------
Falcon Franchise Loan LLC, 3.0625%, 2023^^## 6,749,476 889,360
- -------------------------------------------------------------------------------------------------
First Union-Lehman Brothers Bank of America,
0.5417%, 2035^^ 54,713,111 1,216,316
- -------------------------------------------------------------------------------------------------
First Union-Lehman Brothers Commercial Mortgage Trust,
7%, 2029## 600,000 688,698
- -------------------------------------------------------------------------------------------------
GMAC Commercial Mortgage Securities, Inc., 6.02%, 2033 1,758,000 1,705,399
- -------------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., 7.18%, 2009 430,000 474,381
- -------------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., 1.5914%, 2014^^## 10,951,115 843,126
- -------------------------------------------------------------------------------------------------
Mortgage Capital Funding, Inc., 7.214%, 2007 2,500,000 2,670,105
- -------------------------------------------------------------------------------------------------
Nationslink Funding Corp., 5%, 2009 3,000,000 2,902,472
- -------------------------------------------------------------------------------------------------
Residential Accredit Loans, Inc., 7.75%, 2027 1,371,925 1,369,828
- -------------------------------------------------------------------------------------------------
$30,380,739
- -------------------------------------------------------------------------------------------------
Automotive - 2.6%
- -------------------------------------------------------------------------------------------------
Dana Corp., 6.5%, 2009 $1,400,000 $1,473,500
- -------------------------------------------------------------------------------------------------
Dana Corp., 9%, 2011 EUR 340,000 513,235
- -------------------------------------------------------------------------------------------------
Ford Motor Co., 7.45%, 2031 $1,115,000 1,085,883
- -------------------------------------------------------------------------------------------------
Ford Motor Credit Co., 7.875%, 2010 2,127,000 2,360,238
- -------------------------------------------------------------------------------------------------
General Motors Corp., 8.375%, 2033 1,832,000 1,906,355
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 9.375%, 2013 219,000 251,850
- -------------------------------------------------------------------------------------------------
TRW Automotive, Inc., 11%, 2013 361,000 429,590
- -------------------------------------------------------------------------------------------------
Tenneco Automotive, Inc., 10.25%, 2013 1,250,000 1,456,250
- -------------------------------------------------------------------------------------------------
$9,476,901
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 3.0%
- -------------------------------------------------------------------------------------------------
BBVA Bancomer Capital Trust I, 10.5%, 2011## $1,325,000 $1,445,906
- -------------------------------------------------------------------------------------------------
Banco Mercantil del Norte S.A., 5.875%, 2014## 1,682,000 1,719,845
- -------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 10.125%, 2007## 1,084,000 1,184,271
- -------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 8.5%, 2013## 182,000 190,190
- -------------------------------------------------------------------------------------------------
Mizuho Financial Group, Inc., 4.75%, 2014## EUR 755,000 1,001,876
- -------------------------------------------------------------------------------------------------
RBS Capital Trust II, 6.425% to 2034, 4.113%, 2049 $576,000 599,137
- -------------------------------------------------------------------------------------------------
Turanalem Finance B.V., 8%, 2014## 1,368,000 1,340,640
- -------------------------------------------------------------------------------------------------
UFJ Finance Aruba AEC, 6.75%, 2013 493,000 549,534
- -------------------------------------------------------------------------------------------------
UniCredito Italiano Capital Trust II, 9.2% to 2010,
5.52%, 2049## 1,482,000 1,857,153
- -------------------------------------------------------------------------------------------------
Woori Bank, 5.75%, 2014## 1,152,000 1,209,600
- -------------------------------------------------------------------------------------------------
$11,098,152
- -------------------------------------------------------------------------------------------------
Basic Industry - 0.1%
- -------------------------------------------------------------------------------------------------
Trimas Corp., 9.875%, 2012 $335,000 $343,375
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 2.4%
- -------------------------------------------------------------------------------------------------
CSC Holdings, Inc., 8.125%, 2009 $1,634,000 $1,797,400
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.625%, 2009 1,580,000 1,271,900
- -------------------------------------------------------------------------------------------------
Charter Communications, Inc., 8.375%, 2014## 1,090,000 1,099,537
- -------------------------------------------------------------------------------------------------
Continental Cablevision, Inc., 9.5%, 2013 1,628,000 1,783,420
- -------------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 9.5%, 2013 420,000 411,600
- -------------------------------------------------------------------------------------------------
Mediacom Broadband LLC, 11%, 2013 395,000 424,625
- -------------------------------------------------------------------------------------------------
Rogers Cable, Inc., 5.5%, 2014 1,217,000 1,137,895
- -------------------------------------------------------------------------------------------------
TCI Communications, Inc., 9.8%, 2012 841,000 1,083,660
- -------------------------------------------------------------------------------------------------
$9,010,037
- -------------------------------------------------------------------------------------------------
Building - 0.8%
- -------------------------------------------------------------------------------------------------
American Standard Cos., Inc., 7.375%, 2008 $735,000 $812,175
- -------------------------------------------------------------------------------------------------
Atrium Cos., Inc., 10.5%, 2009 1,000,000 1,050,000
- -------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 7.75%, 2014## 545,000 540,912
- -------------------------------------------------------------------------------------------------
Jacuzzi Brands, Inc., 9.625%, 2010 355,000 399,375
- -------------------------------------------------------------------------------------------------
$2,802,462
- -------------------------------------------------------------------------------------------------
Business Services - 1.2%
- -------------------------------------------------------------------------------------------------
Iron Mountain, Inc., 8.625%, 2013 $650,000 $703,625
- -------------------------------------------------------------------------------------------------
Iron Mountain, Inc., 7.75%, 2015 1,250,000 1,350,000
- -------------------------------------------------------------------------------------------------
Lucent Technologies, Inc., 5.5%, 2008 1,060,000 1,086,500
- -------------------------------------------------------------------------------------------------
Xerox Corp., 7.625%, 2013 1,030,000 1,133,000
- -------------------------------------------------------------------------------------------------
$4,273,125
- -------------------------------------------------------------------------------------------------
Chemicals - 3.1%
- -------------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 $900,000 $990,000
- -------------------------------------------------------------------------------------------------
BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014## 675,000 756,000
- -------------------------------------------------------------------------------------------------
Equistar Chemicals LP, 10.625%, 2011 835,000 964,425
- -------------------------------------------------------------------------------------------------
Huntsman International LLC, 10.125%, 2009 720,000 756,000
- -------------------------------------------------------------------------------------------------
IMC Global, Inc., 10.875%, 2013 1,210,000 1,527,625
- -------------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., "B", 9.625%, 2012 1,000,000 1,125,000
- -------------------------------------------------------------------------------------------------
JohnsonDiversey Holding, Inc., 0% to 2007, 10.67%, 2013 1,000,000 855,000
- -------------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 EUR 70,000 96,264
- -------------------------------------------------------------------------------------------------
Lyondell Chemical Co., 11.125%, 2012 $1,340,000 1,579,525
- -------------------------------------------------------------------------------------------------
Nalco Co., 7.75%, 2011 475,000 514,188
- -------------------------------------------------------------------------------------------------
Nova Chemicals Corp., 6.5%, 2012 955,000 1,005,138
- -------------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 1,190,000 1,112,650
- -------------------------------------------------------------------------------------------------
$11,281,815
- -------------------------------------------------------------------------------------------------
Conglomerates - 0.5%
- -------------------------------------------------------------------------------------------------
Invensys PLC, 9.875%, 2011## $530,000 $564,450
- -------------------------------------------------------------------------------------------------
Tyco International Group S.A., 6.75%, 2011 1,055,000 1,193,214
- -------------------------------------------------------------------------------------------------
$1,757,664
- -------------------------------------------------------------------------------------------------
Construction - 0.2%
- -------------------------------------------------------------------------------------------------
D.R. Horton, Inc., 8%, 2009 $760,000 $856,900
- -------------------------------------------------------------------------------------------------
Consumer Cyclical - 0.7%
- -------------------------------------------------------------------------------------------------
Cendant Corp., 6.25%, 2008 $835,000 $901,104
- -------------------------------------------------------------------------------------------------
GEO Group, Inc., 8.25%, 2013 775,000 813,750
- -------------------------------------------------------------------------------------------------
KinderCare Learning Centers, Inc., 9.5%, 2009 876,000 886,950
- -------------------------------------------------------------------------------------------------
$2,601,804
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 0.3%
- -------------------------------------------------------------------------------------------------
Remington Arms Co., Inc., 10.5%, 2011 $1,100,000 $973,500
- -------------------------------------------------------------------------------------------------
Containers - 1.3%
- -------------------------------------------------------------------------------------------------
Crown European Holdings S.A., 9.5%, 2011 $1,435,000 $1,635,900
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.875%, 2009 390,000 428,025
- -------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.25%, 2013 1,460,000 1,606,000
- -------------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 1,030,000 960,475
- -------------------------------------------------------------------------------------------------
$4,630,400
- -------------------------------------------------------------------------------------------------
Defense Electronics - 0.1%
- -------------------------------------------------------------------------------------------------
L-3 Communications Holdings, Inc., 7.625%, 2012 $445,000 $491,725
- -------------------------------------------------------------------------------------------------
Electronics - 0.2%
- -------------------------------------------------------------------------------------------------
Flextronics International Ltd., 6.5%, 2013 $790,000 $829,500
- -------------------------------------------------------------------------------------------------
Emerging Market Agencies - 1.7%
- -------------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 8.625%, 2022 $1,457,000 $1,682,835
- -------------------------------------------------------------------------------------------------
Petroleos Mexicanos, 9.5%, 2027 1,865,000 2,298,613
- -------------------------------------------------------------------------------------------------
Petroliam Nasional Berhad, 7.75%, 2015 801,000 972,462
- -------------------------------------------------------------------------------------------------
Petronas Capital Ltd., 7.875%, 2022## 1,020,000 1,253,294
- -------------------------------------------------------------------------------------------------
$6,207,204
- -------------------------------------------------------------------------------------------------
Emerging Market Sovereign - 7.3%
- -------------------------------------------------------------------------------------------------
Aries Vermogensverwaltungs, 9.6%, 2014## $750,000 $876,562
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 3.125%, 2012 2,160,017 1,981,816
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 5,021,384 4,986,862
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 3.0625%, 2024 995,000 875,600
- -------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 11%, 2040 2,373,000 2,676,744
- -------------------------------------------------------------------------------------------------
Republic of Colombia, 8.25%, 2014 1,150,000 1,150,000
- -------------------------------------------------------------------------------------------------
Republic of Colombia, 11.75%, 2020 316,000 386,310
- -------------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2023 - 2029 1,424,000 1,576,821
- -------------------------------------------------------------------------------------------------
Republic of Panama, 8.875%, 2027 302,000 314,080
- -------------------------------------------------------------------------------------------------
Republic of Peru, 9.875%, 2015 1,014,000 1,178,268
- -------------------------------------------------------------------------------------------------
Republic of South Africa, 8.5%, 2017 2,164,000 2,672,540
- -------------------------------------------------------------------------------------------------
Russian Federation, 3%, 2008 - 2011 2,053,000 1,805,425
- -------------------------------------------------------------------------------------------------
Russian Federation, 11%, 2018 1,499,000 2,034,893
- -------------------------------------------------------------------------------------------------
State of Qatar, 9.75%, 2030 1,610,000 2,320,413
- -------------------------------------------------------------------------------------------------
United Mexican States, 8%, 2022 584,000 670,140
- -------------------------------------------------------------------------------------------------
United Mexican States, 7.5%, 2033 1,374,000 1,464,684
- -------------------------------------------------------------------------------------------------
$26,971,158
- -------------------------------------------------------------------------------------------------
Energy - Independent - 1.2%
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 8.125%, 2011## $855,000 $936,225
- -------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7.5%, 2014 860,000 956,750
- -------------------------------------------------------------------------------------------------
Kerr-McGee Corp., 6.95%, 2024 2,146,000 2,363,478
- -------------------------------------------------------------------------------------------------
$4,256,453
- -------------------------------------------------------------------------------------------------
Energy - Integrated - 0.7%
- -------------------------------------------------------------------------------------------------
Amerada Hess Corp., 7.3%, 2031 $830,000 $934,273
- -------------------------------------------------------------------------------------------------
Siberian Oil Co., 10.75%, 2009 87,000 95,918
- -------------------------------------------------------------------------------------------------
Tyumen Oil Co., 11%, 2007 1,504,000 1,710,800
- -------------------------------------------------------------------------------------------------
$2,740,991
- -------------------------------------------------------------------------------------------------
Entertainment - 0.9%
- -------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $864,000 $892,080
- -------------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014## 565,000 591,838
- -------------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 913,000 879,904
- -------------------------------------------------------------------------------------------------
Turner Broadcasting System, Inc., 8.375%, 2013 653,000 799,153
- -------------------------------------------------------------------------------------------------
$3,162,975
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 1.3%
- -------------------------------------------------------------------------------------------------
Burns, Philp & Co. Ltd., 9.75%, 2012 $2,515,000 $2,766,500
- -------------------------------------------------------------------------------------------------
Michael Foods, Inc., 8%, 2013 880,000 928,400
- -------------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 245,000 274,400
- -------------------------------------------------------------------------------------------------
Tyson Foods, Inc., 8.25%, 2011 750,000 891,935
- -------------------------------------------------------------------------------------------------
$4,861,235
- -------------------------------------------------------------------------------------------------
Forest & Paper Products - 1.6%
- -------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8.5%, 2013 $1,145,000 $1,265,225
- -------------------------------------------------------------------------------------------------
Georgia Pacific Corp., 9.375%, 2013 1,750,000 2,060,625
- -------------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 8.5%, 2011 775,000 873,812
- -------------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 775,000 883,500
- -------------------------------------------------------------------------------------------------
Stone Container Corp., 7.375%, 2014## 890,000 950,075
- -------------------------------------------------------------------------------------------------
$6,033,237
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 1.3%
- -------------------------------------------------------------------------------------------------
Boyd Gaming Corp., 6.75%, 2014 $5,000 $5,244
- -------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.375%, 2011 1,630,000 1,837,825
- -------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 700,000 743,750
- -------------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd., 8%, 2010 935,000 1,070,575
- -------------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 1,000,000 1,172,500
- -------------------------------------------------------------------------------------------------
$4,829,894
- -------------------------------------------------------------------------------------------------
Industrial - 0.7%
- -------------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $1,280,000 $1,408,000
- -------------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 9.875%, 2007 1,000,000 960,000
- -------------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 10%, 2008 140,000 152,600
- -------------------------------------------------------------------------------------------------
$2,520,600
- -------------------------------------------------------------------------------------------------
Insurance - Property & Casualty - 0.3%
- -------------------------------------------------------------------------------------------------
Allianz AG, 5.5%, 2049 EUR 832,000 $1,123,352
- -------------------------------------------------------------------------------------------------
International Market Agencies - 0.5%
- -------------------------------------------------------------------------------------------------
Kreditanstalt fur Wiederaufbau, 3.25%, 2008 EUR 1,402,000 $1,816,268
- -------------------------------------------------------------------------------------------------
International Market Sovereign - 17.0%
- -------------------------------------------------------------------------------------------------
Federal Republic of Germany, 4%, 2007 EUR 1,696,000 $2,239,788
- -------------------------------------------------------------------------------------------------
Federal Republic of Germany, 3.5%, 2008 4,972,000 6,491,596
- -------------------------------------------------------------------------------------------------
Federal Republic of Germany, 5.25%, 2010 522,000 731,936
- -------------------------------------------------------------------------------------------------
Federal Republic of Germany, 6.25%, 2030 389,000 621,765
- -------------------------------------------------------------------------------------------------
Government of Australia, 8.75%, 2008 AUD 1,132,000 946,550
- -------------------------------------------------------------------------------------------------
Government of Australia, 6.25%, 2015 1,291,000 1,030,958
- -------------------------------------------------------------------------------------------------
Government of Canada, 5.5%, 2009 CAD 744,000 652,582
- -------------------------------------------------------------------------------------------------
Government of Canada, 5.25%, 2012 726,000 632,017
- -------------------------------------------------------------------------------------------------
Government of Canada, 8%, 2023 127,000 143,820
- -------------------------------------------------------------------------------------------------
Government of New Zealand, 7%, 2009 NZD 1,434,000 1,021,229
- -------------------------------------------------------------------------------------------------
Government of New Zealand, 6.5%, 2013 4,687,000 3,306,385
- -------------------------------------------------------------------------------------------------
Kingdom of Belgium, 3.75%, 2009 EUR 853,000 1,120,944
- -------------------------------------------------------------------------------------------------
Kingdom of Belgium, 5%, 2012 831,000 1,154,056
- -------------------------------------------------------------------------------------------------
Kingdom of Denmark, 7%, 2007 DKK 5,239,000 1,010,590
- -------------------------------------------------------------------------------------------------
Kingdom of Denmark, 6%, 2009 9,355,000 1,809,456
- -------------------------------------------------------------------------------------------------
Kingdom of Denmark, 5%, 2013 1,601,000 297,497
- -------------------------------------------------------------------------------------------------
Kingdom of Netherlands, 5.75%, 2007 EUR 2,496,000 3,416,918
- -------------------------------------------------------------------------------------------------
Kingdom of Netherlands, 3.75%, 2009 2,814,000 3,694,963
- -------------------------------------------------------------------------------------------------
Kingdom of Spain, 6%, 2008 2,530,328 3,552,936
- -------------------------------------------------------------------------------------------------
Republic of Austria, 5.5%, 2007 1,988,000 2,741,423
- -------------------------------------------------------------------------------------------------
Republic of Austria, 5%, 2012 1,210,000 1,684,626
- -------------------------------------------------------------------------------------------------
Republic of Austria, 4.65%, 2018 201,000 268,768
- -------------------------------------------------------------------------------------------------
Republic of Finland, 2.75%, 2006 2,277,000 2,930,367
- -------------------------------------------------------------------------------------------------
Republic of Finland, 3%, 2008 2,666,000 3,423,038
- -------------------------------------------------------------------------------------------------
Republic of France, 4.75%, 2007 2,177,000 2,936,823
- -------------------------------------------------------------------------------------------------
Republic of France, 4%, 2009 1,755,000 2,328,850
- -------------------------------------------------------------------------------------------------
Republic of Ireland, 4.25%, 2007 4,532,000 6,049,164
- -------------------------------------------------------------------------------------------------
Republic of Portugal, 5.45%, 2013 584,000 835,785
- -------------------------------------------------------------------------------------------------
United Kingdom Treasury, 7.25%, 2007 GBP 206,000 406,917
- -------------------------------------------------------------------------------------------------
United Kingdom Treasury, 5%, 2008 - 2012 2,071,000 3,865,024
- -------------------------------------------------------------------------------------------------
United Kingdom Treasury, 5.75%, 2009 655,000 1,261,952
- -------------------------------------------------------------------------------------------------
$62,608,723
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 2.2%
- -------------------------------------------------------------------------------------------------
AGCO Corp., 9.5%, 2008 $1,415,000 $1,521,125
- -------------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## 1,500,000 1,710,000
- -------------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.5%, 2012 865,000 1,000,156
- -------------------------------------------------------------------------------------------------
Terex Corp., 10.375%, 2011 795,000 894,375
- -------------------------------------------------------------------------------------------------
Terex Corp., 9.25%, 2011 995,000 1,114,400
- -------------------------------------------------------------------------------------------------
Terex Corp., 7.375%, 2014 120,000 128,400
- -------------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012 1,700,000 1,683,000
- -------------------------------------------------------------------------------------------------
$8,051,456
- -------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.8%
- -------------------------------------------------------------------------------------------------
Alliance Imaging, Inc., 10.375%, 2011 $1,100,000 $1,215,500
- -------------------------------------------------------------------------------------------------
Baxter International, Inc., 9.5%, 2008 677,000 799,430
- -------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc., 8.125%, 2012 816,000 909,840
- -------------------------------------------------------------------------------------------------
$2,924,770
- -------------------------------------------------------------------------------------------------
Metals & Mining - 0.8%
- -------------------------------------------------------------------------------------------------
Century Aluminum Co., 7.5%, 2014## $150,000 $159,000
- -------------------------------------------------------------------------------------------------
Foundation PA Coal Co., 7.25%, 2014## 115,000 122,906
- -------------------------------------------------------------------------------------------------
Peabody Energy Corp., 6.875%, 2013 860,000 943,850
- -------------------------------------------------------------------------------------------------
Phelps Dodge Corp., 8.75%, 2011 742,000 917,134
- -------------------------------------------------------------------------------------------------
U.S. Steel Corp., 9.75%, 2010 627,000 717,915
- -------------------------------------------------------------------------------------------------
$2,860,805
- -------------------------------------------------------------------------------------------------
Mortgage Backed - 5.2%
- -------------------------------------------------------------------------------------------------
Fannie Mae, 5.5%, 2018 - 2034 $15,023,671 $15,436,291
- -------------------------------------------------------------------------------------------------
Fannie Mae, 6.5%, 2031 771,723 813,033
- -------------------------------------------------------------------------------------------------
Fannie Mae, 5%, 2034 2,972,433 2,970,024
- -------------------------------------------------------------------------------------------------
$19,219,348
- -------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.2%
- -------------------------------------------------------------------------------------------------
AmeriGas Partners LP, 8.875%, 2011 $610,000 $667,950
- -------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 2.2%
- -------------------------------------------------------------------------------------------------
ANR Pipeline Co., 8.875%, 2010 $300,000 $336,750
- -------------------------------------------------------------------------------------------------
CenterPoint Energy Resources Corp., 7.875%, 2013 1,679,000 2,007,169
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7%, 2011 570,000 572,850
- -------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.75%, 2013 1,090,000 1,136,325
- -------------------------------------------------------------------------------------------------
Enterprise Products Partners LP, 6.375%, 2013 850,000 919,149
- -------------------------------------------------------------------------------------------------
Magellan Midstream Partners LP, 5.65%, 2016 167,000 169,899
- -------------------------------------------------------------------------------------------------
Southern Natural Gas Co., Inc., 8.875%, 2010 1,050,000 1,182,563
- -------------------------------------------------------------------------------------------------
Williams Cos., Inc., 7.125%, 2011 1,500,000 1,680,000
- -------------------------------------------------------------------------------------------------
$8,004,705
- -------------------------------------------------------------------------------------------------
Oils - 0.7%
- -------------------------------------------------------------------------------------------------
Gaz Capital S.A., 8.625%, 2034## $950,000 $1,066,375
- -------------------------------------------------------------------------------------------------
Gazprom OAO, 9.625%, 2013 590,000 679,975
- -------------------------------------------------------------------------------------------------
Valero Energy Corp., 6.875%, 2012 802,000 912,815
- -------------------------------------------------------------------------------------------------
$2,659,165
- -------------------------------------------------------------------------------------------------
Pollution Control - 0.2%
- -------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 $715,000 $727,512
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 1.7%
- -------------------------------------------------------------------------------------------------
Dex Media East LLC, 9.875%, 2009 $1,100,000 $1,265,000
- -------------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013 986,000 1,165,945
- -------------------------------------------------------------------------------------------------
Lighthouse International Co. S.A., 8%, 2014## EUR 640,000 802,346
- -------------------------------------------------------------------------------------------------
Mail-Well Corp., 9.625%, 2012 $1,530,000 1,698,300
- -------------------------------------------------------------------------------------------------
MediaNews Group, Inc., 6.875%, 2013 1,180,000 1,224,250
- -------------------------------------------------------------------------------------------------
$6,155,841
- -------------------------------------------------------------------------------------------------
Restaurants - 0.3%
- -------------------------------------------------------------------------------------------------
YUM! Brands, Inc., 8.875%, 2011 $942,000 $1,175,703
- -------------------------------------------------------------------------------------------------
Retailers - 1.4%
- -------------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 $1,510,000 $1,627,025
- -------------------------------------------------------------------------------------------------
J. Crew Operating Corp., 10.375%, 2007 500,000 513,750
- -------------------------------------------------------------------------------------------------
Limited Brands, Inc., 5.25%, 2014 1,126,000 1,125,108
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.5%, 2011 1,230,000 1,362,225
- -------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.25%, 2013 575,000 599,438
- -------------------------------------------------------------------------------------------------
$5,227,546
- -------------------------------------------------------------------------------------------------
Supermarkets - 0.3%
- -------------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 $1,125,000 $1,223,438
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 3.3%
- -------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 11%, 2010 $744,000 $870,480
- -------------------------------------------------------------------------------------------------
American Tower Corp., 7.125%, 2012## 675,000 686,812
- -------------------------------------------------------------------------------------------------
American Tower Escrow Corp., 0%, 2008 1,225,000 921,812
- -------------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 995,000 1,079,575
- -------------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 1,215,000 1,300,050
- -------------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 445,000 495,063
- -------------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 8.375%, 2010## 964,000 985,690
- -------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 1,110,000 1,232,100
- -------------------------------------------------------------------------------------------------
PTC International Finance II S.A., 11.25%, 2009 729,000 772,740
- -------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.875%, 2010 895,000 901,713
- -------------------------------------------------------------------------------------------------
U.S. Unwired, Inc., 10%, 2012 425,000 460,063
- -------------------------------------------------------------------------------------------------
Ubiquitel Operating Co., 9.875%, 2011 440,000 476,300
- -------------------------------------------------------------------------------------------------
Vimpel-Communications, 10.45%, 2005## 1,077,000 1,109,310
- -------------------------------------------------------------------------------------------------
Vimpel-Communications, 10%, 2009## 708,000 769,950
- -------------------------------------------------------------------------------------------------
$12,061,658
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 2.4%
- -------------------------------------------------------------------------------------------------
Citizens Communications Co., 9.25%, 2011 $953,000 $1,095,950
- -------------------------------------------------------------------------------------------------
Citizens Communications Co., 9%, 2031 46,000 49,105
- -------------------------------------------------------------------------------------------------
Deutsche Telekom International Finance B.V., 8.75%, 2030 1,108,000 1,462,077
- -------------------------------------------------------------------------------------------------
Eircom Funding PLC, 8.25%, 2013 675,000 750,937
- -------------------------------------------------------------------------------------------------
Qwest Services Corp., 14%, 2010## 1,055,000 1,252,813
- -------------------------------------------------------------------------------------------------
Sprint Capital Corp., 6.875%, 2028 512,000 549,850
- -------------------------------------------------------------------------------------------------
Telecom Italia Capital, 5.25%, 2013 961,000 983,956
- -------------------------------------------------------------------------------------------------
Telecom Italia S.p.A., 5.625%, 2007 EUR 966,000 1,307,007
- -------------------------------------------------------------------------------------------------
Time Warner Telecom Holdings, Inc., 9.25%, 2014 $540,000 542,700
- -------------------------------------------------------------------------------------------------
Verizon New York, Inc., 7.375%, 2032 831,000 941,484
- -------------------------------------------------------------------------------------------------
$8,935,879
- -------------------------------------------------------------------------------------------------
Tobacco - 0.2%
- -------------------------------------------------------------------------------------------------
R.J. Reynolds Tobacco Holdings, Inc., 7.25%, 2012 $904,000 $904,000
- -------------------------------------------------------------------------------------------------
U.S. Government Agencies - 1.4%
- -------------------------------------------------------------------------------------------------
Fannie Mae, 2.5%, 2006 $1,094,000 $1,091,344
- -------------------------------------------------------------------------------------------------
Small Business Administration, 4.34%, 2024 484,219 477,851
- -------------------------------------------------------------------------------------------------
Small Business Administration, 4.77%, 2024 1,026,425 1,038,630
- -------------------------------------------------------------------------------------------------
Small Business Administration, 5.18%, 2024 2,460,000 2,544,253
- -------------------------------------------------------------------------------------------------
$5,152,078
- -------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 4.3%
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 5.75%, 2005 $3,000,000 $3,107,226
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.625%, 2008 832,773 918,588
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.25%, 2008### 6,787,000 6,840,556
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.875%, 2009 4,539,684 5,150,590
- -------------------------------------------------------------------------------------------------
$16,016,960
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 6.6%
- -------------------------------------------------------------------------------------------------
AES Corp., 9%, 2015## $1,220,000 $1,421,300
- -------------------------------------------------------------------------------------------------
Allegheny Energy Supply Co. LLC, 8.25%, 2012## 1,200,000 1,353,000
- -------------------------------------------------------------------------------------------------
Beaver Valley Funding Corp., 9%, 2017 1,705,000 2,008,132
- -------------------------------------------------------------------------------------------------
CMS Energy Corp., 8.5%, 2011 1,500,000 1,702,500
- -------------------------------------------------------------------------------------------------
Calpine Corp., 8.5%, 2008 901,000 554,115
- -------------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 800,000 580,000
- -------------------------------------------------------------------------------------------------
CenterPoint Energy, Inc., 7.25%, 2010 775,000 867,330
- -------------------------------------------------------------------------------------------------
DPL, Inc., 6.875%, 2011 1,312,000 1,430,080
- -------------------------------------------------------------------------------------------------
Duke Capital Corp., 8%, 2019 679,000 825,118
- -------------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 9.875%, 2010## 790,000 897,637
- -------------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013 1,161,000 1,304,102
- -------------------------------------------------------------------------------------------------
Enersis S.A., 7.375%, 2014 838,000 877,490
- -------------------------------------------------------------------------------------------------
MSW Energy Holdings LLC, 7.375%, 2010 785,000 824,250
- -------------------------------------------------------------------------------------------------
Midland Funding II, 13.25%, 2006 1,500,000 1,685,712
- -------------------------------------------------------------------------------------------------
NRG Energy, Inc., 8%, 2013 1,260,000 1,387,575
- -------------------------------------------------------------------------------------------------
NorthWestern Corp., 5.875%, 2014## 160,000 165,000
- -------------------------------------------------------------------------------------------------
PG&E Corp., 6.875%, 2008 280,000 303,800
- -------------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 7.75%, 2007 1,580,000 1,690,600
- -------------------------------------------------------------------------------------------------
Reliant Energy, Inc., 8.125%, 2005 342,000 354,660
- -------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25%, 2010 795,000 882,450
- -------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.5%, 2013 805,000 905,625
- -------------------------------------------------------------------------------------------------
TXU Corp., 6.375%, 2006 1,793,000 1,883,543
- -------------------------------------------------------------------------------------------------
W3A Funding Corp., 8.09%, 2017 555,681 622,480
- -------------------------------------------------------------------------------------------------
$24,526,499
- -------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $338,488,072) $360,379,946
- -------------------------------------------------------------------------------------------------
Stocks
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers
- -------------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 814 $68,132
- -------------------------------------------------------------------------------------------------
Specialty Chemicals
- -------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 1 $25
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $302,783) $68,157
- -------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.2%
- -------------------------------------------------------------------------------------------------
Automotive - 0.2%
- -------------------------------------------------------------------------------------------------
Ford Motor Co. Capital Trust II, 6.5% (Identified Cost,
$721,213) 13,755 $687,612
- -------------------------------------------------------------------------------------------------
Preferred Stock
- -------------------------------------------------------------------------------------------------
Real Estate
- -------------------------------------------------------------------------------------------------
HRPT Properties Trust, 8.75% (Identified Cost, $34,871) 1,275 $34,999
- -------------------------------------------------------------------------------------------------
Warrants
- -------------------------------------------------------------------------------------------------
Banco Central del Uruguay (Emerging Market Sovereign) 1,250,000 $0
- -------------------------------------------------------------------------------------------------
DWC Construction Co., Inc. (Utilities - Other)* 67,756 9,776
- -------------------------------------------------------------------------------------------------
DWC Trading (Utilities - Other)* 26,835 5,526
- -------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Specialty Chemicals)* 2 3
- -------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $--) $15,305
- -------------------------------------------------------------------------------------------------
Convertible Bond - 0.4%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 0.4%
- -------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 5.25%, 2010
(Identified Cost, $1,241,477) $1,300,000 $1,324,375
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 0.1%
- -------------------------------------------------------------------------------------------------
Goldman Sachs, 1.86%, dated 10/29/04, due 11/01/04, total
to be received $382,059 (secured by various U.S. Treasury
and Federal Agency obligations in a jointly traded account),
at Cost $382,000 $382,000
- -------------------------------------------------------------------------------------------------
Total Investments (+) (Identified Cost, $341,170,416) $362,892,394
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.6% 5,849,856
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $368,742,250
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^^ Interest only security.
## SEC Rule 144A restriction.
### Security segregated as collateral for open futures contracts.
+ Restricted security.
(+) As of October 31, 2004, 1 security representing $68,132 and less than 0.1% of net assets was fair
valued in accordance with the policies adopted by the Board of Trustees.
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 Dollar GBP = British Pound
CAD = Canadian Dollar NZD = New Zealand Dollar
DKK = Danish Krone SEK = Swedish Krona
EUR = Euro
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 10/31/04
ASSETS
Investments, at value (identified cost, $341,170,416) $362,892,394
- -----------------------------------------------------------------------------------------------------
Cash 408,150
- -----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange contracts 449,753
- -----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange contracts
subject to master netting agreements 394,534
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,842,627
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 309,824
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 6,306,835
- -----------------------------------------------------------------------------------------------------
Other assets 2,965
- -----------------------------------------------------------------------------------------------------
Total assets $374,607,082
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $468,760
- -----------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 2,009,196
- -----------------------------------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 91,125
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased 2,613,211
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 497,020
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 12,072
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 55,642
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 19,092
- -----------------------------------------------------------------------------------------------------
Administrative fee 350
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 98,364
- -----------------------------------------------------------------------------------------------------
Total liabilities $5,864,832
- -----------------------------------------------------------------------------------------------------
Net assets $368,742,250
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $430,973,493
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 20,195,048
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (80,130,909)
- -----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (2,295,382)
- -----------------------------------------------------------------------------------------------------
Net assets $368,742,250
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 53,703,513
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $190,165,142
- -----------------------------------------------------------------------------------------------------
Shares outstanding 27,548,029
- -----------------------------------------------------------------------------------------------------
Net asset value per share $6.90
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$6.90) $7.24
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $130,075,123
- -----------------------------------------------------------------------------------------------------
Shares outstanding 19,049,876
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $6.83
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $36,536,727
- -----------------------------------------------------------------------------------------------------
Shares outstanding 5,374,555
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $6.80
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $11,965,258
- -----------------------------------------------------------------------------------------------------
Shares outstanding 1,731,053
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $6.91
- -----------------------------------------------------------------------------------------------------
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B, and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses.
It also describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 10/31/04
NET INVESTMENT INCOME
Income
- -----------------------------------------------------------------------------------------------------
Interest $25,521,451
- -----------------------------------------------------------------------------------------------------
Dividends 10,268
- -----------------------------------------------------------------------------------------------------
Total investment income $25,531,719
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $2,457,698
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 20,085
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 632,236
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 668,658
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,379,916
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 383,164
- -----------------------------------------------------------------------------------------------------
Administrative fee 34,726
- -----------------------------------------------------------------------------------------------------
Custodian fee 196,359
- -----------------------------------------------------------------------------------------------------
Printing 57,332
- -----------------------------------------------------------------------------------------------------
Postage 46,809
- -----------------------------------------------------------------------------------------------------
Auditing fees 47,955
- -----------------------------------------------------------------------------------------------------
Legal fees 7,023
- -----------------------------------------------------------------------------------------------------
Miscellaneous 115,081
- -----------------------------------------------------------------------------------------------------
Total expenses $6,047,042
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (7,250)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (1,666,260)
- -----------------------------------------------------------------------------------------------------
Net expenses $4,373,532
- -----------------------------------------------------------------------------------------------------
Net investment income $21,158,187
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $12,000,488
- -----------------------------------------------------------------------------------------------------
Futures contracts (874,300)
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions (3,847,100)
- -----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $7,279,088
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $6,093,261
- -----------------------------------------------------------------------------------------------------
Futures contracts (407,267)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign currencies (1,177,752)
- -----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $4,508,242
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $11,787,330
- -----------------------------------------------------------------------------------------------------
Change in net assets from operations $32,945,517
- -----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting
from operations, any distributions, and any shareholder transactions.
FOR YEARS ENDED 10/31 2004 2003
CHANGE IN NET ASSETS
OPERATIONS
Net investment income $21,158,187 $21,464,494
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 7,279,088 7,109,012
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation 4,508,242 19,366,235
- ------------------------------------------------------------- -------------- ------------
Change in net assets from operations $32,945,517 $47,939,741
- ------------------------------------------------------------- -------------- ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(11,527,423) $(11,234,807)
- -------------------------------------------------------------------------------------------------------
Class B (7,428,777) (8,085,948)
- -------------------------------------------------------------------------------------------------------
Class C (2,061,458) (1,949,589)
- -------------------------------------------------------------------------------------------------------
Class I (687,080) (599,006)
- ------------------------------------------------------------- -------------- ------------
Total distributions declared to shareholders $(21,704,738) $(21,869,350)
- ------------------------------------------------------------- -------------- ------------
Change in net assets from fund share transactions $(30,796,574) $(6,475,192)
- ------------------------------------------------------------- -------------- ------------
Redemption fees $1,803 $--
- ------------------------------------------------------------- -------------- ------------
Total change in net assets $(19,553,992) $19,595,199
- ------------------------------------------------------------- -------------- ------------
NET ASSETS
At beginning of period $388,296,242 $368,701,043
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions in
excess of net investment income of $2,295,382 and
$3,961,354, respectively) $368,742,250 $388,296,242
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years.
Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by
which an investor would have earned (or lost) on an investment in the fund (assuming reinvestment of all distributions) held
for the entire period. This information has been audited by the fund's independent registered public accounting firm, whose
report, together with the fund's financial statements, are included in this report.
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $6.69 $6.24 $6.46 $6.67 $7.30
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.40 $0.38 $0.41 $0.52 $0.60
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.22 0.46 (0.20) (0.16) (0.59)
- ----------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.62 $0.84 $0.21 $0.36 $0.01
- ----------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.41) $(0.39) $(0.39) $(0.49) $(0.48)
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.04) (0.08) (0.16)
- ----------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.41) $(0.39) $(0.43) $(0.57) $(0.64)
- ----------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+ $-- $-- $-- $--
- ----------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $6.90 $6.69 $6.24 $6.46 $6.67
- ----------------------------------------------- -------- ------ ------ ------ ------
Total return (%)(+) 9.57 13.81 3.39 5.54 (0.03)
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.87 0.93 0.94 0.96 0.92
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 5.92 5.89 6.59 7.83 8.57
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 64 136 147 153 127
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $190,165 $190,926 $176,624 $184,482 $111,791
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating
expenses, exclusive of management, distribution and service, and certain other fees and expenses in excess of 0.08% of
average daily net assets. In addition, the investment adviser contractually waived a portion of its fee for the periods
indicated. Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual
expenses were over this limitation and the waivers had not been in place, the net investment income per share and the
ratios would have been:
Net investment income $0.37 $0.36 $0.39 $0.46 $0.54
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.32 1.32 1.40 1.80 1.81
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.47 5.50 6.13 6.99 7.68
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly. (+) Total returns do not include the applicable
sales charge. If the charge had been included, the results would have been lower.
(S)(S) As required, effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium and accreting market discount on all debt securities. The effect of
this change for the year ended October 31, 2002 was to decrease net investment income per share and increase net
realized and unrealized gains and losses per share. The impact of this change calculates to less than $0.01 per share.
In addition, the ratio of net investment income to average net assets decreased by 0.05%. Per share, ratios, and
supplemental data for periods prior to October 31, 2002 have not been restated to reflect this change in presentation.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $6.62 $6.18 $6.39 $6.61 $7.24
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.35 $0.34 $0.37 $0.47 $0.55
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.22 0.45 (0.19) (0.17) (0.59)
- ----------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.57 $0.79 $0.18 $0.30 $(0.04)
- ----------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.36) $(0.35) $(0.36) $(0.45) $(0.44)
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.03) (0.07) (0.15)
- ----------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.36) $(0.35) $(0.39) $(0.52) $(0.59)
- ----------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+ $-- $-- $-- $--
- ----------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $6.83 $6.62 $6.18 $6.39 $6.61
- ----------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 8.90 13.00 2.93 4.71 (0.67)
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.52 1.58 1.59 1.61 1.56
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 5.27 5.25 5.95 7.22 7.89
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 64 136 147 153 127
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $130,075 $146,903 $146,096 $163,299 $137,013
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating
expenses, exclusive of management, distribution and service, and certain other fees and expenses in excess of 0.08% of
average daily net assets. In addition, the investment adviser contractually waived a portion of its fee for the periods
indicated. Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual
expenses were over this limitation and the waivers had not been in place, the net investment income per share and the
ratios would have been:
Net investment income $0.32 $0.31 $0.34 $0.42 $0.49
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.97 1.97 2.05 2.45 2.45
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 4.82 4.86 5.49 6.38 7.00
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(S)(S) As required, effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium and accreting market discount on all debt securities. The effect of
this change for the year ended October 31, 2002 was to decrease net investment income per share and increase net
realized and unrealized gains and losses per share. The impact of this change calculates to less than $0.01 per share.
In addition, the ratio of net investment income to average net assets decreased by 0.05%. Per share, ratios, and
supplemental data for periods prior to October 31, 2002 have not been restated to reflect this change in presentation.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $6.59 $6.15 $6.37 $6.59 $7.22
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.35 $0.33 $0.37 $0.47 $0.55
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.22 0.45 (0.20) (0.17) (0.59)
- ----------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.57 $0.78 $0.17 $0.30 $(0.04)
- ----------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.36) $(0.34) $(0.36) $(0.45) $(0.44)
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.03) (0.07) (0.15)
- ----------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.36) $(0.34) $(0.39) $(0.52) $(0.59)
- ----------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+ $-- $-- $-- $--
- ----------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $6.80 $6.59 $6.15 $6.37 $6.59
- ----------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 8.91 13.04 2.78 4.73 (0.67)
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS C (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.53 1.58 1.59 1.61 1.56
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 5.26 5.23 5.95 7.18 7.90
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 64 136 147 153 127
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $36,537 $40,703 $35,952 $40,787 $37,956
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating
expenses, exclusive of management, distribution and service, and certain other fees and expenses in excess of 0.08% of
average daily net assets. In addition, the investment adviser contractually waived a portion of its fee for the periods
indicated. Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual
expenses were over this limitation and the waivers had not been in place, the net investment income per share and the
ratios would have been:
Net investment income $0.32 $0.31 $0.34 $0.42 $0.49
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.98 1.97 2.05 2.45 2.45
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 4.81 4.84 5.49 6.34 7.01
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(S)(S) As required, effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium and accreting market discount on all debt securities. The effect of
this change for the year ended October 31, 2002 was to decrease net investment income per share and increase net
realized and unrealized gains and losses per share. The impact of this change calculates to less than $0.01 per share.
In addition, the ratio of net investment income to average net assets decreased by 0.05%. Per share, ratios, and
supplemental data for periods prior to October 31, 2002 have not been restated to reflect this change in presentation.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $6.70 $6.25 $6.47 $6.68 $7.31
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.42 $0.40 $0.44 $0.55 $0.68
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.22 0.46 (0.21) (0.17) (0.65)
- ---------------------------------------------- --------- ------ ------ ------ ------
Total from investment operations $0.64 $0.86 $0.23 $0.38 $0.03
- ---------------------------------------------- --------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.43) $(0.41) $(0.41) $(0.51) $(0.50)
- -----------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.04) (0.08) (0.16)
- ---------------------------------------------- --------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.43) $(0.41) $(0.45) $(0.59) $(0.66)
- ---------------------------------------------- --------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+ $-- $-- $-- $--
- ---------------------------------------------- --------- ------ ------ ------ ------
Net asset value, end of period $6.91 $6.70 $6.25 $6.47 $6.68
- ---------------------------------------------- --------- ------ ------ ------ ------
Total return (%) 9.95 14.19 3.75 5.92 0.33
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
--------------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.52 0.58 0.59 0.61 0.60
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 6.28 6.23 6.93 8.21 9.53
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 64 136 147 153 127
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $11,965 $9,764 $10,029 $10,249 $7,542
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually agreed under a temporary expense agreement to pay all of the fund's operating
expenses, exclusive of management and certain other fees and expenses in excess of 0.08% of average daily net assets.
In addition, the investment adviser contractually waived a portion of its fee for the periods indicated. Effective June
7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent
Chief Compliance Officer service fees paid to Tarantino LLC. To the extent actual expenses were over this limitation
and the waivers had not been in place, the net investment income per share and the ratios would have been:
Net investment income $0.39 $0.38 $0.41 $0.49 $0.62
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.97 0.97 1.05 1.45 1.49
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 5.83 5.84 6.47 7.37 8.64
- -----------------------------------------------------------------------------------------------------------------------------
+ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(S)(S) As required, effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium and accreting market discount on all debt securities. The effect of
this change for the year ended October 31, 2002 was to decrease net investment income per share and increase net
realized and unrealized gains and losses per share. The impact of this change calculates to less than $0.01 per share.
In addition, the ratio of net investment income to average net assets decreased by 0.05%. Per share, ratios, and
supplemental data for periods prior to October 31, 2002 have not been restated to reflect this change in presentation.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Strategic Income Fund (the fund) is a non-diversified series of MFS Series
Trust VIII (the trust). The trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
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 fund can invest up to 100% of its portfolio in high-yield securities rated
below investment grade. Investments in high-yield securities involve greater
degrees of credit and market risk than investments in higher-rated securities
and tend to be more sensitive to economic conditions.
The fund 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 - Bonds and other fixed income securities (other than
short-term obligations) in the fund's portfolio are valued at an evaluated bid
price as reported by an independent pricing service, or to the extent a
valuation is not reported by a pricing service, such securities are valued on
the basis of quotes from brokers and dealers. Prices obtained from pricing
services utilize both dealer-supplied valuations and electronic data processing
techniques which take into account appropriate 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 quoted prices or exchange or over-the-
counter prices, since such valuations are believed to reflect more accurately
the fair value of such securities. Equity securities in the fund's portfolio for
which market quotations are available are valued at the last sale or official
closing price as reported by an independent pricing service on the primary
market or exchange on which they are primarily traded, or at the last quoted bid
price for securities in which there were no sales during the day. Equity
securities traded over the counter are valued at the last sales price traded
each day as reported by an independent pricing service, or to the extent there
are no sales reported, such securities are valued on the basis of quotations
obtained from brokers and dealers. Foreign currency options are valued by MFS
using an external pricing model approved by the Board of Trustees that uses
market data from an independent pricing source. Futures contracts are valued at
the settlement price as reported by an independent pricing service on the
primary exchange on which they are traded. Forward foreign currency contracts
are valued using spot rates and forward points as reported by an independent
pricing source. Short-term obligations with a remaining maturity in excess of 60
days will be valued upon dealer-supplied valuations. All other short-term
obligations in the fund's portfolio are valued at amortized cost, which
constitutes market value as determined by the Board of Trustees. 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. When pricing service information or market quotations are not
readily available, securities are priced at fair value as determined under the
direction of the Board of Trustees. For example, significant events (such as
movement in the U.S. securities market, or other regional and local
developments) may occur between the time that foreign markets close (where the
security is principally traded) and the time that the fund calculates its net
asset value (generally, the close of the NYSE) that may impact the value of
securities traded in these foreign markets. In these cases the fund may utilize
information from an external vendor or other sources to adjust closing market
quotations of foreign equity securities to reflect what it believes to be the
fair value of the securities as of the fund valuation time. Because the
frequency of significant events is not predictable, fair valuation of foreign
equity securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The fund requires that the
securities collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the fund to obtain those securities
in the event of a default under the repurchase agreement. The fund 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 fund under each such
repurchase agreement. The fund, 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 - 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.
FUTURES CONTRACTS - The fund may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the fund is required
to deposit with the broker, either in cash or securities, an amount equal to a
certain percentage of the contract amount. Subsequent payments are made or
received by the fund each day, depending on the daily fluctuations in the value
of the contract, and are recorded for financial statement purposes as unrealized
gains or losses by the fund. The fund's investment in futures contracts is
designed to hedge against anticipated future changes in interest rates.
Investments in interest rate futures for purposes other than hedging may be made
to modify the duration of the portfolio without incurring the additional
transaction costs involved in buying and selling the underlying securities.
Investments in currency futures for purposes other than hedging may be made to
change the fund's relative position in one or more currencies without buying and
selling portfolio assets. Investments in equity index contracts or contracts on
related options for purposes other than hedging, may be made when the fund has
cash on hand and wishes to participate in anticipated market appreciation while
the cash is being invested. Should interest rates move unexpectedly, the fund
may not achieve the anticipated benefits of the futures contracts and may
realize a loss.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The fund 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 fund may enter into
forward foreign currency exchange contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the fund may enter into contracts to
deliver or receive foreign currency it will receive from or require for its
normal investment activities. The fund 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
fund may enter into contracts with the intent of changing the relative exposure
of the fund'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.
DOLLAR ROLL TRANSACTIONS - The fund enters into dollar roll transactions, with
respect to mortgage backed securities issued by Ginnie Mae, Fannie Mae, and
Freddie Mac, in which the fund sells mortgage backed securities to financial
institutions and simultaneously agrees to accept substantially similar (same
type, coupon, and maturity) securities at a later date at an agreed-upon price.
During the period between the sale and repurchase in a dollar roll transaction
the fund will not be entitled to receive interest and principal payments on the
securities sold but is compensated by interest earned on the proceeds of the
initial sale and by a lower purchase price on the securities to be repurchased
which enhances the fund's total return. The fund accounts for dollar roll
transactions as purchases and sales. If certain criteria are met these dollar
roll transactions may be considered a financing transaction whereby the
difference in the sales price and the future purchase price is recorded as an
adjustment to interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
Class A, Class B, Class C, and Class I shares redeemed or exchanged within 5
business days following their acquisition (either by purchase or exchange). The
fund may change the redemption fee period in the future, including changes in
connection with pending Securities and Exchange Commission rules. See the fund's
prospectus for details. These fees are accounted for as an addition to paid-in
capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement purposes in accordance
with U.S. generally accepted accounting principles. 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.
The fund may enter in "TBA" (to be announced) purchase commitments to purchase
securities for a fixed unit price at a future date. Although the unit price has
been established, the principal value has not been finalized. However, the
principal amount of the commitments will not fluctuate more than 0.01%. The fund
holds, and maintains until settlement date, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns. Income on
the securities will not be earned until settlement date. TBA purchase
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to settlement
date, which is in addition to the risk of decline in the value of the fund's
other assets. Unsettled TBA purchase commitments are valued at the current
market value of the underlying securities, according to the procedures described
under "Investment Valuations" above.
The fund may enter into "TBA" (to be announced) sale commitments to hedge its
portfolio positions or to sell mortgage-backed securities it owns under delayed
delivery arrangements. Proceeds of TBA sale commitments are not received until
the contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction.
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 fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. This amount, for the year ended October 31, 2004, is shown as a reduction
of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund'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 fund
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 foreign currency transactions, derivatives, defaulted bonds, and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended October 31, 2004
and October 31, 2003 was as follows:
10/31/04 10/31/03
Distributions declared from:
- ------------------------------------------------------------------------------
Ordinary income $21,704,738 $21,869,350
- ------------------------------------------------------------------------------
During the year ended October 31, 2004, distributions in excess of net
investment income decreased by $2,212,523, accumulated undistributed net
realized loss on investments and foreign currency transactions increased by
$3,784,852, and paid-in capital increased by $1,572,329 due to differences
between book and tax accounting for foreign currency transactions, and defaulted
bonds. This change had no effect on the net assets or net asset value per share.
As of October 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $2,937,454
----------------------------------------------------------
Capital loss carryforward (78,537,252)
----------------------------------------------------------
Unrealized appreciation (depreciation) 19,666,336
----------------------------------------------------------
Other temporary differences (6,297,781)
----------------------------------------------------------
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 as follows:
EXPIRATION DATE
October 31, 2006 $(17,364,805)
----------------------------------------------------------
October 31, 2007 (11,626,162)
----------------------------------------------------------
October 31, 2008 (3,849,634)
----------------------------------------------------------
October 31, 2009 (17,590,678)
----------------------------------------------------------
October 31, 2010 (28,105,973)
----------------------------------------------------------
Total $(78,537,252)
----------------------------------------------------------
The availability of a portion of these respective capital loss carryforwards,
which were acquired on August 6, 2001, in connection with the MFS Global
Governments Fund acquisition, may be limited in a given year.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses. Class B shares will convert to Class A shares approximately eight
years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund 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 0.65% of
the fund's average daily net assets. As part of a settlement agreement with the
New York Attorney General concerning market timing and related matters (See
Legal Proceedings footnote), MFS has agreed to reduce the fund's management fee
to 0.40% of average daily net assets for the period March 1, 2004 through
February 28, 2009. During this time period, the Board of Trustees will continue
to review the appropriateness of all advisory fees in accordance with their
oversight responsibilities. After February 28, 2009 the management fee will be
determined in accordance with then existing review policies approved by the
Board of Trustees overseeing the fund. The investment adviser has contractually
agreed to pay the fund's operating expenses exclusive of management,
distribution and service, and certain other fees such that the fund's aggregate
expenses do not exceed 0.08% of its average daily net assets. This is reflected
as a reduction of expenses in the Statement of Operations.
Management fees incurred for the year ended October 31, 2004 were an effective
rate of 0.43% of average daily net assets on an annualized basis.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairperson, and pays no compensation directly to its Trustees who are officers
of the investment adviser, or to officers of the fund, all of whom receive
remuneration for their services to the fund from MFS. Certain officers and
Trustees of the fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The fund has an unfunded
defined benefit plan for retired Independent Trustees and an unfunded retirement
benefit deferral plan for current Independent Trustees. Included in Trustees'
compensation is $3,023 as a result of the change in the unfunded retirement
benefit deferral plan for certain current Independent Trustees and a pension
expense of $5,362 for retired Independent Trustees for the year ended October
31, 2004.
This fund and certain other MFS funds (the "funds") have entered into a service
agreement (the "Agreement") which provides for payment of fees by the funds to
Tarantino LLC in return for the provision of services of an Independent Chief
Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the funds
for a proportional share of substantially all of the payments made by the funds
to Tarantino LLC and also to provide office space and other administrative
support and supplies to the ICCO. The funds can terminate the Agreement with
Tarantino LLC at any time under the terms of the Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement of
the costs MFS incurs to provide these services, subject to review and approval
by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior to
April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund'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%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended October 31, 2004, the fund paid MFS $34,726, equivalent to
0.0092% of average daily net assets, to partially reimburse MFS for the costs of
providing administrative services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$41,487 for the year ended October 31, 2004, as its portion of the sales charge
on sales of Class A shares of the fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class C
shares pursuant to rule 12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share classes
in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD based
on the average daily net assets of accounts attributable to such dealers. The
fees are calculated based on each class' average daily net assets. The maximum
distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C
Distribution Fee 0.10% 0.75% 0.75%
- ----------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- ----------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00%
- ----------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
October 31, 2004 amounted to:
CLASS A CLASS B CLASS C
Service Fee Retained by MFD $11,919 $744 $372
- ----------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended October 31, 2004 were as follows:
CLASS A CLASS B CLASS C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- ----------------------------------------------------------------------------------------------------------
Certain Class A and Class C shares are subject to a contingent deferred sales charge in the event of a
shareholder redemption within, for Class A shares, 12 months following the purchase, and, for Class C
shares, the first year from the end of the calendar month of purchase. A contingent deferred sales charge
is imposed on shareholder redemptions of Class B shares in the event of a shareholder redemption within
six years from the end of the calendar month of purchase. MFD receives all contingent deferred sales
charges. Contingent deferred sales charges imposed during the year ended October 31, 2004 were as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges Imposed $4,904 $259,752 $7,127
- ----------------------------------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the fund's
Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's average
daily net assets. For the period April 1, 2004 through June 30, 2004, the fee
was set at 0.10% of the fund's average daily net assets. Effective July 1, 2004,
the fund is charged up to 0.0861% of its average daily net assets. For the year
ended October 31, 2004, the fund paid MFSC a fee of $374,678 for shareholder
services which equated to 0.10% of the fund's average daily net assets. Also
included in shareholder servicing costs are out-of- pocket expenses, paid to
MFSC, which amounted to $92,561 for the year ended October 31, 2004, as well as
other expenses paid to unaffiliated vendors.
(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 $44,130,399 $40,727,163
- --------------------------------------------------------------------------------
Investments (non-U.S. government
securities) $189,834,141 $212,696,014
- --------------------------------------------------------------------------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are as
follows:
Aggregate cost $342,907,294
----------------------------------------------------------
Gross unrealized appreciation $21,926,013
----------------------------------------------------------
Gross unrealized depreciation (1,940,913)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $19,985,100
----------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
fund shares were as follows:
Year ended 10/31/04 Year ended 10/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 5,835,048 $39,675,485 7,567,850 $49,531,911
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 1,412,848 9,558,766 1,321,769 8,588,972
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (8,236,613) (55,676,175) (8,643,657) (56,501,924)
- ----------------------------------------------------------------------------------------------------------
Net change (988,717) $(6,441,924) 245,962 $1,618,959
- ----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 3,177,700 $21,382,554 5,148,028 $33,175,157
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 800,463 5,358,327 845,214 5,431,058
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (7,126,733) (47,651,435) (7,450,870) (48,077,748)
- ----------------------------------------------------------------------------------------------------------
Net change (3,148,570) $(20,910,554) (1,457,628) $(9,471,533)
- ----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 1,708,821 $11,379,196 2,303,782 $14,947,512
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 231,053 1,540,142 206,996 1,324,544
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (2,741,128) (18,241,249) (2,179,827) (13,993,479)
- ----------------------------------------------------------------------------------------------------------
Net change (801,254) $(5,321,911) 330,951 $2,278,577
- ----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 556,653 $3,796,259 720,482 $4,702,562
- ----------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 108,319 733,832 91,637 595,677
- ----------------------------------------------------------------------------------------------------------
Shares reacquired (391,402) (2,652,276) (959,003) (6,199,434)
- ----------------------------------------------------------------------------------------------------------
Net change 273,570 $1,877,815 (146,884) $(901,195)
- ----------------------------------------------------------------------------------------------------------
(6) LINE OF CREDIT
The fund 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 Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended October 31, 2004 was $1,347, and is
included in miscellaneous expense. The fund had no significant borrowings during
the year ended October 31, 2004.
(7) FINANCIAL INSTRUMENTS
The fund 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 forward foreign currency exchange contracts and futures
contracts. The notional or contractual amounts of these instruments represent
the investment the fund 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.
Forward Foreign Currency Exchange Contracts
SALES
CONTRACTS TO NET UNREALIZED
DELIVER/ IN EXCHANGE CONTRACTS APPRECIATION
SETTLEMENT DATE RECEIVE FOR AT VALUE (DEPRECIATION)
12/13/04 - 12/15/04 AUD 2,486,363 $1,787,701 $1,852,104 $(64,403)
11/15/04 CAD 717,401 550,000 589,150 (39,150)
11/16/04 DKK 21,759,837 3,574,335 3,744,819 (170,484)
11/15/04 - 11/22/04 EUR 33,985,676 41,866,616 43,473,245 (1,606,629)
11/16/04 GBP 2,990,277 5,423,828 5,485,874 (62,046)
12/13/04 NZD 6,381,257 4,279,909 4,346,393 (66,484)
----------- ----------- -----------
$57,482,389 $59,491,585 $(2,009,196)
=========== =========== ===========
PURCHASES
11/16/04 DKK 3,706,833 $612,754 $637,938 $25,184
11/15/04 -11/22/04 EUR 5,737,332 7,089,964 7,339,043 249,079
11/16/04 SEK 20,688,875 2,749,889 2,925,379 175,490
----------- ----------- -----------
$10,452,607 $10,902,360 $449,753
=========== =========== ===========
At October 31, 2004, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $394,534 with
Merrill Lynch International.
At October 31, 2004, the fund had sufficient cash and/or securities to cover any
commitments under these contracts.
Futures Contracts
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION
U.S. 10-Yr. Treasury Notes December 2004 243 Short $(407,267)
- --------------------------------------------------------------------------------
At October 31, 2004, the fund had sufficient cash and/or securities to cover any
margin requirements under these contracts.
(9) RESTRICTED SECURITIES
At October 31, 2004, the fund owned the following securities which are subject
to legal or contractual restrictions on resale, excluding securities issued
under Rule 144A, constituting 0.002% of net assets which may not be publicly
sold without registration under the securities Act of 1933. The fund 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/PRINCIPAL
DESCRIPTION ACQUISITION AMOUNT COST VALUE
DLJ Mortgage Acceptance Corp. 3/1/98 841,527 $841,527 $815,423
- --------------------------------------------------------------------------------------------------------------
(10) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under the
terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50 million
in penalty to certain MFS funds, pursuant to a plan developed by an independent
distribution consultant. The brokerage allocation practices which were the
subject of this proceeding were discontinued by MFS in November 2003. The
agreement with the SEC is reflected in an order of the SEC. Pursuant to the SEC
order, on July 28, 2004, MFS transferred these settlement amounts to the SEC,
and those MFS funds entitled to these settlement amounts accrued an estimate of
their pro rata portion of these amounts. Once the final distribution plan is
approved by the SEC, these amounts will be distributed by the SEC to the
affected MFS funds. The SEC settlement order states that MFS failed to
adequately disclose to the Boards of Trustees and to shareholders of the MFS
funds the specifics of its preferred arrangements with certain brokerage firms
selling MFS fund shares. The SEC settlement order states that MFS had in place
policies designed to obtain best execution of all MFS fund trades. As part of
the settlement, MFS retained an independent compliance consultant to review the
completeness of its current policies and practices regarding disclosure to MFS
fund trustees and to MFS fund shareholders of strategic alliances between MFS or
its affiliates and broker-dealers and other financial advisers who support the
sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New York
Attorney General ("NYAG") and the Bureau of Securities Regulation of the State
of New Hampshire ("NH") to settle administrative proceedings alleging false and
misleading information in certain MFS open-end retail fund ("MFS retail funds")
prospectuses regarding market timing and related matters (the "February
Settlements"). These regulators alleged that prospectus language for certain MFS
retail funds was false and misleading because, although the prospectuses for
those funds in the regulators' view indicated that they prohibited market
timing, MFS did not limit trading activity in 11 domestic large cap stock, high
grade bond and money market retail funds. MFS' former Chief Executive Officer,
John W. Ballen, and former President, Kevin R. Parke, also reached agreement
with the SEC in which they agreed to, among other terms, monetary fines and
temporary suspensions from association with any investment adviser or registered
investment company. Messrs. Ballen and Parke have resigned their positions with,
and will not be returning to, MFS and the MFS funds. Under the terms of the
February Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to increase
certain management fees during this period. MFS has also paid an administrative
fine to NH in the amount of $1 million, which will be used for investor
education purposes (NH retained $250,000 and $750,000 was contributed to the
North American Securities Administrators Association's Investor Protection
Trust). In addition, under the terms of the February Settlements, MFS is in the
process of adopting certain governance changes and reviewing its policies and
procedures.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc.,
MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS
funds, certain current and/or former Trustees of these MFS funds, and certain
officers of MFS have been named as defendants in multiple lawsuits filed in
federal and state courts. The lawsuits variously have been commenced as class
actions or individual actions on behalf of investors who purchased, held or
redeemed shares of the MFS funds during specified periods, as class actions on
behalf of participants in certain retirement plan accounts, or as derivative
actions on behalf of the MFS funds. The lawsuits relating to market timing and
related matters have been transferred to, and consolidated before, the United
States District Court for the District of Maryland, as part of a multi-district
litigation of market timing and related claims involving several other fund
complexes (In re Mutual Funds Investment Litigation (Alger, Columbia, Janus,
MFS, One Group, Putnam, Allianz Dresdner), No. 1:04-md-15863 (transfer began
March 19, 2004)). The plaintiffs in these consolidated lawsuits generally seek
injunctive relief including removal of the named Trustees, adviser and
distributor, rescission of contracts and 12b-1 Plans, disgorgement of fees and
profits, monetary damages, punitive damages, attorney's fees and costs and other
equitable and declaratory relief. Four lawsuits alleging improper brokerage
allocation practices and excessive compensation are pending in the United States
District Court for the District of Massachusetts (Forsythe v. Sun Life Financial
Inc., et al., No. 04cv10584 (GAO) (March 25, 2004); Eddings v. Sun Life
Financial Inc., et al., No. 04cv10764 (GAO) (April 15, 2004); Marcus Dumond, et
al. v. Massachusetts Financial Servs. Co., et al., No. 04cv11458 (GAO) (May 4,
2004); and Koslow v. Sun Life Financial Inc., et al., No. 04cv11019 (GAO) (May
20, 2004)). The plaintiffs in these lawsuits generally seek compensatory
damages, punitive damages, recovery of fees, rescission of contracts, an
accounting, restitution, declaratory relief, equitable and/or injunctive relief
and attorney's fees and costs. The various lawsuits generally allege that some
or all of the defendants (i) permitted or acquiesced in market timing and/or
late trading in some of the MFS funds, inadequately disclosed MFS' internal
policies concerning market timing and such matters, and received excessive
compensation as fiduciaries to the MFS funds, or (ii) permitted or acquiesced in
the improper use of fund assets by MFS to support the distribution of MFS fund
shares and inadequately disclosed MFS' use of fund assets in this manner. The
actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. Insofar as any of
the actions is appropriately brought derivatively on behalf of any of the MFS
funds, any recovery will inure to the benefit of the MFS funds. The defendants
are reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of certain MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS funds
to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage they
allegedly sustained, whether certain shareholders or putative class members may
have additional claims to compensation, or whether the damages that may be
awarded in any of the actions will exceed these amounts. In the event the MFS
funds incur any losses, costs or expenses in connection with such lawsuits, the
Boards of Trustees of the affected MFS funds may pursue claims on behalf of such
funds against any party that may have liability to the funds in respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or other
adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Strategic
Income Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Strategic Income Fund (the Fund) (one of the portfolios comprising MFS Series
Trust VIII), including the portfolio of investments, as of October 31, 2004, and
the related statement of operations for the year then ended, the statements of
changes in net assets for each of the two years in the period then ended, and
the financial highlights for each of the five years in the period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of securities owned at October 31, 2004, by correspondence
with the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Strategic Income Fund at October 31, 2004, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the five years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
December 10, 2004
- -------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- -------------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of December 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.) The
address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- ------------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004); Harvard
Law School (education), John
Olin Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser), President
(March 1997 to July 2001); The
Bank of New York (financial
services), Director; Bell
Canada Enterprises
(telecommunications), Director;
Medtronic, Inc. (medical
technology), Director; Telesat
(satellite communications),
Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company), Principal
(1997 to April 2001); Lincoln
Electric Holdings, Inc.
(welding equipment
manufacturer), Director;
Southwest Gas Corporation
(natural gas distribution
company), Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments (investor
in health care companies),
Managing General Partner (since
1993); Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel and
Secretary (since April 2004);
Hale and Door LLP (law firm)
(prior to April 2004)
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September 2000
to July 2002); Lexington Global
Asset Managers, Inc., Executive
Vice President and Chief
Financial Officer (prior to
September 2000); Lexington
Funds, Chief Financial Officer
(prior to September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "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 fund. The
address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees
are not elected for fixed terms. The trust will hold a shareholders' meeting in 2005 and at least once
every five years hereafter to elect Trustees. Each Trustee and officer holds office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or
removal. Messrs. Ives, Poorvu and Sherratt and Ms. Lane are members of the trust's Audit Committee.
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 99 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 CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
INDEPENDENT REGISTERED PUBLIC
DISTRIBUTOR ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street, Boston, MA 02116
PORTFOLIO MANAGER
William J. Adams
- -------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- -------------------------------------------------------------------------------
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
- -------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- -------------------------------------------------------------------------------
The fund will file a complete schedule of portfolio holdings with the Securities
and Exchange Commission (the Commission) for the first and third quarters of
each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at
the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
- -------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Share prices, account 1-800-MFS-TALK
balances exchanges or (1-800-637-8255)
stock and bond outlooks touch-tone required 24 hours a day, 365 days a
year
- --------------------------------------------------------------------------------
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc., 500
Boylston Street, Boston, MA 02116.
MFO-ANN-12/04 29M
MFS(R) GLOBAL GROWTH FUND 10/31/04
ANNUAL REPORT
- -------------------------------------------------------------------------------
[logo] M F S(R)
INVESTMENT MANAGEMENT
THIS REPORT HAS BEEN PREPARED FOR THE GENERAL INFORMATION OF SHAREHOLDERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
ANNUAL REPORT
LETTER FROM THE CEO 1
------------------------------------------------------
PORTFOLIO COMPOSITION 5
------------------------------------------------------
MANAGEMENT REVIEW 6
------------------------------------------------------
PERFORMANCE SUMMARY 8
------------------------------------------------------
EXPENSE TABLE 13
------------------------------------------------------
PORTFOLIO OF INVESTMENTS 15
------------------------------------------------------
FINANCIAL STATEMENTS 22
------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 37
------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 49
------------------------------------------------------
TRUSTEES AND OFFICERS 50
------------------------------------------------------
PROXY VOTING POLICIES AND
INFORMATION 54
------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE 54
------------------------------------------------------
FEDERAL TAX INFORMATION 55
------------------------------------------------------
CONTACT INFORMATION BACK COVER
------------------------------------------------------
- -------------------------------------------------------------------------------
LETTER FROM THE CEO
- -------------------------------------------------------------------------------
Dear Shareholders,
[Photo of Robert J. Manning]
For most investors, the main factor in determining long-term success is asset
allocation - how they spread their money among stocks, bonds, and cash. In fact,
the total returns of investors may be more influenced by their asset allocation
strategy than by their security selection within each asset class. The principle
behind asset allocation is simple: by diversifying across a variety of types of
securities, investors reduce the overall risk of their portfolio because gains
in one area are likely to offset losses in another.
One of the dangers of not having an asset allocation plan is the temptation to
simply chase performance, by moving money into whichever asset class appears to
be outperforming at the moment. The problem with this approach is that by the
time a particular area of the market comes into favor, investors may have
already missed some of the best performance. We would suggest that one way to
benefit from swings in the market is to acquire a diversified portfolio so that
investors hold a range of asset classes before the market swings in their
direction.
UNDERSTAND YOUR EMOTIONS
It usually takes a bear market for people to appreciate the benefits of
diversification. At MFS, we believe proper asset allocation is important in all
market environments. But we understand that there are emotional components of
investment decisions that sometimes keep investors from achieving their long
term goals. The three common behaviors that negatively impact investment
decisions are overconfidence, looking backwards, and loss aversion.
o Overconfidence. After experiencing gains in the market, particularly
during a bull market, investors have a natural tendency to overestimate
their own abilities. During the global bull market of the late 1990s, for
example, a large number of investors traded their own stocks and made
significant profits. However, most of these same investors later handed
back those profits - and then some - because they focused more on
short-term blips in the market and less on the fundamental factors that
affect a company's long-term prospects.
o Looking backwards. Although security prices are determined by
expectations about the future, many investors make choices based on the
recent past. Investors who have achieved momentary success in the market
tend to take on too much risk, believing that better- than-average
returns can be easily duplicated. On the other hand, those who have had
negative experiences tend to become overly cautious and take on too
little risk. Recent historical experience tends to dictate an investor's
frame of reference and may lead to irrational decisions.
o Loss aversion. Simply put, investors would rather avoid the immediate
pain of losses than enjoy the future pleasure of gains. As a result, some
investors tend to overreact to short-term downturns in the market by
seeking to mitigate their losses, rather than remaining invested to
benefit from the long-term growth potential of the stock and bond
markets.
THINK LIKE A PROFESSIONAL INVESTOR
Asset allocation helps reduce the emotional factors that tend to affect the
long-term returns of investors. Professional investors - those who manage assets
for money management firms, pension funds, and endowments - have tended to
outperform the average retirement investor because they focus on asset
allocation. For example, the investment performance of the average 401(k)
participant has lagged these professional investors by more than two percentage
points a year, on average, over the past 10 years.(1)
We think asset allocation is one of the most important decisions for investors.
A study of the performance of 91 large U.S. corporate pension plans with assets
of more than $100 million over a 10-year period beginning in 1974 concluded that
asset allocation policies accounted for 93.6% of their returns, while individual
security selection and the timing of their investments accounted for only 6.4%
for their overall performance.(2)
Professional investors target a realistic level of return based on the amount of
risk they are willing to take, then set allocations to meet their goals. On
average, U.S. professional investors allocate 35% to 40% of their assets to
domestic equity stocks; 20% to 30% to fixed income issues; 10% to international
stocks; and between 10% and 20% to other investment classes such as real
estate.(3) And within those categories, they hold a broad range of styles and
asset classes.
In contrast, 401(k) participants who held company stock in their retirement
plans at the end of 2002 had roughly 42% of their retirement assets in company
stock while the rest was allocated to either growth or value stock funds.(4)
These participants virtually ignored the broad range of equity, fixed-income,
and international offerings provided by their retirement plans.
ALLOCATE, DIVERSIFY, REBALANCE
We recommend working with a professional adviser to find an optimal mix of
investments based on your individual goals. In our view, a disciplined asset
allocation strategy is composed of three simple steps: allocate, diversify and
rebalance.
o Allocate. Investors should work with their financial adviser to specify
their long-term goals and tolerance for risk. Then investors should
allocate their assets across the major asset classes - stocks, bonds, and
cash - to help them pursue an investment return that is consistent with
their risk tolerance level.
o Diversify. By diversifying their assets, investors trade some performance
in the top performing categories for a more predictable and stable
portfolio. At the same time, investors should include different
investment styles and market capitalizations of stocks and a range of
fixed-income investments, as well as U.S. and non-U.S. securities.
Because security subclasses tend to move in and out of favor during
various market and economic environments, a broad portfolio increases the
benefits of diversification.
o Rebalance. We suggest that investors consult with their professional
advisers periodically to rebalance their portfolios to maintain the
percentages that they have dedicated to each asset class. Allocations can
shift as markets rise and fall, making for a riskier or more conservative
portfolio than an investor originally intended. For example, a portfolio
of 50% stocks and 50% bonds at the start of 2000 would have shifted to
32% stocks and 68% bonds at the end of 2002 because of the weak stock
market.(5)
In short, these three simple concepts - allocate, diversify and rebalance - help
take emotion out of the investment process and help prevent investors from
trying to outguess the market. An asset allocation strategy cannot turn a down
market cycle into a good one, but it is an invaluable tool to manage risk and
keep investors on track toward reaching their long-term investment goals.
A DISCIPLINED INVESTMENT PROCESS IS PARAMOUNT
Disciplined diversification has helped investors pursue long-term, above-
average results through the years. Since 1924, when we invented the mutual fund,
MFS(R) has strived to give investors the products and tools they need to
maintain well-diversified portfolios. MFS provides a variety of products in each
asset class as well as a family of asset allocation funds. These asset
allocation portfolios cover a range from conservative to moderate, growth, and
aggressive growth allocations, each with a strategy based on a distinct level of
risk. We recommend developing a comprehensive financial plan with an investment
advisor who is familiar with your risk tolerance, your individual goals, and
your financial situation.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management
November 15, 2004
Asset allocation and diversification can not guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can be
guaranteed.
(1) Source: Watson Wyatt
(2) "Determinants of Portfolio Performance," in Financial Analysts Journal,
January/February 1995, by Gary P. Brinson, L. Randolph Hood, and Gilbert L.
Beebower
(3) Source: Greenwich Associates
(4) Source: Hewitt Associates
(5) Source: Lipper Inc.
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
PORTFOLIO STRUCTURE
Stocks 97.1%
Cash & Other Net Assets 2.4%
Preferred Stock 0.5%
TOP TEN HOLDINGS
Vodafone Group PLC 2.0%
- ------------------------------------------------------------------------------
Microsoft Corp. 1.8%
- ------------------------------------------------------------------------------
Johnson & Johnson 1.7%
- ------------------------------------------------------------------------------
BP PLC 1.6%
- ------------------------------------------------------------------------------
Cisco Systems, Inc. 1.5%
- ------------------------------------------------------------------------------
Citigroup, Inc. 1.4%
- ------------------------------------------------------------------------------
Roche Holding AG 1.4%
- ------------------------------------------------------------------------------
Yahoo!, Inc. 1.3%
- ------------------------------------------------------------------------------
News Corp (LTD.) 1.3%
- ------------------------------------------------------------------------------
Dell, Inc. 1.3%
- ------------------------------------------------------------------------------
SECTOR WEIGHTINGS
Technology 19.2%
- ------------------------------------------------------------------------------
Financial Services 14.4%
- ------------------------------------------------------------------------------
Health Care 12.7%
- ------------------------------------------------------------------------------
Leisure 8.9%
- ------------------------------------------------------------------------------
Consumer Staples 7.4%
- ------------------------------------------------------------------------------
Retailing 7.1%
- ------------------------------------------------------------------------------
Basic Materials 6.5%
- ------------------------------------------------------------------------------
Utilities & Communications 5.6%
- ------------------------------------------------------------------------------
Energy 4.7%
- ------------------------------------------------------------------------------
Miscellaneous 4.1%
- ------------------------------------------------------------------------------
Industrial Goods & Services 4.0%
- ------------------------------------------------------------------------------
Autos & Housing 2.8%
- ------------------------------------------------------------------------------
Transportation 0.2%
- ------------------------------------------------------------------------------
COUNTRY WEIGHTINGS
United States 35.3%
- ------------------------------------------------------------------------------
Great Britain 14.6%
- ------------------------------------------------------------------------------
Japan 11.1%
- ------------------------------------------------------------------------------
France 6.1%
- ------------------------------------------------------------------------------
Switzerland 5.9%
- ------------------------------------------------------------------------------
Sweden 3.5%
- ------------------------------------------------------------------------------
Canada 2.3%
- ------------------------------------------------------------------------------
Spain 2.2%
- ------------------------------------------------------------------------------
Australia 2.2%
- ------------------------------------------------------------------------------
Other 16.8%
- ------------------------------------------------------------------------------
Percentages are based on net assets as of 10/31/04.
The portfolio is actively managed, and current holdings may be different.
- ------------------------------------------------------------------------------
MANAGEMENT REVIEW
- ------------------------------------------------------------------------------
SUMMARY OF RESULTS
For the year ended October 31, 2004, Class A shares of the MFS Global Growth
Fund provided an average annual return not including sales charges of,
outperforming the 8.62% return for its benchmark, the MSCI All Country World
Growth Index. Relative to the fund's prior benchmarks, the fund outperformed the
8.42% return for the MSCI World Growth Index, but underperformed the 14.03%
return for the MSCI All Country World Index.
MARKET ENVIRONMENT
In 2004, many measures of global economic growth, including employment,
corporate spending, and earnings growth continued to improve, though we feel
that near-record-high oil prices, concerns about rising interest rates, and an
unsettled geopolitical environment adversely affected global markets. The U.S.
Federal Reserve Board raised interest rates three times during the period, and
this appears to have set expectations for an ongoing series of modest rate
hikes.
CONTRIBUTORS TO RELATIVE PERFORMANCE
Strong stock selection in the technology, financial services, retailing, and
health care sectors was the principal source of the fund's relative performance
for the period. In the technology sector, our position in wireless company
Research in Motion helped boost relative results. Our underweighted positions in
Intel and Microsoft also added to returns.
In the financial services sector, our position in Austrian bank Erste Bank aided
relative results. In retailing, U.K. company NEXT was among the fund's top
contributors. Underweighting poor-performing Wal-Mart also helped relative
returns.
In the health care sector, the fund benefited from our underweighting in Pfizer
and Genentech. Individual stocks in other sectors that contributed to relative
results included energy company, BP, and consumer staples company, Kibun Food.
DETRACTORS FROM RELATIVE PERFORMANCE
Stock selection in the transportation sector held back relative performance for
the period. Our position in low cost airline JetBlue hurt relative results.
Stock selection in the utilities and communications sector also detracted from
relative returns. Although not among the funds' top detractors, Vodafone Group,
Brasil Telecom, and Andrew Corp. held back relative results. Our avoidance of
strong-performing AT&T Wireless also detracted from relative performance. In the
special products and services sector, our position in secondary education
company, Corinthian Colleges, hurt the fund's performance.
Stocks in other sectors that were among the fund's top detractors include
technology companies Agere Systems, Seiko Epson, Cap Gemini, and Red Hat. Our
avoidance of QUALCOMM also hurt relative results. Food company Coolbrands and
imaging equipment and services provider CTI Molecular also took away from the
fund's performance for the period.
The fund's cash position also detracted from relative performance. As with all
mutual funds, this portfolio holds some cash to buy new holdings and to provide
liquidity. In a period when equity markets rose holding any cash hurt
performance against our benchmark, the MSCI All Country World Growth Index,
which has no cash.
The views expressed are those of the portfolio managers only through the end of
the period as stated on the cover and do not necessarily reflect the views of
MFS or any other person in the MFS organization. these views are subject to
change at any time based on market and other conditions, and MFS disclaims any
responsibility to update such views. These views may not be relied upon as
investment advice or as an indication of trading intent on behalf of any MFS
fund. References to specific securities are not recommendations of such
securities and may not be representative of any MFS fund's current or future
investments.
The portfolio is actively managed, and current holdings may be different.
It is not possible to invest directly in an index.
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 10/31/04
- -------------------------------------------------------------------------------
The following chart illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results include
the deduction of the maximum applicable sales charge and reflect the percentage
change in net asset value, including reinvestment of dividends and capital gains
distributions. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT FAVORABLE
MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN DOES NOT
REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND
DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
MSCI All
MFS Global MSCI All Country
Growth Fund Country MSCI World World Growth
-- Class A World Index Growth Index Index
11/94 $ 9,425 $10,000 $10,000 $10,000
10/96 11,504 $10,000 12,982 12,503
12/96 11,504 $10,000 12,982 12,503
10/98 12,986 13,163 18,226 16,402
10/00 22,820 16,537 22,769 20,835
10/02 13,748 9,899 13,441 13,478
10/04 19,180 13,055 17,560 19,249
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class inception date 1-yr 3-yr 5-yr 10-yr
- ------------------------------------------------------------------------------
A 11/18/93 11.70% 6.75% 1.35% 7.36%
- ------------------------------------------------------------------------------
B 11/18/93 10.82% 5.95% 0.60% 6.55%
- ------------------------------------------------------------------------------
C 1/3/94 10.79% 5.94% 0.58% 6.56%
- ------------------------------------------------------------------------------
I 1/2/97 11.98% 7.01% 1.59% 7.58%
- ------------------------------------------------------------------------------
R1 12/31/02 11.41% 6.59% 1.26% 7.32%
- ------------------------------------------------------------------------------
R2 10/31/03 11.09% 6.04% 0.65% 6.58%
- ------------------------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ------------------------------------------------------------------------------
Average global multi-cap
growth fund+ 11.76% 6.74% 2.90% 7.45%
- ------------------------------------------------------------------------------
MSCI All Country World
Growth Index# 8.62% 5.15% -5.21% --
- ------------------------------------------------------------------------------
MSCI World Growth Index# 8.42% 4.45% -5.64% 5.79%
- ------------------------------------------------------------------------------
MSCI All Country World
Index# 14.03% 7.27% -1.41% 6.77%
- ------------------------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 5.28% 4.66% 0.15% 6.73%
- ------------------------------------------------------------------------------
B 6.82% 5.05% 0.31% 6.55%
- ------------------------------------------------------------------------------
C 9.79% 5.94% 0.58% 6.56%
- ------------------------------------------------------------------------------
I, R1, and R2 Class shares do not have a sales charge. Please see Notes to
Performance Summary for more details.
- --------------------
Cumulative
without sales charge
- --------------------
Share class
- ------------------------------------------------------------------------------
A 11.70% 21.64% 6.92% 103.50%
- ------------------------------------------------------------------------------
B 10.82% 18.93% 3.03% 88.62%
- ------------------------------------------------------------------------------
C 10.79% 18.89% 2.92% 88.69%
- ------------------------------------------------------------------------------
I 11.98% 22.55% 8.22% 107.72%
- ------------------------------------------------------------------------------
R1 11.41% 21.10% 6.44% 102.59%
- ------------------------------------------------------------------------------
R2 11.09% 19.22% 3.28% 89.08%
- ------------------------------------------------------------------------------
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITIONS
MSCI ALL COUNTRY WORLD INDEX - measures developed and emerging market stock
markets.
MSCI ALL COUNTRY WORLD GROWTH INDEX - commonly used measure of global growth
stocks.
MSCI WORLD GROWTH INDEX - a commonly used measure of global growth stocks.
Note to Shareholders: Effective April 5, 2004, the MSCI All Country World Growth
Index became the primary benchmark of the fund, replacing the MSCI All Country
World Index. We believe the MSCI All Country World Growth Index more accurately
reflects the fund's investment style. Please note that returns for the MSCI All
Country World Growth Index are not available for periods prior to January 1,
1997.
Also, effective April 6, 2004, the MSCI World Growth Index was dropped as the
fund's secondary benchmark.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A results including sales charge reflect the deduction of the maximum
5.75% sales charge. Class B results including sales charge reflect the deduction
of the applicable contingent deferred sales charge (CDSC), which declines over
six years from 4% to 0%. Class C results including sales charge (assuming
redemption within one year from the end of the calendar month of purchase),
reflect the deduction of the 1% CDSC. Class I shares have no sales charges and
are available only to certain investors. Class R1 and R2 shares have no sales
charges and are available only to certain retirement plans.
Performance for R1 and I shares includes the performance of the fund's Class A
shares for periods prior to their offering. Performance for R2 shares includes
the performance of the fund's Class B shares for periods prior to their
offering. This blended class performance has been adjusted to take into account
differences in sales loads, if any, applicable to these share classes, but has
not been adjusted to take into account differences in class specific operating
expenses (such as Rule 12b-1 fees). Compared to performance these share classes
would have experienced had they been offered for the entire period, the use of
blended performance generally results in higher performance for share classes
with higher operating expenses than the initial share class to which it is
blended, and lower performance for share classes with lower operating expenses
than the initial share class to which it is blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
The performance shown reflects a non-recurring accrual made to the fund on July
28, 2004, relating to MFS' revenue sharing settlement with the Securities and
Exchange Commission, without which the performance would have been lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
The portfolio may invest a substantial amount of its assets in issuers located
in a limited number of countries and therefore is susceptible to adverse
economic, political or regulatory developments affecting those countries.
The portfolio may invest in small-, mid-sized, or emerging companies, which are
susceptible to greater risk than is customarily associated with investing in
more established companies.
The portfolio will allocate its investments among U.S. emerging growth
companies, foreign growth companies and emerging markets companies, based upon
judgments made by MFS. The portfolio could miss attractive investment
opportunities by underweighting markets where there are significant returns, and
could lose value by overweighting markets where there are significant declines.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Please see the prospectus for further information regarding these and other risk
considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM MAY 1, 2004, THROUGH
OCTOBER 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period, May 1, 2004 through October 31, 2004.
ACTUAL EXPENSES
The first line for each share class in the table on the next page provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to estimate the
expenses that you paid over the period. Simply divide your account value by
$1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first line under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your account
during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table on the next page provides
information about hypothetical account values and hypothetical expenses based on
the fund's actual expense ratio and an assumed rate of return of 5% per year
before expenses, which is not the fund's actual return. The hypothetical account
values and expenses may not be used to estimate the actual ending account
balance or expenses you paid for the period. You may use this information to
compare the ongoing costs of investing in the fund and other funds. To do so,
compare this 5% hypothetical example with the 5% hypothetical examples that
appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
- ------------------------------------------------------------------------------
Share Class
- ------------------------------------------------------------------------------
Expenses
Annualized Beginning Ending Paid During
Expense Account Value Account Value* Period**
Ratio 5/01/04 10/31/04 5/01/04-10/31/04
- ------------------------------------------------------------------------------
Actual 1.48% $1,000 $1,042 $7.62
A ---------------------------------------------------------------------------
Hypothetical 1.48% $1,000 $1,018 $7.53
- ------------------------------------------------------------------------------
Actual 2.24% $1,000 $1,038 $11.51
B ---------------------------------------------------------------------------
Hypothetical 2.24% $1,000 $1,014 $11.37
- ------------------------------------------------------------------------------
Actual 2.24% $1,000 $1,038 $11.51
C ---------------------------------------------------------------------------
Hypothetical 2.24% $1,000 $1,014 $11.37
- ------------------------------------------------------------------------------
Actual 1.23% $1,000 $1,043 $6.34
I ---------------------------------------------------------------------------
Hypothetical 1.23% $1,000 $1,019 $6.26
- ------------------------------------------------------------------------------
Actual 1.73% $1,000 $1,041 $8.90
R1 ---------------------------------------------------------------------------
Hypothetical 1.73% $1,000 $1,016 $8.79
- ------------------------------------------------------------------------------
Actual 1.96% $1,000 $1,040 $10.08
R2 ---------------------------------------------------------------------------
Hypothetical 1.96% $1,000 $1,015 $9.96
- ------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -------------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 10/31/04
- -------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
STOCKS - 97.1%
- -------------------------------------------------------------------------------------------------
Aerospace - 0.8%
- -------------------------------------------------------------------------------------------------
Lockheed Martin Corp. 63,120 $3,477,281
- -------------------------------------------------------------------------------------------------
Airlines - 0.2%
- -------------------------------------------------------------------------------------------------
easyJet Airline Co. Ltd.* 387,200 $1,120,276
- -------------------------------------------------------------------------------------------------
Alcoholic Beverages - 0.8%
- -------------------------------------------------------------------------------------------------
Pernod Ricard^ 25,600 $3,553,245
- -------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.5%
- -------------------------------------------------------------------------------------------------
Burberry Group PLC 40,900 $293,583
- -------------------------------------------------------------------------------------------------
Toray Industries, Inc. 413,000 1,931,091
- -------------------------------------------------------------------------------------------------
$2,224,674
- -------------------------------------------------------------------------------------------------
Automotive - 0.8%
- -------------------------------------------------------------------------------------------------
Autoliv, Inc.^ 48,380 $2,059,160
- -------------------------------------------------------------------------------------------------
Magna International, Inc., "A" 19,600 1,429,820
- -------------------------------------------------------------------------------------------------
$3,488,980
- -------------------------------------------------------------------------------------------------
Banks & Credit Companies - 9.5%
- -------------------------------------------------------------------------------------------------
Aiful Corp. 19,050 $1,903,830
- -------------------------------------------------------------------------------------------------
American Express Co. 83,360 4,423,915
- -------------------------------------------------------------------------------------------------
Anglo Irish Bank Corp. PLC 118,490 2,270,644
- -------------------------------------------------------------------------------------------------
Bank Hapoalim B.M. 1,510,980 4,113,510
- -------------------------------------------------------------------------------------------------
Citigroup, Inc. 144,507 6,411,776
- -------------------------------------------------------------------------------------------------
DEPFA BANK PLC^ 203,480 3,123,622
- -------------------------------------------------------------------------------------------------
Erste Bank der oesterreichischen Sparkassen AG 106,740 4,764,130
- -------------------------------------------------------------------------------------------------
Irish Life & Permanent PLC 130,850 2,209,546
- -------------------------------------------------------------------------------------------------
Royal Bank of Scotland Group PLC 120,026 3,538,827
- -------------------------------------------------------------------------------------------------
Shinsei Bank Ltd.^ 319,000 2,079,157
- -------------------------------------------------------------------------------------------------
Takefuji Corp. 26,820 1,697,388
- -------------------------------------------------------------------------------------------------
UBS AG 74,773 5,401,733
- -------------------------------------------------------------------------------------------------
$41,938,078
- -------------------------------------------------------------------------------------------------
Biotechnology - 2.4%
- -------------------------------------------------------------------------------------------------
Amgen, Inc.* 72,250 $4,103,800
- -------------------------------------------------------------------------------------------------
Celgene Corp.* 77,260 2,288,441
- -------------------------------------------------------------------------------------------------
Genzyme Corp.* 84,540 4,435,814
- -------------------------------------------------------------------------------------------------
$10,828,055
- -------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 5.1%
- -------------------------------------------------------------------------------------------------
Antena 3 de Television S.A.^* 24,088 $1,551,514
- -------------------------------------------------------------------------------------------------
LodgeNet Entertainment Corp.* 88,960 1,205,408
- -------------------------------------------------------------------------------------------------
News Corp. Ltd. 712,434 5,739,724
- -------------------------------------------------------------------------------------------------
Time Warner, Inc.* 195,290 3,249,626
- -------------------------------------------------------------------------------------------------
TV Azteca S.A. de C.V., ADR^ 415,600 4,164,312
- -------------------------------------------------------------------------------------------------
Viacom, Inc., "B" 94,790 3,458,887
- -------------------------------------------------------------------------------------------------
Walt Disney Co. 126,960 3,201,931
- -------------------------------------------------------------------------------------------------
$22,571,402
- -------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 2.3%
- -------------------------------------------------------------------------------------------------
E*TRADE Financial Corp.* 216,160 $2,788,464
- -------------------------------------------------------------------------------------------------
Franklin Resources, Inc. 68,130 4,130,041
- -------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. 32,280 3,175,706
- -------------------------------------------------------------------------------------------------
$10,094,211
- -------------------------------------------------------------------------------------------------
Business Services - 3.4%
- -------------------------------------------------------------------------------------------------
Accenture Ltd., "A"* 117,660 $2,848,549
- -------------------------------------------------------------------------------------------------
Fiserv, Inc.* 60,330 2,144,128
- -------------------------------------------------------------------------------------------------
Getty Images, Inc.^* 75,970 4,492,106
- -------------------------------------------------------------------------------------------------
Manpower, Inc. 66,770 3,021,343
- -------------------------------------------------------------------------------------------------
SOFTBANK CORP.^ 59,100 2,679,639
- -------------------------------------------------------------------------------------------------
$15,185,765
- -------------------------------------------------------------------------------------------------
Chemicals - 1.7%
- -------------------------------------------------------------------------------------------------
Monsanto Co. 78,630 $3,361,433
- -------------------------------------------------------------------------------------------------
Sasol Ltd. 212,160 4,214,410
- -------------------------------------------------------------------------------------------------
$7,575,843
- -------------------------------------------------------------------------------------------------
Computer Software - 5.5%
- -------------------------------------------------------------------------------------------------
Amdocs Ltd.* 92,690 $2,331,154
- -------------------------------------------------------------------------------------------------
Business Objects S.A., ADR^* 100,560 2,566,291
- -------------------------------------------------------------------------------------------------
Mercury Interactive Corp.* 53,600 2,327,848
- -------------------------------------------------------------------------------------------------
Microsoft Corp. 279,710 7,829,083
- -------------------------------------------------------------------------------------------------
Oracle Corp.* 356,790 4,516,961
- -------------------------------------------------------------------------------------------------
Red Hat, Inc.^* 146,830 1,885,297
- -------------------------------------------------------------------------------------------------
VERITAS Software Corp.* 130,010 2,844,619
- -------------------------------------------------------------------------------------------------
$24,301,253
- -------------------------------------------------------------------------------------------------
Computer Software - Systems - 1.3%
- -------------------------------------------------------------------------------------------------
Dell, Inc.* 158,620 $5,561,217
- -------------------------------------------------------------------------------------------------
Construction - 1.5%
- -------------------------------------------------------------------------------------------------
Italcementi S.p.A. 257,590 $2,675,719
- -------------------------------------------------------------------------------------------------
Siam Cement Public Co. Ltd. 636,110 3,967,454
- -------------------------------------------------------------------------------------------------
$6,643,173
- -------------------------------------------------------------------------------------------------
Consumer Goods & Services - 1.8%
- -------------------------------------------------------------------------------------------------
Colgate-Palmolive Co. 70,030 $3,124,739
- -------------------------------------------------------------------------------------------------
Reckitt Benckiser PLC 181,020 4,968,052
- -------------------------------------------------------------------------------------------------
$8,092,791
- -------------------------------------------------------------------------------------------------
Electrical Equipment - 0.9%
- -------------------------------------------------------------------------------------------------
Nitto Denko Corp. 87,100 $4,138,412
- -------------------------------------------------------------------------------------------------
Electronics - 5.9%
- -------------------------------------------------------------------------------------------------
Brother Industries Ltd. 408,000 $3,499,400
- -------------------------------------------------------------------------------------------------
CANON, Inc. 68,000 3,359,373
- -------------------------------------------------------------------------------------------------
Funai Electric Co. Ltd.^ 28,100 3,678,893
- -------------------------------------------------------------------------------------------------
Marvell Technology Group Ltd.* 104,370 2,981,851
- -------------------------------------------------------------------------------------------------
Murata Manufacturing Co. Ltd. 63,100 3,010,013
- -------------------------------------------------------------------------------------------------
Samsung Electronics Co. Ltd. 10,930 4,290,965
- -------------------------------------------------------------------------------------------------
Seiko Epson Corp. 100,200 4,145,619
- -------------------------------------------------------------------------------------------------
Stanley Electric Co. Ltd.^ 81,200 1,254,069
- -------------------------------------------------------------------------------------------------
$26,220,183
- -------------------------------------------------------------------------------------------------
Energy - Independent - 2.1%
- -------------------------------------------------------------------------------------------------
EnCana Corp. 44,780 $2,221,803
- -------------------------------------------------------------------------------------------------
Reliance Industries Ltd. 387,390 4,520,475
- -------------------------------------------------------------------------------------------------
Talisman Energy, Inc.* 92,910 2,495,714
- -------------------------------------------------------------------------------------------------
$9,237,992
- -------------------------------------------------------------------------------------------------
Energy - Integrated - 2.6%
- -------------------------------------------------------------------------------------------------
BP PLC, ADR 125,494 $7,310,026
- -------------------------------------------------------------------------------------------------
Total S.A.^ 20,160 4,203,718
- -------------------------------------------------------------------------------------------------
$11,513,744
- -------------------------------------------------------------------------------------------------
Food & Drug Stores - 0.5%
- -------------------------------------------------------------------------------------------------
7-Eleven, Inc.^* 107,800 $2,271,346
- -------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 4.0%
- -------------------------------------------------------------------------------------------------
Cadbury Schweppes PLC 446,310 $3,709,917
- -------------------------------------------------------------------------------------------------
Compass Group PLC 962,980 3,980,236
- -------------------------------------------------------------------------------------------------
Groupe Danone 25,700 2,156,713
- -------------------------------------------------------------------------------------------------
Nestle S.A. 14,772 3,502,569
- -------------------------------------------------------------------------------------------------
PepsiCo, Inc. 87,930 4,359,569
- -------------------------------------------------------------------------------------------------
$17,709,004
- -------------------------------------------------------------------------------------------------
Forest & Paper Products - 0.8%
- -------------------------------------------------------------------------------------------------
Aracruz Celulose S.A., ADR^ 112,030 $3,773,171
- -------------------------------------------------------------------------------------------------
Gaming & Lodging - 0.5%
- -------------------------------------------------------------------------------------------------
Carnival Corp. 45,650 $2,308,064
- -------------------------------------------------------------------------------------------------
General Merchandise - 0.7%
- -------------------------------------------------------------------------------------------------
Target Corp. 64,410 $3,221,788
- -------------------------------------------------------------------------------------------------
Insurance - 2.1%
- -------------------------------------------------------------------------------------------------
Riunione Adriatica di Sicurta S.p.A. 217,070 $4,598,494
- -------------------------------------------------------------------------------------------------
Sanlam Group 2,729,880 4,811,266
- -------------------------------------------------------------------------------------------------
$9,409,760
- -------------------------------------------------------------------------------------------------
Internet - 2.1%
- -------------------------------------------------------------------------------------------------
eBay, Inc.* 38,210 $3,729,678
- -------------------------------------------------------------------------------------------------
Yahoo!, Inc.* 158,840 5,748,420
- -------------------------------------------------------------------------------------------------
$9,478,098
- -------------------------------------------------------------------------------------------------
Leisure & Toys - 1.1%
- -------------------------------------------------------------------------------------------------
Electronic Arts, Inc.* 45,170 $2,029,037
- -------------------------------------------------------------------------------------------------
Nintendo Co. Ltd. 16,900 1,909,262
- -------------------------------------------------------------------------------------------------
Tamron Co. Ltd.^ 27,700 973,353
- -------------------------------------------------------------------------------------------------
$4,911,652
- -------------------------------------------------------------------------------------------------
Machinery & Tools - 2.3%
- -------------------------------------------------------------------------------------------------
Atlas Copco AB, "A"^ 44,520 $1,847,656
- -------------------------------------------------------------------------------------------------
Eaton Corp. 29,840 1,908,268
- -------------------------------------------------------------------------------------------------
Mitsui Mining and Smelting Co. Ltd. 729,000 2,885,288
- -------------------------------------------------------------------------------------------------
Neopost S.A.^ 21,312 1,483,128
- -------------------------------------------------------------------------------------------------
Sandvik AB^ 51,850 1,946,575
- -------------------------------------------------------------------------------------------------
$10,070,915
- -------------------------------------------------------------------------------------------------
Medical Equipment - 2.6%
- -------------------------------------------------------------------------------------------------
Discovery Partners International, Inc.* 120 $566
- -------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc.* 34,270 1,965,727
- -------------------------------------------------------------------------------------------------
Medtronic, Inc. 63,050 3,222,486
- -------------------------------------------------------------------------------------------------
Straumann Holding AG 11,240 2,333,434
- -------------------------------------------------------------------------------------------------
Synthes, Inc.* 38,620 4,125,157
- -------------------------------------------------------------------------------------------------
$11,647,370
- -------------------------------------------------------------------------------------------------
Metals & Mining - 3.0%
- -------------------------------------------------------------------------------------------------
Anglo American PLC 224,320 $4,920,184
- -------------------------------------------------------------------------------------------------
BHP Billiton Ltd. 383,160 3,969,726
- -------------------------------------------------------------------------------------------------
Mining and Metallurgical Co. Norilsk Nickel, ADR^ 70,510 4,378,671
- -------------------------------------------------------------------------------------------------
$13,268,581
- -------------------------------------------------------------------------------------------------
Pharmaceuticals - 7.7%
- -------------------------------------------------------------------------------------------------
AstraZeneca PLC 95,420 $3,912,394
- -------------------------------------------------------------------------------------------------
Chugai Pharmaceutical Co. Ltd. 168,700 2,645,275
- -------------------------------------------------------------------------------------------------
Elan Corp. PLC, ADR^* 62,750 1,618,950
- -------------------------------------------------------------------------------------------------
Eli Lilly & Co. 37,000 2,031,670
- -------------------------------------------------------------------------------------------------
Johnson & Johnson 130,570 7,622,677
- -------------------------------------------------------------------------------------------------
Medicis Pharmaceutical Corp., "A" 52,410 2,131,515
- -------------------------------------------------------------------------------------------------
Novartis AG 89,580 4,281,783
- -------------------------------------------------------------------------------------------------
Roche Holding AG 62,080 6,360,784
- -------------------------------------------------------------------------------------------------
Sanofi-Aventis^ 46,350 3,397,503
- -------------------------------------------------------------------------------------------------
$34,002,551
- -------------------------------------------------------------------------------------------------
Printing & Publishing - 2.2%
- -------------------------------------------------------------------------------------------------
Johnston Press PLC 314,559 $3,181,035
- -------------------------------------------------------------------------------------------------
Meredith Corp. 43,560 2,134,440
- -------------------------------------------------------------------------------------------------
Yell Group PLC 640,840 4,308,635
- -------------------------------------------------------------------------------------------------
$9,624,110
- -------------------------------------------------------------------------------------------------
Real Estate - 0.6%
- -------------------------------------------------------------------------------------------------
Leopalace21 Corp. 134,300 $2,456,003
- -------------------------------------------------------------------------------------------------
Special Products & Services - 0.7%
- -------------------------------------------------------------------------------------------------
Asahi Glass Co. Ltd. 331,000 $3,045,331
- -------------------------------------------------------------------------------------------------
Specialty Chemicals - 1.0%
- -------------------------------------------------------------------------------------------------
L'Air Liquide S.A.^ 26,247 $4,250,782
- -------------------------------------------------------------------------------------------------
Specialty Stores - 5.3%
- -------------------------------------------------------------------------------------------------
Hennes & Mauritz AB, "B" 147,990 $4,321,258
- -------------------------------------------------------------------------------------------------
Home Depot, Inc. 85,160 3,498,373
- -------------------------------------------------------------------------------------------------
Kingfisher PLC 730,579 4,056,416
- -------------------------------------------------------------------------------------------------
Matalan PLC 570,230 2,404,041
- -------------------------------------------------------------------------------------------------
NEXT PLC 136,283 4,180,875
- -------------------------------------------------------------------------------------------------
Nishimatsuya Chain Co. Ltd.^ 53,600 1,853,077
- -------------------------------------------------------------------------------------------------
TJX Cos., Inc. 138,340 3,317,393
- -------------------------------------------------------------------------------------------------
$23,631,433
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 2.0%
- -------------------------------------------------------------------------------------------------
Vodafone Group PLC 3,445,030 $8,828,283
- -------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 4.4%
- -------------------------------------------------------------------------------------------------
ADTRAN, Inc. 62,170 $1,342,872
- -------------------------------------------------------------------------------------------------
Cisco Systems, Inc.* 346,280 6,652,039
- -------------------------------------------------------------------------------------------------
CSR PLC* 283,830 1,747,979
- -------------------------------------------------------------------------------------------------
Ericsson, Inc., "B"* 1,904,290 5,546,999
- -------------------------------------------------------------------------------------------------
Research In Motion Ltd.* 47,660 4,203,612
- -------------------------------------------------------------------------------------------------
$19,493,501
- -------------------------------------------------------------------------------------------------
Telephone Services - 2.4%
- -------------------------------------------------------------------------------------------------
e.Biscom S.p.A* 40,900 $2,260,281
- -------------------------------------------------------------------------------------------------
Sprint Corp. 170,170 3,565,062
- -------------------------------------------------------------------------------------------------
Telefonica S.A. 281,559 4,660,786
- -------------------------------------------------------------------------------------------------
$10,486,129
- -------------------------------------------------------------------------------------------------
Tobacco - 0.8%
- -------------------------------------------------------------------------------------------------
Altadis S.A. 99,890 $3,676,354
- -------------------------------------------------------------------------------------------------
Utilities - Electric Power - 1.2%
- -------------------------------------------------------------------------------------------------
Suez S.A.^ 230,900 $5,411,340
- -------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $371,535,127) $430,742,141
- -------------------------------------------------------------------------------------------------
PREFERRED STOCKS - 0.5%
- -------------------------------------------------------------------------------------------------
Automotive - 0.5%
- -------------------------------------------------------------------------------------------------
Porsche AG (Identified Cost, $1,499,480) 3,660 $2,336,158
- -------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATION - 1.8%
- -------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- -------------------------------------------------------------------------------------------------
General Electric Capital Corp., 1.84%, due 11/01/04,
at Amortized Cost $7,720,000 $7,720,000
- -------------------------------------------------------------------------------------------------
COLLATERAL FOR SECURITIES LOANED - 11.8%
- -------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
- -------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 52,233,643 $52,233,643
- -------------------------------------------------------------------------------------------------
Total Investments (+) (Identified Cost, $432,988,250) $493,031,942
- -------------------------------------------------------------------------------------------------
OTHER ASSETS, LESS LIABILITIES - (11.2)% (49,544,372)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $443,487,570
- -------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
(+) As of October 31, 2004, one security representing $4,113,510 and 0.9% of net assets was fair
valued in accordance with the policies adopted by the Board of Trustees.
ADR = American Depository Receipt
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- -----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 10/31/04
ASSETS
Investments, at value, including $50,103,494 of securities
on loan (identified cost, $432,988,250) $493,031,942
- -----------------------------------------------------------------------------------------------------
Cash 6,720
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 11,758,298
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 132,679
- -----------------------------------------------------------------------------------------------------
Interest and dividends receivable 509,680
- -----------------------------------------------------------------------------------------------------
Receivable from administrative proceeding settlement 117,040
- -----------------------------------------------------------------------------------------------------
Other assets 7,364
- -----------------------------------------------------------------------------------------------------
Total assets $505,563,723
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Payable to custodian $9,106
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased 8,442,079
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 1,004,060
- -----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 52,233,643
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 32,838
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 74,142
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 17,071
- -----------------------------------------------------------------------------------------------------
Administrative fee 199
- -----------------------------------------------------------------------------------------------------
Administrative service fee 5
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 263,010
- -----------------------------------------------------------------------------------------------------
Total liabilities $62,076,153
- -----------------------------------------------------------------------------------------------------
Net assets $443,487,570
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $583,172,135
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies 60,081,902
- -----------------------------------------------------------------------------------------------------
Accumulated net realized gain (loss) on investments and
foreign currency transactions (199,718,500)
- -----------------------------------------------------------------------------------------------------
Accumulated net investment loss (47,967)
- -----------------------------------------------------------------------------------------------------
Net assets $443,487,570
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 25,351,685
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $304,348,244
- -----------------------------------------------------------------------------------------------------
Shares outstanding 17,135,546
- -----------------------------------------------------------------------------------------------------
Net asset value per share $17.76
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/94.25X$17.76) $18.84
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $108,750,359
- -----------------------------------------------------------------------------------------------------
Shares outstanding 6,435,510
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $16.90
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $21,945,129
- -----------------------------------------------------------------------------------------------------
Shares outstanding 1,310,852
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $16.74
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $7,010,733
- -----------------------------------------------------------------------------------------------------
Shares outstanding 388,684
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $18.04
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $1,193,987
- -----------------------------------------------------------------------------------------------------
Shares outstanding 67,530
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $17.68
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $239,118
- -----------------------------------------------------------------------------------------------------
Shares outstanding 13,563
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $17.63
- -----------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class
B and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and
paid in expenses. It also describes any gains and/or losses generated by fund
operations.
FOR YEAR ENDED 10/31/04
NET INVESTMENT LOSS
Income
- -----------------------------------------------------------------------------------------------------
Dividends $7,512,574
- -----------------------------------------------------------------------------------------------------
Interest 269,047
- -----------------------------------------------------------------------------------------------------
Other# 117,040
- -----------------------------------------------------------------------------------------------------
Foreign taxes withheld (661,293)
- -----------------------------------------------------------------------------------------------------
Total investment income $7,237,368
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $4,233,092
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 18,737
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 929,323
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 1,100,879
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,238,902
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 236,973
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 4,330
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 490
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 245
- -----------------------------------------------------------------------------------------------------
Administrative fee 43,686
- -----------------------------------------------------------------------------------------------------
Custodian fee 442,962
- -----------------------------------------------------------------------------------------------------
Printing 89,042
- -----------------------------------------------------------------------------------------------------
Postage 107,718
- -----------------------------------------------------------------------------------------------------
Auditing fees 48,975
- -----------------------------------------------------------------------------------------------------
Legal fees 11,031
- -----------------------------------------------------------------------------------------------------
Miscellaneous 373,488
- -----------------------------------------------------------------------------------------------------
Total expenses $8,879,873
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (27,504)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser and
distributor (314,765)
- -----------------------------------------------------------------------------------------------------
Net expenses $8,537,604
- -----------------------------------------------------------------------------------------------------
Net investment loss $(1,300,236)
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions* $75,224,983
- -----------------------------------------------------------------------------------------------------
Foreign currency transactions (698,174)
- -----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $74,526,809
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(23,488,329)
- -----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 51,049
- -----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(23,437,280)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $51,089,529
- -----------------------------------------------------------------------------------------------------
Change in net assets from operations $49,789,293
- -----------------------------------------------------------------------------------------------------
# A non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with fund
sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes.
* Includes proceeds received from a non-recurring cash settlement in the amount
of $235,375 from a class-action lawsuit against Cendant Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting
from operations, any distributions, and any shareholder transactions.
FOR YEARS ENDED 10/31 2004 2003
CHANGE IN NET ASSETS
FROM OPERATIONS
Net investment income (loss) $(1,300,236) $161,414
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 74,526,809 (10,407,682)
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (23,437,280) 104,864,278
- ----------------------------------------------------------- -------------- ------------
Change in net assets from operations $49,789,293 $94,618,010
- ----------------------------------------------------------- -------------- ------------
Change in net assets from fund share transactions $(73,285,854) $(60,300,772)
- ----------------------------------------------------------- -------------- ------------
Redemption fees $6,574 $--
- ----------------------------------------------------------- -------------- ------------
Total change in net assets $(23,489,987) $34,317,238
- ----------------------------------------------------------- -------------- ------------
NET ASSETS
At beginning of period $466,977,557 $432,660,319
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated net investment
loss of $47,967 and $234,705, respectively) $443,487,570 $466,977,557
- -------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or,
if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The
total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund
(assuming reinvestment of all distributions) held for the entire period. This information has been audited by the fund's
independent registered public accounting firm, whose report, together with the fund's financial statements, are included in
this report.
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $15.91 $12.73 $14.60 $27.51 $23.20
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS#
Net investment income (loss)(S) $(0.01) $0.04 $(0.01) $(0.03) $0.07
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 1.86 3.14 (1.86) (6.91) 6.14
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $1.85 $3.18 $(1.87) $(6.94) $6.21
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(5.67) $(1.90)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.30) --
- ---------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(5.97) $(1.90)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $17.76 $15.91 $12.73 $14.60 $27.51
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%)(+) 11.70^^^& 24.90^^ (12.81) (30.91) 27.22
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS A (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.60 1.59 1.57 1.52 1.45
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.04) 0.30 (0.08) (0.17) 0.26
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 163 93 130 112 182
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $304,348 $306,333 $269,893 $268,548 $389,664
- -----------------------------------------------------------------------------------------------------------------------------
(S) The distributor contractually waived a portion of its fee for the periods indicated. In addition, effective June 7,
2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of Independent
Chief Compliance Officer services paid to Tarantino LLC. If these fees had been incurred by the fund, the net
investment income (loss) per share and the ratios would have been:
Net investment income (loss) $(0.02) $0.03 $(0.03) $(0.05) $0.04
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.70 1.69 1.67 1.62 1.55
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.14) 0.20 (0.18) (0.27) 0.16
- -----------------------------------------------------------------------------------------------------------------------------
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
(+) Total returns do not include the applicable sales charge. If the charge had been included, the results would have been
lower.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.07 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2003 would have been 0.47% lower.
^^^ The fund's net asset value and total return calculation include proceeds received on March 19, 2004 for the remaining
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2004 would have been 0.05% lower.
& The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were received.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $15.25 $12.29 $14.21 $26.87 $22.73
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS#
Net investment loss(S) $(0.13) $(0.06) $(0.13) $(0.16) $(0.14)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 1.78 3.02 (1.79) (6.74) 6.04
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $1.65 $2.96 $(1.92) $(6.90) $5.90
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(5.47) $(1.76)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.29) --
- ---------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(5.76) $(1.76)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $16.90 $15.25 $12.29 $14.21 $26.87
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 10.82^^^& 24.08^^ (13.51) (31.39) 26.26
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS B (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.35 2.34 2.32 2.27 2.20
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.81) (0.47) (0.89) (0.92) (0.47)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 163 93 130 112 182
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $108,750 $129,229 $133,525 $268,518 $442,368
- -----------------------------------------------------------------------------------------------------------------------------
(S) Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer services paid to Tarantino LLC. If this fee had been incurred by the fund, the net
investment loss per share and the ratios would have been:
Net investment loss $(0.13)* $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.35* -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.81)* -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.07 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2003 would have been 0.56% lower.
^^^ The fund's net asset value and total return calculation include proceeds received on March 19, 2004 for the remaining
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2004 would have been 0.05% lower.
& The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were received.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $15.11 $12.18 $14.08 $26.74 $22.64
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS#
Net investment loss(S) $(0.13) $(0.06) $(0.13) $(0.16) $(0.11)
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 1.76 2.99 (1.77) (6.70) 5.99
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $1.63 $2.93 $(1.90) $(6.86) $5.88
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From realized gain on investments and
net foreign currency transactions $-- $-- $-- $(5.51) $(1.78)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.29) --
- ---------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(5.80) $(1.78)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $16.74 $15.11 $12.18 $14.08 $26.74
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 10.79^^^& 24.06^^ (13.49) (31.45) 26.28
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS C (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.35 2.34 2.32 2.27 2.20
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.81) (0.47) (0.91) (0.92) (0.39)
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 163 93 130 112 182
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $21,945 $24,777 $24,035 $44,241 $62,520
- -----------------------------------------------------------------------------------------------------------------------------
(S) Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer services paid to Tarantino LLC. If this fee had been incurred by the fund, the net
investment loss per share and the ratios would have been:
Net investment loss $(0.13)* $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.35* -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment loss (0.81)* -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.07 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2003 would have been 0.58% lower.
^^^ The fund's net asset value and total return calculation include proceeds received on March 19, 2004 for the remaining
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2004 would have been 0.06% lower.
& The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were received.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $16.11 $12.86 $14.71 $27.71 $23.33
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT
OPERATIONS#
Net investment income(S) $0.04 $0.07 $0.02 $0.01 $0.15
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 1.89 3.18 (1.87) (6.97) 6.19
- ---------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $1.93 $3.25 $(1.85) $(6.96) $6.34
- ---------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO
SHAREHOLDERS
From net realized gain on investments
and foreign currency transactions $-- $-- $-- $(5.74) $(1.96)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net realized gain on
investments and foreign currency
transactions -- -- -- (0.30) --
- ---------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $-- $-- $-- $(6.04) $(1.96)
- ---------------------------------------------- -------- ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $18.04 $16.11 $12.86 $14.71 $27.71
- ---------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 11.98^^^& 25.27^^ (12.64) (30.77) 27.56
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 10/31
-------------------------------------------------------------------------------
CLASS I (CONTINUED) 2004 2003 2002 2001 2000
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.34 1.33 1.32 1.27 1.20
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.21 0.53 0.16 0.08 0.50
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 163 93 130 112 182
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $7,011 $6,249 $5,207 $6,085 $9,003
- -----------------------------------------------------------------------------------------------------------------------------
(S) Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of
Independent Chief Compliance Officer services paid to Tarantino LLC. If this fee had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $0.04* $-- $-- $-- $--
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.34* -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income 0.21* -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003 for the partial
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.07 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2003 would have been 0.54% lower.
^^^ The fund's net asset value and total return calculation include proceeds received on March 19, 2004 for the remaining
payment of a non-recurring litigation settlement from Cendant Corporation, recorded as a realized gain on investment
transactions. The proceeds resulted in an increase in the net asset value of $0.01 per share based on shares outstanding
on the day the proceeds were received. Excluding the effect of this payment from the ending net asset value per share,
total return for the year ended October 31, 2004 would have been 0.05% lower.
& The fund's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, as
described in the Legal Proceedings and Transactions with Affiliates footnotes. The non-recurring accrual did not have a
material impact on the net asset value per share based on the shares outstanding on the day the proceeds were received.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1 10/31/04 10/31/03**
Net asset value, beginning of period $15.87 $12.63***
- ------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment income (loss)(S) $(0.02) $0.03
- ------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency 1.83 3.21***
- ------------------------------------------------------------------- ---------- ------
Total from investment operations $1.81 $3.24
- ------------------------------------------------------------------- ---------- ------
Redemption fees added to paid-in capital# $0.00+++ $--
- ------------------------------------------------------------------- ---------- ------
Net asset value, end of period $17.68 $15.87
- ------------------------------------------------------------------- ---------- ------
Total return (%) 11.41^^^& 25.65***++^^
- ------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA(S):
Expenses## 1.83 1.78+
- ------------------------------------------------------------------------------------------------------
Net investment income (loss) (0.10) 0.21+
- ------------------------------------------------------------------------------------------------------
Portfolio turnover 163 93
- ------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $1,194 $385
- ------------------------------------------------------------------------------------------------------
(S) Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its
proportional share of Independent Chief Compliance Officer services paid to Tarantino LLC. If this
fee had been incurred by the fund, the net investment loss per share and the ratios would have
been:
Net investment loss $(0.02)* $--
- ------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.83* --
- ------------------------------------------------------------------------------------------------------
Net investment loss (0.10)* --
- ------------------------------------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
** For the period from the inception of Class R1 shares, December 31, 2002, through October 31, 2003.
*** The net asset value and total return previously reported as $12.68 and 25.16%, respectively, has
been revised to reflect the net asset value from the day prior to the class' inception date. The
net asset value and total return previously reported was from inception date, the date the share
class was first available to public shareholders.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
^^ The fund's net asset value and total return calculation include proceeds received on March 26, 2003
for the partial payment of a non-recurring litigation settlement from Cendant Corporation, recorded
as a realized gain on investment transactions. The proceeds resulted in an increase in the net
asset value of $0.07 per share based on shares outstanding on the day the proceeds were received.
Excluding the effect of this payment from the ending net asset value per share, total return for
the period ended October 31, 2003 would have been 0.55% lower.
^^^ The fund's net asset value and total return calculation include proceeds received on March 19,
2004 for the remaining payment of a non-recurring litigation settlement from Cendant Corporation,
recorded as a realized gain on investment transactions. The proceeds resulted in an increase in the
net asset value of $0.01 per share based on shares outstanding on the day the proceeds were
received. Excluding the effect of this payment from the ending net asset value per share, total
return for the year ended October 31, 2004 would have been 0.06% lower.
& The fund's net asset value and total return calculation include a non-recurring accrual recorded as
a result of an administrative proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales, as described in the Legal Proceedings and Transactions with Affiliates
footnotes. The non-recurring accrual did not have a material impact on the net asset value per
share based on the shares outstanding on the day the proceeds were received.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED
CLASS R2 10/31/04
Net asset value, beginning of period $15.87
- ---------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment loss(S) $(0.07)
- ---------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency 1.83
- ---------------------------------------------------------------- ---------
Total from investment operations $1.76
- ---------------------------------------------------------------- ---------
Redemption fees added to paid-in capital# $0.00+++
- ---------------------------------------------------------------- ---------
Net asset value, end of period $17.63
- ---------------------------------------------------------------- ---------
Total return (%) 11.09^^^&
- ---------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 2.08
- ---------------------------------------------------------------------------
Net investment loss (0.45)
- ---------------------------------------------------------------------------
Portfolio turnover 163
- ---------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $239
- ---------------------------------------------------------------------------
(S) Effective June 7, 2004, the investment adviser has voluntarily agreed to
reimburse the fund for its proportional share of Independent Chief
Compliance Officer services paid to Tarantino LLC. If this fee had been
incurred by the fund, the net investment loss per share and the ratios would
have been:
Net investment loss $(0.07)*
- ---------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 2.08*
- ---------------------------------------------------------------------------
Net investment loss (0.45)*
- ---------------------------------------------------------------------------
* The reimbursement impact per share amount and ratios were less than $0.01
and 0.01%, respectively.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount was less than $0.01.
^^^ The fund's net asset value and total return calculation include proceeds
received on March 19, 2004 for the remaining payment of a non-recurring
litigation settlement from Cendant Corporation, recorded as a realized gain
on investment transactions. The proceeds resulted in an increase in the net
asset value of $0.01 per share based on shares outstanding on the day the
proceeds were received. Excluding the effect of this payment from the ending
net asset value per share, total return for the year ended October 31, 2004
would have been 0.05% lower.
& The fund's net asset value and total return calculation include a
non-recurring accrual recorded as a result of an administrative proceeding
regarding disclosure of brokerage allocation practices in connection with
fund sales, as described in the Legal Proceedings and Transactions with
Affiliates footnotes. The non-recurring accrual did not have a material
impact on the net asset value per share based on the shares outstanding on
the day the proceeds were received.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Global Growth Fund (the fund) is a diversified series of MFS Series Trust
VIII (the trust). The trust is organized as a Massachusetts business trust and
is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
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 fund 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 - Equity securities in the fund's portfolio for which
market quotations are available are valued at the last sale or official closing
price as reported by an independent pricing service on the primary market or
exchange on which they are primarily traded, or at the last quoted bid price for
securities in which there were no sales during the day. Equity securities traded
over the counter are valued at the last sales price traded each day as reported
by an independent pricing service, or to the extent there are no sales reported,
such securities are valued on the basis of quotations obtained from brokers and
dealers. Short-term obligations with a remaining maturity in excess of 60 days
will be valued upon dealer-supplied valuations. All other short-term obligations
in the fund's portfolio are valued at amortized cost, which constitutes market
value as determined by the Board of Trustees. Money market mutual funds are
valued at net asset value. 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. When pricing service information
or market quotations are not readily available, securities are priced at fair
value as determined under the direction of the Board of Trustees. For example,
significant events (such as movement in the U.S. securities market, or other
regional and local developments) may occur between the time that foreign markets
close (where the security is principally traded) and the time that the fund
calculates its net asset value (generally, the close of the NYSE) that may
impact the value of securities traded in these foreign markets. In these cases,
the fund may utilize information from an external vendor or other sources to
adjust closing market quotations of foreign equity securities to reflect what it
believes to be the fair value of the securities as of the fund's valuation time.
Because the frequency of significant events is not predictable, fair valuation
of foreign equity securities may occur on a frequent basis.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The fund requires that the
securities collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the fund to obtain those securities
in the event of a default under the repurchase agreement. The fund 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 fund under each such
repurchase agreement. The fund, 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 - 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an amount
at least equal to the market value of the securities loaned. State Street
provides the fund with indemnification against Borrower default. The fund bears
the risk of loss with respect to the investment of cash collateral. On loans
collateralized by cash, the cash collateral is invested in a money market fund
or 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 fund and the lending agent. On loans collateralized by U.S. Treasury
securities, a fee is received from the Borrower, and is allocated between the
fund 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.
SHORT TERM FEES - For purchases made prior to July 1, 2004, the fund charges a
2% redemption fee (which is retained by the fund) on proceeds from Class A,
Class B, Class C, and Class I shares redeemed or exchanged within 30 calendar
days following their acquisition (either by purchase or exchange). For purchases
made on or after July 1, 2004, the fund will charge a 2% redemption fee on
proceeds from Class A, Class B, Class C, and Class I shares redeemed or
exchanged within 5 business days following their acquisition. Due to systems
limitations associated with the transition from applying a 30 calendar day
redemption fee to a 5 business day redemption fee, the fund will not impose
redemption fees with respect to purchases made in June 2004 followed by
redemptions made in July 2004. The fund may determine to reinstitute the 30
calendar day redemption fee period, or otherwise change the redemption fee
period in the future, including changes in connection with pending Securities
and Exchange Commission rules. See the fund's prospectus for details. These fees
are accounted for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement purposes in accordance
with U.S. generally accepted accounting principles. Dividends received in cash
are recorded on the ex-dividend date.
The fund was a participant in a class-action lawsuit against Cendant
Corporation. On March 26, 2003 the fund received a partial cash settlement in
the amount of $2,270,891, recorded as a realized gain on investment
transactions. The partial proceeds from the non-recurring litigation settlement
resulted in an increase in net asset value of $0.07 per share based on the
shares outstanding on the day the proceeds were received. Excluding the effect
of this payment from the fund's ending net asset value per share, total return
for the year ended October 31, 2003 would have been lower by 0.47%, 0.56%,
0.58%, 0.54%, and 0.55% for Class A, B, C, I, and R1 shares, respectively.
The fund was a participant in a class-action lawsuit against Cendant
Corporation. On March 19, 2004 the fund received the remaining cash settlement
in the amount of $235,375, recorded as a realized gain on investment
transactions. The remaining proceeds from the non-recurring litigation
settlement resulted in an increase in net asset value of $0.01 per share based
on the shares outstanding on the day the proceeds were received. Excluding the
effect of this payment from the fund's ending net asset value per share, total
return for the year ended October 31, 2004 would have been lower by 0.05%,
0.05%, 0.06%, 0.05%, 0.06%, and 0.05% for Class A, B, C, I, R1, and R2 shares,
respectively.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. During the year ended October 31, 2004, the fund's custodian fees were
reduced by $4,975 under this arrangement. The fund has entered into a commission
recapture agreement, under which certain brokers will credit the fund a portion
of the commissions generated, to offset certain expenses of the fund. For the
year ended October 31, 2004, the fund's miscellaneous expenses were reduced by
$22,529 under this agreement. These amounts are shown as a reduction of total
expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund'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 fund
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 foreign currency transactions, passive foreign investment
companies and wash sales.
The fund paid no distributions for the years ended October 31, 2004 and October
31, 2003.
During the year ended October 31, 2004, accumulated net investment loss
decreased by $1,486,974, accumulated net realized loss on investments and
foreign currency transactions decreased by $561,047 and paid-in capital
decreased by $2,048,021 due to differences between book and tax accounting for
foreign currency transactions, and passive foreign investment companies. This
change had no effect on the net assets or net asset value per share.
As of October 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $(197,464,451)
----------------------------------------------------------
Unrealized appreciation (depreciation) 57,827,853
----------------------------------------------------------
Other temporary differences (47,967)
----------------------------------------------------------
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.
EXPIRATION DATE
October 31, 2009 $(88,353,717)
----------------------------------------------------------
October 31, 2010 (95,953,969)
----------------------------------------------------------
October 31, 2011 (13,156,765)
----------------------------------------------------------
Total $(197,464,451)
----------------------------------------------------------
Realized gain is reported net of any foreign capital gains tax in the Statement
of Operations.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Differences in per share dividend rates are
generally due to differences in separate class expenses. Class B shares will
convert to Class A shares approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities.
Prior to January 1, 2004 the management fee was computed daily and paid monthly
at the following annual rates:
First $1 billion of average net assets 0.90%
----------------------------------------------------------
Average net assets in excess of $1 billion 0.75%
----------------------------------------------------------
Effective January 1, 2004 the management fee is computed daily and paid monthly
at the following annual rates:
First $1 billion of average net assets 0.90%
----------------------------------------------------------
Next $1 billion of average net assets 0.75%
----------------------------------------------------------
Average net assets in excess of $2 billion 0.65%
----------------------------------------------------------
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and pays no compensation directly to its Trustees who are officers
of the investment adviser, or to officers of the fund, all of whom receive
remuneration for their services to the fund from MFS. Certain officers and
Trustees of the fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The fund has an unfunded
defined benefit plan for retired Independent Trustees and an unfunded retirement
benefit deferral plan for current Independent Trustees. Included in Trustees'
compensation is a net increase of $4,044 as a result of the change in the fund's
unfunded retirement benefit deferral plan for certain current Independent
Trustees and a pension expense of $2,746 for retired Independent Trustees for
the year ended October 31, 2004.
This fund and certain other MFS funds (the "funds") have entered into a services
agreement (the "Agreement") which provides for payment of fees by the funds to
Tarantino LLC in return for the provision of services of an Independent Chief
Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and
the sole member of Tarantino LLC. MFS has agreed to reimburse each of the funds
for a proportional share of substantially all of the payments made by the funds
to Tarantino LLC and also to provide office space and other administrative
support and supplies to the ICCO. The funds can terminate the Agreement with
Tarantino LLC at any time under the terms of the Agreement.
The fund's investment adviser, MFS, has been the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in connection
with fund sales, as described in the Legal Proceedings Footnote. Pursuant to the
SEC Order, on July 28, 2004, MFS transferred $1.00 in disgorgement and $50
million in penalty to the SEC (the "Payments"). A plan for distribution of these
Payments has been submitted to the SEC. Contemporaneous with the transfer, the
fund accrued an estimate of the amount to be received upon final approval of the
plan of distribution. The non- recurring accrual in the amount of $117,040 did
not have a material impact on the net asset value per share based on the shares
outstanding on the day the proceeds were recorded.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement of
the costs MFS incurs to provide these services, subject to review and approval
by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior to
April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund'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%
----------------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
----------------------------------------------------------
Next $2.5 billion 0.00832%
----------------------------------------------------------
Next $2.5 billion 0.00032%
----------------------------------------------------------
In excess of $7 billion 0.00000%
----------------------------------------------------------
For the year ended October 31, 2004, the fund paid MFS $43,686 equivalent to
0.0093% of average daily net assets, to partially reimburse MFS for the costs of
providing administrative services.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to Class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in Class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of Class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$19,911 for the year ended October 31, 2004, as its portion of the sales charge
on sales of Class A shares of the fund.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R1, and Class R2 shares pursuant to rule 12b-1 of the Investment Company
Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share classes
in order that MFD may pay expenses on behalf of the fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD based
on the average daily net assets of accounts attributable to such dealers. The
fees are calculated based on each class' average daily net assets. The maximum
distribution and service fees for each class of shares are as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- -----------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
October 31, 2004 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $19,230 $1,967 $1,692 $12 $21
- -----------------------------------------------------------------------------------------------------------------
The Class A distribution fee is currently being waived on a contractual basis.
Fees incurred under the distribution plan during the year ended October 31, 2004 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.25% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within, for Class A shares, 12
months following the purchase, and, for Class C shares, the first year of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended October 31, 2004
were as follows:
CLASS A CLASS B CLASS C
Contingent Deferred Sales Charges
Imposed $11,616 $184,389 $1,757
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as shareholder
servicing agent. The fee, which is calculated as a percentage of the fund's
average daily net assets is set periodically under the supervision of the fund's
Trustees. Prior to April 1, 2004, the fee was set at 0.11% of the fund's average
daily net assets. For the period April 1, 2004 through June 30, 2004, the fee
was set at 0.10% of the fund's average daily net assets. Effective July 1, 2004,
the fund is charged up to 0.0861% of its average daily net assets. For the year
ended October 31, 2004, the fund paid MFSC a fee of $466,630 for shareholder
services which equated to 0.0998% of the fund's average daily net assets. Also
included in shareholder servicing costs are out-of-pocket expenses, paid to
MFSC, which amounted to $125,851 for the year ended October 31, 2004, as well as
other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$748,354,847 and $822,799,883, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are as
follows:
Aggregate cost $435,242,299
----------------------------------------------------------
Gross unrealized appreciation $63,657,090
----------------------------------------------------------
Gross unrealized depreciation (5,867,447)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $57,789,643
----------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
fund shares were as follows:
Year ended 10/31/04 Year ended 10/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 3,300,847 $56,503,582 7,377,913 $97,892,732
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (5,422,553) (92,414,483) (9,326,573) (124,254,583)
- --------------------------------------------------------------------------------------------------------------
Net change (2,121,706) $(35,910,901) (1,948,660) $(26,361,851)
- --------------------------------------------------------------------------------------------------------------
Year ended 10/31/04 Year ended 10/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS B SHARES
Shares sold 932,789 $15,208,458 1,220,548 $16,201,349
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (2,971,167) (48,310,681) (3,608,854) (46,110,137)
- --------------------------------------------------------------------------------------------------------------
Net change (2,038,378) $(33,102,223) (2,388,306) $(29,908,788)
- --------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 139,965 $2,265,902 251,742 $3,305,945
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (468,899) (7,546,242) (585,201) (7,462,333)
- --------------------------------------------------------------------------------------------------------------
Net change (328,934) $(5,280,340) (333,459) $(4,156,388)
- --------------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 54,853 $955,087 62,959 $858,135
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (53,953) (932,446) (80,099) (1,063,016)
- --------------------------------------------------------------------------------------------------------------
Net change 900 $22,641 (17,140) $(204,881)
- --------------------------------------------------------------------------------------------------------------
Year ended 10/31/04 Period ended 10/31/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 91,918 $1,588,452 43,131 $556,217
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (48,614) (829,241) (18,905) (230,101)
- --------------------------------------------------------------------------------------------------------------
Net change 43,304 $759,211 24,226 $326,116
- --------------------------------------------------------------------------------------------------------------
Year ended 10/31/04 Period ended 10/31/03**
SHARES AMOUNT SHARES AMOUNT
CLASS R2 SHARES
Shares sold 17,681 $299,195 315 $5,020
- --------------------------------------------------------------------------------------------------------------
Shares reacquired (4,433) (73,437) -- --
- --------------------------------------------------------------------------------------------------------------
Net change 13,248 $225,758 315 $5,020
- --------------------------------------------------------------------------------------------------------------
* For the period from the commencement of Class R1 shares, December 31, 2002, through October 31, 2003.
** Class R2 shares, which commenced on October 31, 2003, had no operating activity.
(6) LINE OF CREDIT
The fund 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 Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended October 31, 2004 was $3,795, and is
included in miscellaneous expense. The fund had no significant borrowings during
the year ended October 31, 2004.
(7) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the Securities
and Exchange Commission ("SEC") regarding disclosure of brokerage allocation
practices in connection with MFS fund sales (the term "MFS funds" means the
open-end registered management investment companies sponsored by MFS). Under the
terms of the settlement, in which MFS neither admitted nor denied any
wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement and $50 million
in penalty to certain MFS funds, pursuant to a plan developed by an independent
distribution consultant. The brokerage allocation practices which were the
subject of this proceeding were discontinued by MFS in November 2003. The
agreement with the SEC is reflected in an order of the SEC. Pursuant to the SEC
order, on July 28, 2004, MFS transferred these settlement amounts to the SEC,
and those MFS funds entitled to these settlement amounts accrued an estimate of
their pro rata portion of these amounts. Once the final distribution plan is
approved by the SEC, these amounts will be distributed by the SEC to the
affected MFS funds. The SEC settlement order states that MFS failed to
adequately disclose to the Boards of Trustees and to shareholders of the MFS
funds the specifics of its preferred arrangements with certain brokerage firms
selling MFS fund shares. The SEC settlement order states that MFS had in place
policies designed to obtain best execution of all MFS fund trades. As part of
the settlement, MFS retained an independent compliance consultant to review the
completeness of its current policies and practices regarding disclosure to MFS
fund trustees and to MFS fund shareholders of strategic alliances between MFS or
its affiliates and broker-dealers and other financial advisers who support the
sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New York
Attorney General ("NYAG") and the Bureau of Securities Regulation of the State
of New Hampshire ("NH") to settle administrative proceedings alleging false and
misleading information in certain MFS open-end retail fund ("MFS retail funds")
prospectuses regarding market timing and related matters (the "February
Settlements"). These regulators alleged that prospectus language for certain MFS
retail funds was false and misleading because, although the prospectuses for
those funds in the regulators' view indicated that they prohibited market
timing, MFS did not limit trading activity in 11 domestic large cap stock, high
grade bond and money market retail funds. MFS' former Chief Executive Officer,
John W. Ballen, and former President, Kevin R. Parke, also reached agreement
with the SEC in which they agreed to, among other terms, monetary fines and
temporary suspensions from association with any investment adviser or registered
investment company. Messrs. Ballen and Parke have resigned their positions with,
and will not be returning to, MFS and the MFS funds. Under the terms of the
February Settlements, MFS and the executives neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds, which
has been funded by MFS and of which $50 million is characterized as a penalty.
This pool will be distributed in accordance with a methodology developed by an
independent distribution consultant in consultation with MFS and the Board of
Trustees of the MFS retail funds, and acceptable to the SEC. MFS has further
agreed with NYAG to reduce its management fees in the aggregate amount of
approximately $25 million annually over the next five years, and not to increase
certain management fees during this period. MFS has also paid an administrative
fine to NH in the amount of $1 million, which will be used for investor
education purposes (NH retained $250,000 and $750,000 was contributed to the
North American Securities Administrators Association's Investor Protection
Trust). In addition, under the terms of the February Settlements, MFS is in the
process of adopting certain governance changes and reviewing its policies and
procedures.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center, Inc.,
MFS Corporation Retirement Committee, Sun Life Financial Inc., various MFS
funds, certain current and/or former Trustees of these MFS funds, and certain
officers of MFS have been named as defendants in multiple lawsuits filed in
federal and state courts. The lawsuits variously have been commenced as class
actions or individual actions on behalf of investors who purchased, held or
redeemed shares of the MFS funds during specified periods, as class actions on
behalf of participants in certain retirement plan accounts, or as derivative
actions on behalf of the MFS funds. The lawsuits relating to market timing and
related matters have been transferred to, and consolidated before, the United
States District Court for the District of Maryland, as part of a multi-district
litigation of market timing and related claims involving several other fund
complexes (In re Mutual Funds Investment Litigation (Alger, Columbia, Janus,
MFS, One Group, Putnam, Allianz Dresdner), No. 1:04-md-15863 (transfer began
March 19, 2004)). The plaintiffs in these consolidated lawsuits generally seek
injunctive relief including removal of the named Trustees, adviser and
distributor, rescission of contracts and 12b-1 Plans, disgorgement of fees and
profits, monetary damages, punitive damages, attorney's fees and costs and other
equitable and declaratory relief. Four lawsuits alleging improper brokerage
allocation practices and excessive compensation are pending in the United States
District Court for the District of Massachusetts (Forsythe v. Sun Life Financial
Inc., et al., No. 04cv10584 (GAO) (March 25, 2004); Eddings v. Sun Life
Financial Inc., et al., No. 04cv10764 (GAO) (April 15, 2004); Marcus Dumond, et
al. v. Massachusetts Financial Servs. Co., et al., No. 04cv11458 (GAO) (May 4,
2004); and Koslow v. Sun Life Financial Inc., et al., No. 04cv11019 (GAO) (May
20, 2004)). The plaintiffs in these lawsuits generally seek compensatory
damages, punitive damages, recovery of fees, rescission of contracts, an
accounting, restitution, declaratory relief, equitable and/or injunctive relief
and attorney's fees and costs. The various lawsuits generally allege that some
or all of the defendants (i) permitted or acquiesced in market timing and/or
late trading in some of the MFS funds, inadequately disclosed MFS' internal
policies concerning market timing and such matters, and received excessive
compensation as fiduciaries to the MFS funds, or (ii) permitted or acquiesced in
the improper use of fund assets by MFS to support the distribution of MFS fund
shares and inadequately disclosed MFS' use of fund assets in this manner. The
actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. Insofar as any of
the actions is appropriately brought derivatively on behalf of any of the MFS
funds, any recovery will inure to the benefit of the MFS funds. The defendants
are reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed in
the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of certain MFS retail funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the MFS
retail funds, and transferred $50 million for distribution to affected MFS funds
to compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS fund sales. It is not clear whether these
amounts will be sufficient to compensate shareholders for all of the damage they
allegedly sustained, whether certain shareholders or putative class members may
have additional claims to compensation, or whether the damages that may be
awarded in any of the actions will exceed these amounts. In the event the MFS
funds incur any losses, costs or expenses in connection with such lawsuits, the
Boards of Trustees of the affected MFS funds may pursue claims on behalf of such
funds against any party that may have liability to the funds in respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments, will
not result in increased fund redemptions, reduced sales of fund shares, or other
adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Global Growth
Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of the MFS Global Growth Fund (the "Fund") (a
portfolio of MFS Series Trust VIII) as of October 31, 2004, and the related
statement of operations for the year then ended, the statements of changes in
net assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
October 31, 2004 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Global Growth Fund as of October 31, 2004, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended in conformity with accounting principles generally accepted in
the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 20, 2004
- -------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- -------------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of December 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.) The
address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- ------------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004); Harvard Law
School (education), John Olin Visiting
Professor (since July 2002); Secretary
of Economic Affairs, The Commonwealth
of Massachusetts (January 2002 to
December 2002); Fidelity Investments,
Vice Chairman (June 2000 to December
2001); Fidelity Management & Research
Company (investment adviser),
President (March 1997 to July 2001);
The Bank of New York (financial
services), Director; Bell Canada
Enterprises (telecommunications),
Director; Medtronic, Inc. (medical
technology), Director; Telesat
(satellite communications), Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair of February 1992 Private investor; Eastern
(born 05/01/36) Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/ Director
(since April 2001); Encinitos Ventures
(private investment company),
Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.
(welding equipment manufacturer),
Director; Southwest Gas Corporation
(natural gas distribution company),
Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group
(1997 to February 2001);
Borders Group, Inc. (book and
music retailer), Director;
Federal Realty Investment
Trust (real estate investment
trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration,
Class of 1961 Adjunct
Professor in Entrepreneurship
Emeritus
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health care
companies), Managing General Partner
(since 1993); Cambridge Nutraceuticals
(professional nutritional products),
Chief Executive Officer (until May
2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer, President,
Chief Investment Officer and
Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel and
Secretary (since April 2004); Hale and
Door LLP (law firm) (prior to April
2004)
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Robert R. Flaherty(3) Assistant Treasurer August 2000 Massachusetts Financial
(born 09/18/63) Services Company, Vice
President (since August
2000); UAM Fund Services,
Senior Vice President (prior
to August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002); The Bank
of New York, Senior Vice President
(September 2000 to July 2002);
Lexington Global Asset Managers, Inc.,
Executive Vice President and Chief
Financial Officer (prior to September
2000); Lexington Funds, Chief
Financial Officer (prior to September
2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "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 fund. The address of
MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The trust will hold a shareholders' meeting in 2005 and at least once every five
years hereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal. Messrs. Ives, Poorvu and
Sherratt and Ms. Lane are members of the trust's Audit Committee.
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 99 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 CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
INDEPENDENT REGISTERED PUBLIC
DISTRIBUTOR ACCOUNTING FIRM
MFS Fund Distributors, Inc. Deloitte & Touche LLP
500 Boylston Street, Boston, MA 02116-3741 200 Berkeley Street, Boston, MA 02116
PORTFOLIO MANAGERS
Barry P. Dargan
Thomas Melendez
Nicholas D. Smithie
- -------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- -------------------------------------------------------------------------------
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
- -------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- -------------------------------------------------------------------------------
The fund will file a complete schedule of portfolio holdings with the Securities
and Exchange Commission (the Commission) for the first and third quarters of
each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at
the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
- ------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
- --------------------------------------------------------------------------------
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8
a.m. to
8 p.m. Eastern time.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Share prices, account 1-800-MFS-TALK
balances (1-800-637-8255)
exchanges or stock and touch-tone required 24 hours a day, 365 days a
bond outlooks year
- --------------------------------------------------------------------------------
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc., 500
Boylston Street, Boston, MA 02116.
WGF-ANN-12/04 47M
MFS(R) Mutual Funds
ANNUAL REPORT 10/31/04
MFS(R) TAX MANAGED
EQUITY FUND
[logo] M F S(R)
INVESTMENT MANAGEMENT
MFS(R) TAX MANAGED EQUITY FUND
The fund seeks capital appreciation while attempting to lessen the impact of
federal taxes.
THIS REPORT IS PREPARED FOR THE GENERAL INFORMATION OF SHAREHOLDERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
TABLE OF CONTENTS
MANAGEMENT REVIEW 1
------------------------------------------------------
PORTFOLIO COMPOSITION 2
------------------------------------------------------
PERFORMANCE SUMMARY 2
------------------------------------------------------
EXPENSE TABLE 5
------------------------------------------------------
PORTFOLIO OF INVESTMENTS 7
------------------------------------------------------
FINANCIAL STATEMENTS 12
------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 16
------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 21
------------------------------------------------------
TRUSTEES AND OFFICERS 22
------------------------------------------------------
PROXY VOTING POLICIES AND
INFORMATION 24
------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE 24
------------------------------------------------------
FEDERAL TAX INFORMATION 25
------------------------------------------------------
CONTACT INFORMATION BACK COVER
------------------------------------------------------
- -------------------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
MANAGEMENT REVIEW
- -------------------------------------------------------------------------------
SUMMARY OF RESULTS
For the year ended October 31, 2004, Class A shares of the MFS Tax Managed
Equity Fund provided an average annual return not including sales charge of
12.91%, outperforming the 9.41% return for the Standard & Poor's 500 Stock
Index.
MARKET ENVIRONMENT
In 2004, many measures of economic growth, including employment, corporate
spending, and earnings growth continued to improve, though some negative
factors put a drag on the U.S. stock market. Near-record-high oil prices,
concerns about rising interest rates, and an unsettled geopolitical
environment were among the issues that, in our view, dampened U.S. markets.
The U.S. Federal Reserve Board raised interest rates three times during the
period, and this appears to have set expectations for an ongoing series of
modest rate hikes.
CONTRIBUTORS TO PERFORMANCE
Strong stock selection in the utilities & communications sector contributed to
the fund's relative performance for the period. Our overweighted positions in
TXU and Sprint PCS Group, two very strong performers, helped boost relative
results. Stock selection in the health care sector also aided relative
returns. Genentech, a stock not held in the index, was among the fund's top 10
contributors. The stock was sold by the end of the period. Stock selection in
the leisure sector also contributed to the fund's strong relative
outperformance. Our overweighted position in Carnival helped put this stock
among the fund's top 10 contributors.
Stocks in other sectors that contributed to the fund's relative performance
included two strong-performing energy stocks Ashland and Halliburton.
DETRACTORS FROM PERFORMANCE
Stock selection in the technology sector held back relative performance. Among
the top 10 detractors for the period were IAC/InterActiveCorp, National
Semiconductor, and VERITAS. IAC/InterActiveCorp and VERITAS were sold out of
the portfolio by period-end. IAC/InterActiveCorp was not in the benchmark.
eBay, a strong stock performer that we didn't own, hurt relative results.
Stock selection in the basic materials and autos and housing sectors also
detracted from relative returns.
Stocks in other sectors that detracted from relative results included our
overweighted position in poor-performing retailer Sears, Roebuck & Co., which
was subsequently sold from the portfolio, and our avoidance of energy company
ChevronTexaco.
The discussion above focuses on the fund's performance, relative to its
benchmark, through the fund's fiscal year-end of October 31, 2004. On the
following pages, we have also provided the fund's Securities and Exchange
Commission standardized total return (including sales charges) through the end
of the most recent calendar quarter (September 30, 2004), as well as returns
through the same period without the deduction of sales charges.
The views expressed are those of the portfolio manager only through the end of
the period as stated on the cover and do not necessarily reflect the views of
MFS or any other person in the MFS organization. These views are subject to
change at any time based on market and other conditions, and MFS disclaims any
responsibility to update such views. These views may not be relied upon as
investment advice or as an indication of trading intent on behalf of any MFS
fund. References to specific securities are not recommendations of such
securities and may not be representative of any MFS fund's current or future
investments.
- -------------------------------------------------------------------------------
PORTFOLIO COMPOSITION
- -------------------------------------------------------------------------------
PORTFOLIO STRUCTURE
Stocks 99.7%
Cash & Other Net Assets 0.3%
TOP TEN HOLDINGS
EXXON MOBIL CORP. 4.1%
- ------------------------------------------------------------------------------
GENERAL ELECTRIC CO. 3.3%
- ------------------------------------------------------------------------------
CITIGROUP, INC. 3.0%
- ------------------------------------------------------------------------------
BANK OF AMERICA CORP. 2.7%
- ------------------------------------------------------------------------------
JOHNSON & JOHNSON 2.6%
- ------------------------------------------------------------------------------
MICROSOFT CORP. 2.5%
- ------------------------------------------------------------------------------
INTERNATIONAL BUSINESS MACHINES CORP. 2.4%
- ------------------------------------------------------------------------------
WAL-MART STORES, INC. 2.3%
- ------------------------------------------------------------------------------
PROCTER & GAMBLE CO. 2.1%
- ------------------------------------------------------------------------------
PFIZER, INC. 2.1%
- ------------------------------------------------------------------------------
Percentages are based on net assets as of 10/31/04.
The portfolio is actively managed, and current holdings may be different.
SECTOR WEIGHTINGS
Financial services 18.9%
- ------------------------------------------------------------------------------
Technology 15.7%
- ------------------------------------------------------------------------------
Health care 13.7%
- ------------------------------------------------------------------------------
Industrial goods & services 8.4%
- ------------------------------------------------------------------------------
Energy 8.3%
- ------------------------------------------------------------------------------
Retailing 7.9%
- ------------------------------------------------------------------------------
Consumer staples 7.1%
- ------------------------------------------------------------------------------
Utilities & communications 6.7%
- ------------------------------------------------------------------------------
Leisure 5.9%
- ------------------------------------------------------------------------------
Basic materials 3.0%
- ------------------------------------------------------------------------------
Special products & services 2.2%
- ------------------------------------------------------------------------------
Transportation 1.2%
- ------------------------------------------------------------------------------
Autos & housing 0.7%
- ------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PERFORMANCE SUMMARY THROUGH 10/31/04
- -------------------------------------------------------------------------------
Currently, the fund offers only Class A shares, which are available for
purchase at net asset value only by residents of the Commonwealth of
Massachusetts who are employees (or certain relatives of employees) of MFS and
its affiliates or members of the governing boards of the various funds
sponsored by MFS.
The following information illustrates the historical performance of the fund's
Class A shares in comparison to its benchmark. Performance results reflect the
maximum applicable sales charge and the percentage change in net asset value,
including the reinvestment of any dividends and capital gains distributions.
Benchmark comparisons are unmanaged and do not reflect any fees or expenses.
(See Notes to Performance Summary.)
CALL 1-800-343-2829 EXT. 35941 FOR THE MOST RECENT MONTH-END PERFORMANCE
RESULTS. MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE,
AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA
QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. ANY
HIGH SHORT-TERM RETURNS MAY BE AND LIKELY WERE ATTRIBUTABLE TO RECENT
FAVORABLE MARKET CONDITIONS, WHICH MAY NOT BE REPEATED. THE PERFORMANCE SHOWN
DOES NOT REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY
ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (For the period from the
commencment of the fund's investment operations, December 28, 2001, through
October 31, 2004. Index information is from January 2, 2002.)
MFS Tax Managed
Equity Fund -- Standard & Poor's
Class A 500 Stock Index
12/01 $9,425 $10,000
10/02 6,965 7,817
10/03 8,286 9,442
10/04 9,356 10,331
TOTAL RETURNS
- --------------------
Average annual
without sales charge
- --------------------
Class
Share class Inception date 1-yr Life*
- ---------------------------------------------------------------
A 12/28/01 12.91% -0.26%
- ---------------------------------------------------------------
- --------------------
Average annual
- --------------------
Comparative benchmarks
- ---------------------------------------------------------------
Average large-cap core fund+ 5.99% -1.18%
- ---------------------------------------------------------------
Standard & Poor's 500 Stock Index# 9.41% 1.15%
- ---------------------------------------------------------------
- --------------------
Average annual
with sales charge
- --------------------
Share class 1-yr Life*
- ---------------------------------------------------------------
A 6.42% -2.32%
- ---------------------------------------------------------------
- --------------------
Cumulative
without sales charge
- --------------------
- ---------------------------------------------------------------
A 12.91% -0.73%
- ---------------------------------------------------------------
* For the period from the commencement of the fund's investment operations,
December 28, 2001, through October 31, 2004.
Index information is from January 2, 2002.
+ Source: Lipper Inc., an independent firm that reports mutual fund performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
Standard & Poor's 500 Stock Index (the S&P 500) - measures the broad U.S.
stock market.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A results, including sales charge, reflect the deduction of the maximum
5.75% sales charge.
Performance results reflect any applicable subsidies and waivers in effect
during the periods shown. Any such subsidy or waiver is voluntary and may be
revised or rescinded at any time without notice. Without such subsidies and
waivers, the fund's performance results would be less favorable. Please see
the prospectus and financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in foreign and/or emerging markets securities, which
are more susceptible to risks relating to interest rates, currency exchange
rates, economic, and political conditions.
Managing for after-tax returns may negatively impact the fund's performance.
Because the fund balances investment and tax considerations, the fund's pre-
tax performance could be lower than that of a similar fund that is not tax-
managed. In order to reduce or avoid the recognition of net taxable income or
gains, the fund may avoid purchasing securities that it would otherwise have
purchased, may hold securities that it would otherwise have sold, and may sell
securities that it would otherwise have held. The fund may not be a suitable
investment for individual retirement accounts, other tax-exempt or tax-
deferred accounts, or for other investors who are not sensitive to the federal
income tax consequences of their investments. Compared to traditionally
managed mutual funds, the tax-managed strategies may cause a higher percentage
of the fund's net asset value to be represented by unrealized capital
appreciation, which represents a potential future tax liability to
shareholders.
The portfolio's value will vary daily since its investments will fluctuate in
response to issuer, market, regulatory, economic, or political developments.
Please see the prospectus for further information regarding these and other
risk considerations.
- -------------------------------------------------------------------------------
EXPENSE TABLE
- -------------------------------------------------------------------------------
FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
MAY 1, 2004, THROUGH OCTOBER 31, 2004.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of
the period and held for the entire period, May 1, 2004 through October 31,
2004.
ACTUAL EXPENSES
The first line for each share class in the table on the following page
provides information about actual account values and actual expenses. You may
use the information in this line, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide your
account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During Period" to estimate the expenses
you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table on the following page
provides information about hypothetical account values and hypothetical
expenses based on the fund's actual expense ratio and an assumed rate of
return of 5% per year before expenses, which is not the fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in the fund and
other funds. To do so, compare this 5% hypothetical example with the 5%
hypothetical examples that appear in the shareholder reports of the other
funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have
been higher.
- ------------------------------------------------------------------------------
Share Class
- ------------------------------------------------------------------------------
Expenses
Annualized Beginning Ending Paid During
Expense Account Value Account Value* Period**
Ratio 5/01/04 10/31/04 5/01/04-10/31/04
- ------------------------------------------------------------------------------
Actual 1.15% $1,000 $1,030 $5.89
A ---------------------------------------------------------------------------
Hypothetical 1.15% $1,000 $1,019 $5.85
- ------------------------------------------------------------------------------
* Ending account value reflects each class' ending account value assuming the
actual class return per year before expenses (Actual) and a hypothetical 5%
class return per year before expenses (Hypothetical).
** Expenses paid is equal to each class' annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
- -----------------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS - 10/31/04
- -----------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Stocks - 99.7%
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ISSUER SHARES $ VALUE
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Aerospace - 1.8%
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General Dynamics Corp. 20 $2,042
- -----------------------------------------------------------------------------------------------
Lockheed Martin Corp. 127 6,996
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$9,038
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Alcoholic Beverages - 0.5%
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Anheuser-Busch Cos., Inc. 52 $2,597
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Automotive - 0.7%
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SPX Corp. 93 $3,567
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Banks & Credit Companies - 13.4%
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Bank of America Corp. 301 $13,482
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Citigroup, Inc. 339 15,041
- -----------------------------------------------------------------------------------------------
Fannie Mae 81 5,682
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Freddie Mac 110 7,326
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J.P. Morgan Chase & Co. 180 6,948
- -----------------------------------------------------------------------------------------------
MBNA Corp. 83 2,127
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PNC Financial Services Group, Inc. 75 3,923
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Regions Financial Corp. 89 3,122
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SLM Corp. 22 996
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SunTrust Banks, Inc. 78 5,490
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Washington Mutual, Inc. 65 2,516
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$66,653
- -----------------------------------------------------------------------------------------------
Biotechnology - 1.2%
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Amgen, Inc.* 36 $2,045
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Genzyme Corp.* 78 4,093
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$6,138
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Broadcast & Cable TV - 1.7%
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Hearst-Argyle Television, Inc. 86 $2,241
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Time Warner, Inc.* 377 6,273
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$8,514
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Brokerage & Asset Managers - 1.9%
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Lehman Brothers Holdings, Inc. 81 $6,654
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Merrill Lynch & Co., Inc. 54 2,913
- -----------------------------------------------------------------------------------------------
$9,567
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Business Services - 1.9%
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Alliance Data Systems Corp.* 88 $3,721
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DST Systems, Inc.* 62 2,781
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Fair Isaac Corp. 90 2,718
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$9,220
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Chemicals - 1.3%
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3M Co. 86 $6,671
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Computer Software - 4.4%
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Amdocs Ltd.* 109 $2,741
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Autodesk, Inc. 79 4,167
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Microsoft Corp. 446 12,484
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Oracle Corp.* 191 2,418
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$21,810
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Computer Software - Systems - 5.1%
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Apple Computer, Inc.* 65 $3,414
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Dell, Inc.* 224 7,853
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Hewlett-Packard Co. 130 2,426
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International Business Machines Corp. 132 11,847
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$25,540
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Consumer Goods & Services - 2.9%
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Apollo Group, Inc., "A"* 29 $1,914
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Gillette Co. 48 1,991
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Procter & Gamble Co. 208 10,645
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$14,550
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Containers - 0.5%
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Owens-Illinois, Inc.* 131 $2,427
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Electrical Equipment - 4.9%
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General Electric Co. 477 $16,275
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Tyco International Ltd. 254 7,912
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$24,187
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Electronics - 1.7%
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Applied Materials, Inc.* 265 $4,267
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Intel Corp. 82 1,825
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National Semiconductor Corp. 132 2,204
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$8,296
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Energy - Independent - 1.5%
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Ashland, Inc. 77 $4,437
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Valero Energy Corp. 72 3,094
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$7,531
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Energy - Integrated - 5.6%
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ConocoPhillips 90 $7,588
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Exxon Mobil Corp. 409 20,131
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$27,719
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Food & Non-Alcoholic Beverages - 2.1%
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Kellogg Co. 136 $5,848
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Tyson Foods, Inc., "A" 321 4,655
- -----------------------------------------------------------------------------------------------
$10,503
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Forest & Paper Products - 0.6%
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International Paper Co. 74 $2,850
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Gaming & Lodging - 2.3%
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Carnival Corp. 131 $6,623
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Starwood Hotels & Resorts Worldwide, Inc. 99 4,725
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$11,348
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General Merchandise - 3.5%
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Kohl's Corp.* 60 $3,046
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Target Corp. 65 3,251
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Wal-Mart Stores, Inc. 208 11,215
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$17,512
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Health Maintenance Organizations - 1.1%
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CIGNA Corp. 82 $5,204
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Insurance - 3.0%
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Ace Ltd. 146 $5,557
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American International Group, Inc. 42 2,550
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MetLife, Inc. 177 6,788
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$14,895
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Machinery & Tools - 1.5%
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Caterpillar, Inc. 30 $2,416
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Cummins, Inc. 68 4,765
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$7,181
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Medical & Health Technology & Services - 1.4%
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Apria Healthcare Group, Inc.* 68 $1,861
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Community Health Systems, Inc.* 194 5,203
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$7,064
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Medical Equipment - 2.3%
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Baxter International, Inc. 193 $5,937
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Fisher Scientific International, Inc.* 96 5,507
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$11,444
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Metals & Mining - 0.6%
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Alcoa, Inc. 86 $2,795
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Oil Services - 1.2%
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Halliburton Co. 166 $6,149
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Personal Computers & Peripherals - 0.8%
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Lexmark International, Inc., "A"* 45 $3,740
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Pharmaceuticals - 7.6%
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Eli Lilly & Co. 71 $3,899
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Endo Pharmaceuticals Holdings, Inc.* 99 2,158
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Johnson & Johnson 224 13,077
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Merck & Co., Inc. 178 5,573
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Pfizer, Inc. 354 10,248
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Wyeth 65 2,577
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$37,532
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Pollution Control - 0.3%
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Waste Management, Inc. 52 $1,481
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Printing & Publishing - 0.5%
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Tribune Co. 55 $2,376
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Railroad & Shipping - 0.9%
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Union Pacific Corp. 72 $4,534
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Real Estate - 0.5%
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Host Marriott Corp. 170 $2,474
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Restaurants - 1.4%
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McDonald's Corp. 239 $6,967
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Specialty Stores - 4.4%
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American Eagle Outfitters, Inc. 110 $4,497
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Best Buy Co., Inc. 49 2,902
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Home Depot, Inc. 102 4,190
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Lowe's Cos., Inc. 95 5,347
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PETsMART, Inc. 145 4,637
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$21,573
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Telecommunications - Wireline - 3.8%
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Cisco Systems, Inc.* 182 $3,496
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Motorola, Inc. 395 6,818
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QUALCOMM, Inc. 140 5,853
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Scientific-Atlanta, Inc. 96 2,629
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$18,796
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Telephone Services - 3.2%
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BellSouth Corp. 4 $107
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Sprint Corp. 357 7,479
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Verizon Communications, Inc. 217 8,485
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$16,071
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Tobacco - 2.0%
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Altria Group, Inc. 201 $9,740
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Trucking - 0.3%
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FedEx Corp. 18 $1,640
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Utilities - Electric Power - 3.4%
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Dominion Resources, Inc. 25 $1,608
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PG&E Corp.* 144 4,614
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Pinnacle West Capital Corp. 5 213
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PPL Corp. 49 2,548
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TXU Corp. 132 8,081
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$17,064
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Total Stocks (Identified Cost, $449,524) $494,958
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Short-Term Obligations - 1.0%
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ISSUER PAR AMOUNT $ VALUE
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Fannie Mae, 1.69%, due 11/01/04 $2,000 $2,000
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General Electric Capital Corp., 1.84%, due 11/01/04 3,000 3,000
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Total Short-Term Obligations, at Amortized Cost $5,000
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Total Investments (Identified Cost, $454,524) $499,958
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Other Assets, Less Liabilities - (0.7)% (3,418)
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Net Assets - 100.0% $496,540
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* Non-income producing security.
SEE NOTES TO FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
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This statement represents your fund's balance sheet, which details the assets
and liabilities composing the total value of your fund.
AT 10/31/04
ASSETS
Investments, at value (identified cost, $454,524) $499,958
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Cash 216
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Receivable for investments sold 9,136
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Dividends receivable 564
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Receivable from investment adviser 7
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Total assets $509,881
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LIABILITIES
Payable for investments purchased $13,294
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Payable to affiliates
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Management fee 30
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Reimbursement fee 17
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Total liabilities $13,341
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Net assets $496,540
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NET ASSETS CONSIST OF
Paid-in capital $502,182
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Unrealized appreciation (depreciation) on investments 45,434
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Accumulated net realized gain (loss) on investments (52,867)
- -------------------------------------------------------------------------------------------------------
Accumulated undistributed net investment income 1,791
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Net assets $496,540
- -------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 50,547
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Class A shares
Net assets $496,540
- -------------------------------------------------------------------------------------------------------
Shares outstanding 50,547
- -------------------------------------------------------------------------------------------------------
Net asset value per share $9.82
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Offering price per share (100/94.25X$9.82) $10.42
- -------------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
shares.
The fund currently only offers Class A shares. Class B, Class C and Class I
shares were not available for sale at year end October 31, 2004.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and
paid in expenses. It also describes any gains and/or losses generated by fund
operations.
FOR YEAR ENDED 10/31/04
NET INVESTMENT INCOME
Income
- -------------------------------------------------------------------------------------------------------
Dividends $8,894
- -------------------------------------------------------------------------------------------------------
Interest 30
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Total investment income $8,924
- -------------------------------------------------------------------------------------------------------
Expenses
- -------------------------------------------------------------------------------------------------------
Management fee $4,120
- -------------------------------------------------------------------------------------------------------
Shareholder servicing costs 553
- -------------------------------------------------------------------------------------------------------
Distribution and service fee 1,925
- -------------------------------------------------------------------------------------------------------
Administrative fee 51
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Custodian fee 2,022
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Printing 15,861
- -------------------------------------------------------------------------------------------------------
Auditing fees 26,509
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Legal fees 2,269
- -------------------------------------------------------------------------------------------------------
Miscellaneous 6,987
- -------------------------------------------------------------------------------------------------------
Total expenses $60,297
- -------------------------------------------------------------------------------------------------------
Fees paid indirectly (12)
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Reduction of expenses by investment adviser and distributor (53,975)
- -------------------------------------------------------------------------------------------------------
Net expenses $6,310
- -------------------------------------------------------------------------------------------------------
Net investment income $2,614
- -------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis) $19,100
- -------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) $37,734
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $56,834
- -------------------------------------------------------------------------------------------------------
Change in net assets from operations $59,448
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SEE NOTES TO FINANCIAL STATEMENTS
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FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
- ---------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets
resulting from operations, any distributions, and any shareholder
transactions.
FOR YEARS ENDED 10/31 2004 2003
CHANGE IN NET ASSETS
OPERATIONS
Net investment income $2,614 $2,467
- ---------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 19,100 (21,437)
- ---------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments 37,734 88,896
- -------------------------------------------------------------------- ---------- -------
Change in net assets from operations $59,448 $69,926
- -------------------------------------------------------------------- ---------- -------
Distributions declared to shareholders from net investment income $(2,720) $(1,798)
- -------------------------------------------------------------------- ---------- -------
Change in net assets from fund share transactions $315 $1,667
- -------------------------------------------------------------------- ---------- -------
Total change in net assets $57,043 $69,795
- -------------------------------------------------------------------- ---------- -------
NET ASSETS
At beginning of period $439,497 $369,702
- ---------------------------------------------------------------------------------------------------------
At end of period (including accumulated undistributed net
investment income of $1,791 and $1,897, respectively) $496,540 $439,497
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SEE NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years
(or, if shorter, the period of the fund's operation). Certain information reflects financial results for a single fund
share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an
investment in the fund (assuming reinvestment of all distributions) held for the entire period. This information has
been audited by the fund's independent registered public accounting firm, whose report, together with the fund's
financial statements, are included in this report.
YEARS ENDED 10/31
--------------------------------- PERIOD ENDED
2004 2003 10/31/02*
Net asset value, beginning of period $8.75 $7.39 $10.00
- ------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.05 $0.05 $0.02
- ------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 1.07 1.35 (2.63)
- ------------------------------------------------------------- ----------- ------ ------
Total from investment operations $1.12 $1.40 $(2.61)
- ------------------------------------------------------------- ----------- ------ ------
Less distributions declared to shareholders from net
investment income $(0.05) $(0.04) $--
- ------------------------------------------------------------- ----------- ------ ------
Net asset value, end of period $9.82 $8.75 $7.39
- ------------------------------------------------------------- ----------- ------ ------
Total return (%)(+) 12.91 18.97 (26.10)++
- ------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.15 1.15 1.15+
- ------------------------------------------------------------------------------------------------------------------------
Net investment income 0.48 0.63 0.34+
- ------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 50 23 36
- ------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $497 $439 $370
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(S) MFS has contractually agreed, subject to reimbursement, to bear a portion of the fund's "Other Expenses", which are
defined as the fund's operating expenses, exclusive of management, distribution and service, and certain other fees
and expenses, such that Other Expenses do not exceed 0.40% annually. This arrangement is effected by MFS bearing all
of the fund's Other Expenses during the fund's fiscal year and the fund paying MFS an expense reimbursement fee not
greater than 0.40% of average daily net assets. To the extent that the expense reimbursement fee exceeds the fund's
actual expenses, the excess will be applied to unreimbursed amounts paid by MFS under the current agreement. This
agreement will terminate on the earlier of January 1, 2005 or such date as all expenses previously borne by MFS
under the current agreement have been paid by the fund. In addition, the investment adviser and distributor
contractually waived their fees for certain of the periods indicated. Effective June 7, 2004, the investment adviser
also has voluntarily agreed to reimburse the fund for its proportional share of Independent Chief Compliance Officer
services paid to Tarantino LLC. To the extent actual expenses were over this limitation, and the
waivers/reimbursement had not been in place, the net investment loss per share and the ratios would have been:
Net investment loss $(0.90) $(0.75) $(0.77)
- ------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 11.03 11.36 12.18+
- ------------------------------------------------------------------------------------------------------------------------
Net investment loss (9.40) (9.58) (10.68)+
- ------------------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the fund's investment operations, December 28, 2001, through October 31, 2002.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total return does not include the applicable sales charge. If the charge had been included, the results would have
been lower.
SEE NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Tax Managed Equity Fund (the fund) is a diversified series of MFS Series
Trust VIII (the trust). The trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company. The fund currently only offers Class A
shares. Class B, Class C and Class I shares were not available for sale at year
end October 31, 2004.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
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
fund 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 - Equity securities in the fund's portfolio for which
market quotations are available are valued at the last sale or official
closing price as reported by an independent pricing service on the primary
market or exchange on which they are primarily traded, or at the last quoted
bid price for securities in which there were no sales during the day. Equity
securities traded over the counter are valued at the last sales price traded
each day as reported by an independent pricing service, or to the extent there
are no sales reported, such securities are valued on the basis of quotations
obtained from brokers and dealers. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer-supplied valuations.
All other short-term obligations in the fund's portfolio are valued at
amortized cost, which constitutes market value as determined by the Board of
Trustees. 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. When pricing service information or
market quotations are not readily available, securities are priced at fair
value as determined under the direction of the Board of Trustees. For example,
significant events (such as movement in the U.S. securities market, or other
regional and local developments) may occur between the time that foreign
markets close (where the security is principally traded) and the time that the
fund calculates its net asset value (generally, the close of the NYSE) that
may impact the value of securities traded in these foreign markets. In these
cases, the fund may utilize information from an external vendor or other
sources to adjust closing market quotations of foreign equity securities to
reflect what it believes to be the fair value of the securities as of the
fund's valuation time. Because the frequency of significant events is not
predictable, fair valuation of foreign equity securities may occur on a
frequent basis.
SHORT TERM FEES - For purchases made on or after July 1, 2004, the fund will
charge a 2% redemption fee (which is retained by the fund) on proceeds from
Class A shares redeemed or exchanged within 5 business days following their
acquisition (either by purchase or exchange). The fund may change the
redemption fee period in the future, including changes in connection with
pending Securities and Exchange Commission rules. See the fund's prospectus
for details. These fees are accounted for as an addition to paid-in capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. 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.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the fund. This amount, for the year ended October 31, 2004, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund'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 fund
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 capital losses.
The tax character of distributions declared for the years ended October 31,
2004 and October 31, 2003 was as follows:
10/31/04 10/31/03
Distributions declared from:
Ordinary income $2,720 $1,798
- --------------------------------------------------------------------------------
During the year ended October 31, 2004, there were no reclassifications due to
differences between book and tax accounting.
As of October 31, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $1,791
--------------------------------------------------
Capital loss carryforward (52,867)
--------------------------------------------------
Unrealized appreciation (depreciation) 45,434
--------------------------------------------------
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 October 31, 2010, ($31,430) and
October 31, 2011, ($21,437).
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund 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 0.75%
of the fund's average daily net assets.
MFS has contractually agreed, subject to reimbursement, to bear a portion of
the fund's "Other Expenses", which are defined as the fund's operating
expenses, exclusive of management, distribution and service, and certain other
fees and expenses, such that Other Expenses do not exceed 0.40% annually. This
arrangement is effected by MFS bearing all of the fund's Other Expenses during
the fund's fiscal year, and the fund paying MFS an expense reimbursement fee
not greater than 0.40% of average daily net assets. To the extent that the
expense reimbursement fee exceeds the fund's actual expenses, the excess will
be applied to unreimbursed amounts paid by MFS under the current agreement.
This agreement will terminate on the earlier of January 1, 2005 or such date
as all expenses previously borne by MFS under the current agreement have been
paid by the fund. At October 31, 2004, aggregate unreimbursed expenses
amounted to $130,355.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, and pays no compensation directly to its Trustees who are
officers of the investment adviser, or to officers of the fund, all of whom
receive remuneration for their services to the fund from MFS. Certain officers
and Trustees of the fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Trustees
are currently waiving their right to receive compensation from the fund.
This fund and certain other MFS funds (the "funds") have entered into a
services agreement (the "Agreement") which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. MFS has agreed to
reimburse each of the funds for a proportional share of substantially all of
the payments made by the funds to Tarantino LLC and also to provide office
space and other administrative support and supplies to the ICCO. The funds can
terminate the Agreement with Tarantino LLC at any time under the terms of the
Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment advisor. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. Prior
to April 1, 2004, the fund paid MFS an administrative fee up to the following
annual percentage rates of the fund'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%
--------------------------------------------------
Effective April 1, 2004, the fund paid MFS an administrative fee up to the
following annual percentage rates of the fund's average daily net assets:
First $2 billion 0.01120%
--------------------------------------------------
Next $2.5 billion 0.00832%
--------------------------------------------------
Next $2.5 billion 0.00032%
--------------------------------------------------
In excess of $7 billion 0.00000%
--------------------------------------------------
For the year ended October 31, 2004, the fund paid MFS $51, equivalent to
0.0093% of average daily net assets, to partially reimburse MFS for the costs
of providing administrative services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charge on sales of Class A shares for the year ended October
31, 2004.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD up to 0.35%
of its average daily net assets attributable to Class A shares in order that
MFD may pay expenses on behalf of the fund related to the distribution and
servicing of its shares. These expenses include service fees paid to each
securities dealer that enters into a sales agreement with MFD of up to 0.25%
per annum of the funds daily assets attributable to Class A shares which are
attributable to that securities dealer and distribution fee to MFD up to 0.10%
per annum of the fund's average daily net assets attributable to Class A
shares. Distribution and services fees under the Class A distribution plan are
currently being voluntarily waived.
Certain Class A shares are subject to a contingent deferred sales charge in
the event of a shareholder redemption within, for Class A shares, 12 months
following the purchase. There were no contingent deferred sales charges
imposed during the year ended October 31, 2004.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, for its services as
shareholder servicing agent. The fee, which is calculated as a percentage of
the fund's average daily net assets is set periodically under the supervision
of the fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of
the fund's average daily net assets. For the period April 1, 2004 through June
30, 2004, the fee was set at 0.10% of the fund's average daily net assets.
Effective July 1, 2004, the fund is charged up to 0.0861% of its average daily
net assets. For the year ended October 31, 2004, the fund paid MFSC a fee of
$540 for shareholder services which equated to 0.0988% of the fund's average
daily net assets. Also included in shareholder servicing costs are out-of-
pocket expenses, paid to MFSC, which amounted to $2 for the year ended October
31, 2004, as well as other expenses paid to unaffiliated vendors.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated $269,133
and $268,700, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $454,524
--------------------------------------------------
Gross unrealized appreciation $70,703
--------------------------------------------------
Gross unrealized depreciation (25,269)
--------------------------------------------------
Net unrealized appreciation (depreciation)$45,434
--------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
fund shares were as follows:
Year ended 10/31/04 Year ended 10/31/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 11,435 $110,004 2 $20
- ---------------------------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 305 2,720 240 1,798
- ---------------------------------------------------------------------------------------------------------
Shares reacquired (11,435) (112,409) (20) (151)
- ---------------------------------------------------------------------------------------------------------
Net change 305 $315 222 $1,667
- ---------------------------------------------------------------------------------------------------------
(6) LINE OF CREDIT
The fund 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 Federal
Reserve funds rate plus 0.50%. 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 calendar quarter. The commitment fee
allocated to the fund for the year ended October 31, 2004 was $3, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended October 31, 2004.
(7) SUBSEQUENT EVENT
On December 16, 2004, the Board of Trustees approved the termination of the
fund. It is expected that the fund will terminate operations on or about
January 31, 2005.
(8) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the
Securities and Exchange Commission ("SEC") regarding disclosure of brokerage
allocation practices in connection with MFS fund sales (the term "MFS funds"
means the open-end registered management investment companies sponsored by
MFS). Under the terms of the settlement, in which MFS neither admitted nor
denied any wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement
and $50 million in penalty to certain MFS funds, pursuant to a plan developed
by an independent distribution consultant. The brokerage allocation practices
which were the subject of this proceeding were discontinued by MFS in November
2003. The agreement with the SEC is reflected in an order of the SEC. Pursuant
to the SEC order, on July 28, 2004, MFS transferred these settlement amounts
to the SEC, and those MFS funds entitled to these settlement amounts accrued
an estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS open-end retail fund ("MFS
retail funds") prospectuses regarding market timing and related matters (the
"February Settlements"). These regulators alleged that prospectus language for
certain MFS retail funds was false and misleading because, although the
prospectuses for those funds in the regulators' view indicated that they
prohibited market timing, MFS did not limit trading activity in 11 domestic
large cap stock, high grade bond and money market retail funds. MFS' former
Chief Executive Officer, John W. Ballen, and former President, Kevin R. Parke,
also reached agreement with the SEC in which they agreed to, among other
terms, monetary fines and temporary suspensions from association with any
investment adviser or registered investment company. Messrs. Ballen and Parke
have resigned their positions with, and will not be returning to, MFS and the
MFS funds. Under the terms of the February Settlements, MFS and the executives
neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds,
which has been funded by MFS and of which $50 million is characterized as a
penalty. This pool will be distributed in accordance with a methodology
developed by an independent distribution consultant in consultation with MFS
and the Board of Trustees of the MFS retail funds, and acceptable to the SEC.
MFS has further agreed with NYAG to reduce its management fees in the
aggregate amount of approximately $25 million annually over the next five
years, and not to increase certain management fees during this period. MFS has
also paid an administrative fine to NH in the amount of $1 million, which will
be used for investor education purposes (NH retained $250,000 and $750,000 was
contributed to the North American Securities Administrators Association's
Investor Protection Trust). In addition, under the terms of the February
Settlements, MFS is in the process of adopting certain governance changes and
reviewing its policies and procedures.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center,
Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various
MFS funds, certain current and/or former Trustees of these MFS funds, and
certain officers of MFS have been named as defendants in multiple lawsuits
filed in federal and state courts. The lawsuits variously have been commenced
as class actions or individual actions on behalf of investors who purchased,
held or redeemed shares of the MFS funds during specified periods, as class
actions on behalf of participants in certain retirement plan accounts, or as
derivative actions on behalf of the MFS funds. The lawsuits relating to market
timing and related matters have been transferred to, and consolidated before,
the United States District Court for the District of Maryland, as part of a
multi-district litigation of market timing and related claims involving
several other fund complexes (In re Mutual Funds Investment Litigation (Alger,
Columbia, Janus, MFS, One Group, Putnam, Allianz Dresdner), No. 1:04-md-15863
(transfer began March 19, 2004)). The plaintiffs in these consolidated
lawsuits generally seek injunctive relief including removal of the named
Trustees, adviser and distributor, rescission of contracts and 12b-1 Plans,
disgorgement of fees and profits, monetary damages, punitive damages,
attorney's fees and costs and other equitable and declaratory relief. Four
lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District
of Massachusetts (Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584
(GAO) (March 25, 2004); Eddings v. Sun Life Financial Inc., et al., No.
04cv10764 (GAO) (April 15, 2004); Marcus Dumond, et al. v. Massachusetts
Financial Servs. Co., et al., No. 04cv11458 (GAO) (May 4, 2004); and Koslow v.
Sun Life Financial Inc., et al., No. 04cv11019 (GAO) (May 20, 2004)). The
plaintiffs in these lawsuits generally seek compensatory damages, punitive
damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. The various lawsuits generally allege that some or
all of the defendants (i) permitted or acquiesced in market timing and/or late
trading in some of the MFS funds, inadequately disclosed MFS' internal
policies concerning market timing and such matters, and received excessive
compensation as fiduciaries to the MFS funds, or (ii) permitted or acquiesced
in the improper use of fund assets by MFS to support the distribution of MFS
fund shares and inadequately disclosed MFS' use of fund assets in this manner.
The actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. Insofar as any of
the actions is appropriately brought derivatively on behalf of any of the MFS
funds, any recovery will inure to the benefit of the MFS funds. The defendants
are reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed
in the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS
has established a restitution pool in the amount of $225 million to compensate
certain shareholders of certain MFS retail funds for damages that they
allegedly sustained as a result of market timing or late trading in certain of
the MFS retail funds, and transferred $50 million for distribution to affected
MFS funds to compensate those funds based upon the amount of brokerage
commissions allocated in recognition of MFS fund sales. It is not clear
whether these amounts will be sufficient to compensate shareholders for all of
the damage they allegedly sustained, whether certain shareholders or putative
class members may have additional claims to compensation, or whether the
damages that may be awarded in any of the actions will exceed these amounts.
In the event the MFS funds incur any losses, costs or expenses in connection
with such lawsuits, the Boards of Trustees of the affected MFS funds may
pursue claims on behalf of such funds against any party that may have
liability to the funds in respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments,
will not result in increased fund redemptions, reduced sales of fund shares,
or other adverse consequences to the MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
To the Trustees of MFS Series Trust VIII and Shareholders of MFS Tax Managed
Equity Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Tax Managed Equity Fund (the Fund) (one of the portfolios comprising MFS
Series Trust VIII), including the portfolio of investments, as of October 31,
2004, and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period
then ended, and the financial highlights for each of the periods indicated
therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
financial highlights. Our procedures included confirmation of securities owned
at October 31, 2004, by correspondence with the custodian and brokers or by
other appropriate auditing procedures where replies from brokers were not
received. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Tax Managed Equity Fund at October 31, 2004, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and its financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
December 10, 2004
- -------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- -------------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of December 10, 2004, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.) The
address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS & OTHER
POSITION(s) HELD TRUSTEE/OFFICER DIRECTORSHIPS(2) DURING
NAME, DATE OF BIRTH WITH FUND SINCE(1) THE PAST FIVE YEARS
- ------------------- ---------------- --------------- ------------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and President February 2004 Massachusetts Financial Services
(born 10/20/63) Company, Chief Executive Officer,
President, Chief Investment Officer
and Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February
2004); Harvard Law School
(education), John Olin Visiting
Professor (since July 2002);
Secretary of Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice Chairman
(June 2000 to December 2001);
Fidelity Management & Research
Company (investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services), Director;
Bell Canada Enterprises
(telecommunicatio ns), Director;
Medtronic, Inc. (medical
technology), Director; Telesat
(satellite communications),
Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and February 1992 Private investor; Eastern
(born 05/01/36) Chair of Trustees Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
Lawrence H. Cohn, Trustee August 1993 Brigham and Women's Hospital, Chief
M.D. of Cardiac Surgery; Harvard Medical
(born 03/11/37) School, Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service provider),
Vice Chairman/Director (since April
2001); Encinitos Ventures (private
investment company), Principal
(1997 to April 2001); Lincoln
Electric Holdings, Inc. (welding
equipment manufacturer), Director;
Southwest Gas Corporation (natural
gas distribution company), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co., Inc.,
(born 02/08/53) Managing Director, Investment
Banking Group (1997 to February
2001); Borders Group, Inc. (book
and music retailer), Director;
Federal Realty Investment Trust
(real estate investment trust),
Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 06/23/35) Partner
William J. Poorvu Trustee August 1982 Private investor; Harvard
(born 04/10/35) University Graduate School of
Business Administration, Class of
1961 Adjunct Professor in
Entrepreneurship Emeritus
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning specialists),
President; Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care industry
(born 04/25/46) consultant
OFFICERS
Robert J. Manning(3) President and Trustee February 2004 Massachusetts Financial Services
(born 10/20/63) Company, Chief Executive Officer,
President, Chief Investment Officer
and Director
James R. Bordewick, Assistant Secretary September 1990 Massachusetts Financial Services
Jr.(3) and Assistant Clerk Company, Senior Vice President and
(born 03/06/59) Associate General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial Services
(born 12/01/56) Company, Senior Vice President,
General Counsel and Secretary
(since April 2004); Hale and Door
LLP (law firm) (prior to April
2004)
Stephanie A. DeSisto Assistant Treasurer May 2003 Massachusetts Financial Services
(3) Company, Vice President (since
(born 10/01/53) April 2003); Brown Brothers
Harriman & Co., Senior Vice
President (November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior Vice
President (prior to November 2002)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial Services
(born 03/09/61) and Assistant Clerk Company, Assistant General Counsel
Robert R. Flaherty Assistant Treasurer August 2000 Massachusetts Financial Services
(3) Company, Vice President (since
(born 09/18/63) August 2000); UAM Fund Services,
Senior Vice President (prior to
August 2000)
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial Services
(born 08/29/58) Company, Senior Vice President
(since July 2002); The Bank of New
York, Senior Vice President
(September 2000 to July 2002);
Lexington Global Asset Managers,
Inc., Executive Vice President and
Chief Financial Officer (prior to
September 2000); Lexington Funds,
Chief Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial Services
(born 11/11/64) and Assistant Clerk Company, Vice President, Senior
Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/ Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial Services
(born 11/13/57) Company, Vice President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services), Principal
(since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice President
(April 2003 to June 2004); David L.
Babson & Co. (investment adviser),
Managing Director, Chief
Administrative Officer and Director
(February 1997 to March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial Services
(born 06/12/60) Company, Senior Vice President
- ----------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "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 fund. The address of
MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The trust will hold a shareholders' meeting in 2005 and at least once every five
years hereafter to elect Trustees. Each Trustee and officer holds office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal. Messrs. Ives, Poorvu and
Sherratt and Ms. Lane are members of the trust's Audit Committee.
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 99 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 CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110
INDEPENDENT REGISTERED PUBLIC
DISTRIBUTOR ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street, Boston, MA 02116
PORTFOLIO MANAGER
Matthew W. Krummell
- -------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- -------------------------------------------------------------------------------
A general description of the MFS funds' proxy voting policies and procedures
is available without charge, upon request, by calling 1-800-225-2606, by
visiting the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
- -------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- -------------------------------------------------------------------------------
The fund will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (unaudited)
- -------------------------------------------------------------------------------
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
For the year ended October 31, 2004, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations is 100%.
The fund hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for by Jobs and
Growth Tax Relief Reconciliation Act of 2003. Complete information will be
reported in conjunction with your 2004 Form 1099-DIV.
CONTACT INFORMATION
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
Type of Information Phone number Hours, Eastern Time
- -------------------------------------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any business
day
- -------------------------------------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any business
day
- -------------------------------------------------------------------------------------------------------------
Share prices, account balances exchanges or 1-800-MFS-TALK
stock and bond outlooks (1-800-637-8255)
touch-tone required 24 hours a day, 365 days a year
- -------------------------------------------------------------------------------------------------------------
[logo] M F S(R)
INVESTMENT MANAGEMENT
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
TME-ANN 12/04
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's
principal executive officer and principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Mr. J. Atwood Ives and Ms. Amy B. Lane, members of the Audit Committee, have
been determined by the Board of Trustees in their reasonable business judgment
to meet the definition of "audit committee financial expert" as such term is
defined in Form N-CSR. In addition, Mr. Ives and Ms. Lane are "independent"
members of the Audit Committee as defined in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(A) THROUGH 4(D) AND 4(G):
The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve
as independent accountants to certain series of the Registrant ("Funds"), and
Ernst & Young LLP ("E&Y") to serve in the same capacity for other Funds of the
Registrant. The tables below set forth the audit fees billed to the Funds as
well as fees for non-audit services provided to the Funds and/or to the Funds'
investment adviser, Massachusetts Financial Services Company ("MFS") and to
various entities either controlling, controlled by, or under common control with
MFS that provide ongoing services to the Funds ("MFS Related Entities").
For the fiscal years ended October 31, 2004 and 2003, audit fees billed to the
following Fund by Deloitte were as follows:
Audit Fees
FEES BILLED BY DELOITTE: 2004 2003
------ ------
MFS Global Growth Fund 40,400 38,400
------ ------
TOTAL 40,400 38,400
For the fiscal years ended October 31, 2004 and 2003, audit fees billed to the
following Funds by E&Y were as follows:
Audit Fees
FEES BILLED BY E&Y: 2004 2003
------ ------
MFS Strategic Income Fund 36,950 35,400
MFS Tax Managed Equity 20,900 14,260
------ ------
Fund
TOTAL 57,850 49,660
For the fiscal years ended October 31, 2004 and 2003, fees billed by Deloitte
and E&Y for audit-related, tax and other services provided to the Funds and for
audit-related, tax and other services provided to MFS and MFS Related Entities
were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY DELOITTE: 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
To MFS Global Growth 0 0 9,600 4,800 0 0
Fund
To MFS and MFS Related 928,350 166,150 35,000 20,000 32,500 49,644
Entities relating directly to the
operations and financial
reporting of the
above Fund*
To Fund, MFS and MFS 928,350 166,150 44,600 42,429 68,500 121,644
Related Entities#
FEES BILLED BY E&Y: 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
To MFS Strategic Income 0 0 11,590 6,895 0 0
Fund
To MFS Tax Managed 0 0 9,930 3,175 0 0
- - ----- ----- - -
EQUITY FUND
TOTAL NON-AUDIT FEES 0 0 21,520 10,070 0 0
BILLED BY E&Y TO
ABOVE FUNDS
To MFS and MFS Related 0 0 0 0 40,000 14,607
Entities relating directly to the
operations and financial
reporting of the above
Funds*
To Funds, MFS and MFS 0 0 28,520 10,070 40,000 24,607
Related Entities##
* This amount reflects the fees billed to MFS and MFS Related Entities for
non-audit services relating directly to the operations and financial
reporting of the Funds (which services also related to the operations and
financial reporting of other funds within the MFS Funds complex).
# This amount reflects the aggregate fees billed by Deloitte for non-audit
services rendered to the Fund and for non-audit services rendered to MFS and
the MFS Related Entities.
## This amount reflects the aggregate fees billed by E&Y for non-audit services
rendered to the Funds and for non-audit services rendered to MFS and the MFS
Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance
and related services that are reasonably related to the performance of the
audit or review of financial statements, but not reported under "Audit
Fees," including accounting consultations, agreed-upon procedure reports,
attestation reports and comfort letters.
(2) The fees included under "Tax Fees" are fees associated with tax compliance,
tax advice and tax planning, including services relating to the filing or
amendment of federal, state or local income tax returns, regulated
investment company qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services
provided by Deloitte or E&Y other than those reported under "Audit Fees",
"Audit-Related Fees" and "Tax Fees."
For periods prior to May 6, 2003, the amounts shown above under "Audit-Related
Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services
that would have been subject to pre-approval if the Securities and Exchange
Commission's rules relating to pre-approval of non-audit services had been in
effect.
ITEM 4(E)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Funds and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the Audit
Committee and it is not practical to wait to seek pre-approval at the next
regular meeting of the Audit Committee, pre-approval of such services may be
referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 between such regular meetings of the Audit Committee. Any engagement
pre-approved by the Chair between regular meetings of the Audit Committee shall
be presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(E)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Funds and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after the
start of the engagement with respect to services other than audit review or
attest services, if certain conditions are satisfied).
ITEM 4(F): Not applicable.
ITEM 4(H): The Registrant's Audit Committee has considered whether the provision
by a Registrant's independent registered public accounting firm of non-audit
services to MFS and MFS Related Entities that were not pre-approved by the
Committee (because such services were provided prior to the effectiveness of SEC
rules requiring pre-approval or because such services did not relate directly to
the operations and financial reporting of the Registrant) was compatible with
maintaining the independence of the independent registered public accounting
firm as the Registrant's principal auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments for each series of the Registrant is included as part
of the report to shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Board of Trustees of the Registrant has adopted procedures by which
shareholders may send communications, including recommendations to the Board for
nominees to the Registrant's Board. Shareholders may mail written
recommendations to the Board to the attention of the Board of Trustees, MFS
Series Trust VIII, Massachusetts Financial Services Company, 500 Boylston
Street, Boston, MA 02116, c/o , Jeffrey N. Carp, Secretary of the Fund.
Shareholder communications must be in writing and be signed by the shareholder
and identify the series of the Registrant to which they relate. Such
recommendations must be accompanied by the candidate's biographical and
occupational data (including whether the candidate would be an "interested
person" of the Registrant), a written consent of the candidate to be named as a
nominee and to serve as Trustee if elected, record and ownership information for
the recommending shareholder with respect to the series of the Registrant to
which the recommendation relates and a description of any arrangements or
understandings regarding recommendation of the candidate for consideration.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act) as conducted within
90 days of the filing date of this Form N-CSR, the registrant's principal
financial officer and principal executive officer have concluded that those
disclosure controls and procedures provide reasonable assurance that the
material information required to be disclosed by the registrant on this
report is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and
forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: Code of Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS SERIES TRUST VIII
By (Signature and Title)* ROBERT J. MANNING
-----------------------------------------------------
Robert J. Manning, President
Date: December 21, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* ROBERT J. MANNING
-----------------------------------------------------
Robert J. Manning, President
(Principal Executive Officer)
Date: December 21, 2004
By (Signature and Title)* RICHARD M. HISEY
---------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: December 21, 2004
-----------------
* Print name and title of each signing officer under his or her signature.