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 811-5822
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MFS CHARTER INCOME TRUST
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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: November 30, 2004
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Date of reporting period: May 31, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS
MFS(R) Mutual Funds
SEMIANNUAL REPORT 5/31/04
MFS(R) CHARTER INCOME TRUST
A path for pursuing opportunity
[graphic omitted]
[logo] M F S(R)
INVESTMENT MANAGEMENT
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MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
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Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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MFS(R) CHARTER INCOME TRUST
The trust seeks to maximize current income.
New York Stock Exchange Symbol: MCR
TABLE OF CONTENTS
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MFS PRIVACY POLICY
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LETTER FROM THE CEO 1
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MFS ORIGINAL RESEARCH(R) 5
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MANAGEMENT REVIEW 6
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PORTFOLIO MANAGER'S PROFILE 9
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PERFORMANCE SUMMARY 10
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DIVIDEND REINVESTMENT AND CASH
PURCHASE PLAN 12
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PORTFOLIO OF INVESTMENTS 13
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FINANCIAL STATEMENTS 28
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NOTES TO FINANCIAL STATEMENTS 32
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TRUSTEES AND OFFICERS 43
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CONTACT INFORMATION 47
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
Our firm was built on the strength of MFS Original Research(R), our in-depth
analysis of every security we consider for our portfolios. We've been honing
this process since 1932, when we created one of the mutual fund industry's
first research departments. And we continue to fine-tune this process so that
we can provide strong and consistent long-term investment performance to help
you achieve your financial goals.
While we have achieved strong investment performance in many of our
portfolios, our goal is to achieve the same strong results across all asset
classes. To ensure that our portfolio teams are doing the best possible job
for our firm's clients and shareholders, I am focusing the vast majority of my
time on the three key elements that I believe truly differentiate MFS from its
competitors: people, process, and culture.
PEOPLE
Our people have always been our most valuable resource. Our philosophy is to
deliver consistent, repeatable investment results by hiring the most talented
investors in our industry. We recruit from the nation's top business schools
and hire experienced analysts, both domestically and around the globe.
Our analysts are the engine that powers our entire investment team because
their recommendations have a direct impact on the investment performance of
our portfolios. To demonstrate our ongoing commitment in this area, we
increased the number of equity analysts at MFS from less than 40 at the end of
2000 to about 50 in June 2004. During that same period, we doubled the average
investment experience of our domestic equity analysts, in part by recruiting
more seasoned analysts to the firm. Moreover, our international network of
investment personnel now spans key regions of the world with offices in
London, Mexico City, Singapore, and Tokyo, as well as Boston.
One of the major advantages that MFS has over many of its competitors is that
the position of research analyst is a long-term career for many members of our
team, not simply a steppingstone toward becoming a portfolio manager. We have
worked to elevate the stature of the analyst position to be on par with that
of a portfolio manager. In fact, an exceptional research analyst has the
opportunity to earn more at MFS than some portfolio managers.
At the same time, we look within the firm to promote talented analysts who
choose a path toward becoming a portfolio manager. We rarely hire portfolio
managers from our competitors because we believe the best investors are those
steeped in the MFS process and culture. In the past few months, we have
identified three senior research analysts who will assume roles on the
management teams of several of our larger portfolios. MFS is fortunate to have
a deep bench of talented investment personnel, and we welcome the opportunity
to put their skills to work for our clients.
PROCESS
MFS was built on the strength of its bottom-up approach to researching
securities. We have enhanced the mentoring process for our research analysts
by calling on several of our most seasoned portfolio managers to supplement
the work of Director of Global Equity Research David A. Antonelli. These
portfolio managers are taking a special interest in developing the careers of
our research analysts and strengthening our investment process. Kenneth J.
Enright of our value equity group is working with a team of domestic analysts;
David E. Sette-Ducati of our small- and mid-cap equity team is working with
analysts concentrating on small- and mid-cap companies; and Barnaby Wiener of
our international equity team in London heads the European equity research
team.
We have combined the bottom-up approach of our research process with a top-
down approach to risk controls on portfolio composition. We have a very strong
quantitative team under the leadership of industry veteran Deborah H. Miller,
who represents the equity management department on the Management Committee of
the firm. Quantitative analysis helps us generate investment ideas and, more
importantly, assess the appropriate level of risk for each portfolio. The risk
assessment is designed to assure that each portfolio operates within its
investment objectives.
Additionally, we have increased the peripheral vision of our investment
personnel across asset classes through the collaboration of our Equity, Fixed
Income, Quantitative Analysis, and Risk Management teams. We recently codified
this key aspect of our culture by forming an Investment Management Committee,
composed of key members of these teams. This Committee will work to ensure
that all teams are sharing information, actively debating investment ideas,
and creating a unified investment team.
CULTURE
Teamwork is at the heart of our ability to deliver consistent and competitive
investment performance over time. At MFS, each member of our team is involved
in our success; we have no superstars. The collaborative nature of our process
works to assure a consistent investment approach across all of our products
and provides a high level of continuity in portfolio management because our
investment performance never depends on the contributions of just a single
individual. Our culture is based on an environment of teamwork that allows our
investment personnel to be successful. In turn, we demand superior investment
results from every member of our team.
We have created a meritocracy at our firm based on investment results. We hold
all of our portfolio managers accountable for the performance of their
portfolios and their contributions to the team. We also track the equity and
fixed-income ratings of our analysts so we can evaluate them based on the
performance of their recommendations. We align bonus compensation to
investment performance by weighting rewards to those who have created the
greatest long-term benefit for our shareholders and who contribute most
successfully to the Original Research(SM) process.
The strength of our culture has resulted in a tremendous amount of stability,
both in terms of people and assets under management. Although we have
dismissed members of our team whose performance did not meet MFS' high
standards, only one portfolio manager has voluntarily left the firm over the
past six months, based on a decision to retire from the industry. Similarly,
our firm's assets under management have remained quite steady in the midst of
a challenging environment.
In short, we can help you achieve your financial goals by hiring talented
people, following a disciplined process, and maintaining our firm's unique
culture. The recent enhancements described in this letter reflect the
collaborative spirit and the depth of resources in our investment teams.
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
CEO, President, and Chief Investment Officer
MFS Investment Management(R)
June 18, 2004
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
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MFS ORIGINAL RESEARCH(R)
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THE MFS(R) DIFFERENCE
For 80 years MFS has been offering investors clear paths to pursuing specific
investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with
insight and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain first-hand
knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
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MANAGEMENT REVIEW
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MARKET ENVIRONMENT
The six-month period ended May 31, 2004, encompassed two markedly contrasting
backdrops for fixed-income investing. Early in the period, interest rates
continued to move down amid uncertainty about the pace of economic growth,
especially in view of reports documenting the lack of new-job creation. In our
view, improving corporate profitability and rising gross domestic product
statistics were not enough to persuade investors that the economy was in full
recovery. We believe the predominant expectation early in the period was that
the U.S. Federal Reserve Board was not likely to tighten monetary policy
quickly. In this environment, the riskier, higher- yielding classes of bonds,
especially domestic high-yield securities and emerging market debt, showed the
strongest performance.
A new environment emerged for the final two months of the period, however, after
the U.S. Department of Labor reported strong job growth for April and May. We
believe investors began to anticipate that the Fed would begin raising
short-term interest rates, perhaps as early as June, and that market interest
rates shot up and prices of Treasuries and other domestic high-grade securities
fell on the basis of those expectations. The yield on the 10-year Treasury,
which fell to as low as 3.68% in March, rose to 4.65% by May 31, after starting
the six-month period at 4.32%.
Despite losing ground in the final month of the period, domestic high-yield
bonds led other fixed-income sectors in performance for the six months, while
high-grade domestic securities and Treasuries tended to lag. (The principal
value and interest on Treasury securities are guaranteed by the U.S.
government if held to maturity while those of other high-grade securities are
not.) High-grade sovereign debt of foreign nations fared better than U.S.
Treasuries, while emerging market debt fell hard in the final two months after
performing strongly early in the period.
TRUST POSITIONING
Throughout the period, we maintained overweighted positions relative to what we
would consider neutral positions, in domestic high-yield and emerging market
debt to take advantage of their yield premiums over lower-yielding, high-grade
investments. This continued the strategy we initiated during 2003 when we became
less conservative and sought to benefit from the prospect of an improving
economy and rising corporate profitability. Together, domestic high-yield
corporate bonds and emerging market securities accounted for approximately 40%
of portfolio assets for much of the period. We de-emphasized Treasuries and
high-grade domestic bonds, which have tended to be the most sensitive to the
risk of falling prices when interest rates begin to rise. To further protect the
trust's exposure to interest-rate risk, we lowered the portfolio's effective
duration from 4.59 years to 4.36 years, paying particular attention to the
duration of our domestic high-grade holdings, which we feel are the most
vulnerable to rising rates in the United States.
CONTRIBUTORS TO PERFORMANCE
The trust's emphasis on U.S. high-yield bonds was a significant factor
supporting trust performance. Even when interest rates started to rise and
overall bond prices declined in April, high-yield bonds tended to hold up
better than other types of bonds. However, even they lost value in the final
month of the period as investors, we believe, became more risk averse. The
lowering of duration helped to reduce the negative impact on prices associated
with rising interest rates. The trust's diversification and exposure to non-
dollar government bonds also helped, as these securities were less affected by
increasing interest rates in the United States.
DETRACTORS FROM PERFORMANCE
A goal of this portfolio is to provide investors with diversification across the
fixed-income markets. Relative performance results will naturally vary when
compared with a particular benchmark that comprises just one or a few
fixed-income sectors. For the six-month period ended May 31, 2004, the trust's
net asset value results trailed two of the four benchmarks for the types of
securities in which it invests: the Lehman Brothers High Yield Index, a solely
high-yield benchmark, and the Citigroup World Government Non-Dollar Hedged
Index, which is composed of currency-hedged, high-grade U.S. and foreign
government bonds. Conversely, the trust at net asset value outperformed the
Lehman Brothers Aggregate Bond Index, a benchmark that covers the broad U.S.
fixed-income market, and the J.P. Morgan Emerging Markets Bond Index Global,
which is composed entirely of emerging market issues. Nevertheless, the trust's
overweighted position in emerging market debt did detract from overall
performance.
While the portfolio's performance at net asset value was positive, the
discount deepened on the market price of publicly traded trust shares. This
resulted in a negative return at the trust's market price despite positive
performance by the underlying investment portfolio.
Respectfully,
/s/ Joseph C. Flaherty, Jr.
Joseph C. Flaherty, Jr.
Portfolio Manager
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.
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Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment-related news.
o From Week in Review, link to MFS Global Perspective for our current view of
the world.
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PORTFOLIO MANAGER'S PROFILE
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Joseph C. Flaherty, Jr., is Senior Vice President of MFS Investment
Management(R) (MFS(R)) and Director of Fixed Income Quantitative Research. He
is portfolio manager of the global asset allocation portfolios of our mutual
funds, variable annuities, and offshore investment products.
Joe joined MFS as a fixed-income quantitative research associate in 1993 and
was named quantitative research analyst and Assistant Vice President in 1996.
He became Vice President and manager of the Quantitative Research Group in
1998, portfolio manager in 1999, and Director of Fixed Income Quantitative
Research in 2004.
He earned a Bachelor of Science degree in mechanical engineering from Tufts
University in 1984 and an M.B.A. in finance from Bentley College in 1990.
All portfolio managers at MFS are supported by an investment staff of over 160
professionals utilizing MFS Original Research(R), a global, company-oriented,
bottom-up process of selecting securities.
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PERFORMANCE SUMMARY THROUGH 5/31/04
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All results are historical. Investment return and principal value will
fluctuate, and shares, when sold, may be worth more or less than their
original cost. More recent returns may be different from those shown. Past
performance is no guarantee of future results.
PRICE SUMMARY
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Six months ended
5/31/04
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Date Price
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Net asset value 11/30/2003 $9.58
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5/31/2004 $9.43
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New York Stock Exchange 11/30/2003 $8.78
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3/10/2004 (high)* $9.32
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5/12/2004 (low)* $8.23
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5/31/2004 $8.37
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*For the period December 1, 2003, through May 31, 2004.
TOTAL RETURN VS BENCHMARKS
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Six months ended
5/31/04
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New York Stock Exchange price* -1.68%
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Net asset value* 1.52%
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Citigroup World Government Non-dollar Hedged Index# 1.56%
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J.P. Morgan Emerging Markets Bond Index Global# -0.86%
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Lehman Brothers Aggregate Bond Index# 0.60%
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Lehman Brothers High Yield Index# 2.19%
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* Includes reinvestment of dividends and capital gains distributions.
# Source: Standard & Poor's Micropal.
INDEX DEFINITIONS
CITIGROUP WORLD GOVERNMENT NON-DOLLAR HEDGED INDEX - measures the government
bond markets around the world, ex-U.S.
J.P. MORGAN EMERGING MARKETS BOND INDEX GLOBAL (THE EMBI GLOBAL) - tracks debt
instruments in the emerging markets (includes a broader array of countries
than the EMBI Plus).
LEHMAN BROTHERS AGGREGATE BOND INDEX - a measure of the U.S. bond market.
LEHMAN BROTHERS HIGH YIELD INDEX - measures the performance of the high-yield
bond market.
It is not possible to invest directly in an index.
KEY RISK CONSIDERATIONS
Investing in foreign and/or emerging markets securities involves risks
relating to interest rates, currency exchange rates, economic, and political
conditions.
The portfolio may invest in derivative securities, which may include futures
and options. These types of instruments can increase price fluctuation.
The portfolio focuses on companies in a limited number of sectors, making it
more susceptible to adverse economic, political, or regulatory developments
affecting those sectors than a portfolio that invests more broadly.
Investments in high yield or lower-rated securities may provide greater
returns but are subject to greater-than-average risk.
Because the portfolio invests in a limited number of companies a change in one
security's value may have a more significant effect on the portfolio's value.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
These risks may increase share price volatility. Please see the prospectus for
further information on these and other risk considerations.
In accordance with Section 23(c) of the Investment Company Act of 1940, the
trust hereby gives notice that it may from time to time repurchase shares of
the trust in the open market at the option of the Board of Trustees and on
such terms as the Trustees shall determine.
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
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The trust offers a Dividend Reinvestment and Cash Purchase Plan that allows
you to reinvest either all of the distributions paid by the trust or only the
long-term capital gains. Purchases are made at the market price unless that
price exceeds the net asset value (the shares are trading at a premium). If
the shares are trading at a premium, purchases will be made at a discounted
price of either the net asset value or 95% of the market price, whichever is
greater. Twice each year you can also buy shares. Investments may be made in
any amount over $100 in January and July on the 15th of the month or
shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee,
you can ask the firm or nominee to participate in the plan on your behalf. If
the nominee does not offer the plan, you may wish to request that your shares
be re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. The automatic
reinvestment of distributions does not relieve you of any income tax that may
be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please
have available the name of the trust and your account and Social Security
numbers. For certain types of registrations, such as corporate accounts,
instructions must be submitted in writing. Please call for additional details.
When you withdraw from the plan, you can receive the value of the reinvested
shares in one of two ways: a check for the value of the full and fractional
shares, or a certificate for the full shares and a check for the fractional
shares.
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PORTFOLIO OF INVESTMENTS (unaudited) - 5/31/04
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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 - 94.1%
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PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
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U.S. Bonds - 61.6%
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Advertising & Broadcasting - 2.0%
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Allbritton Communications Co., 7.75%, 2012 $1,500 $1,486,875
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Lamar Media Corp., 7.25%, 2013 1,390 1,428,225
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Muzak LLC, 10%, 2009 440 422,400
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Paxson Communications Corp., 0% to 2006, 12.25% to 2009 2,305 1,959,250
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Spanish Broadcasting System, Inc., 9.625%, 2009 1,500 1,582,500
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XM Satellite Radio Holdings, Inc., 12%, 2010 882 987,840
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XM Satellite Radio Holdings, Inc., 0% to 2005, 14% to 2009 358 331,608
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Young Broadcasting, Inc., 8.5%, 2008 2,600 2,749,500
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$10,948,198
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Aerospace - 0.8%
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Hexcel Corp., 9.875%, 2008 $1,240 $1,370,200
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Hexcel Corp., 9.75%, 2009 800 836,000
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K&F Industries, Inc., 9.25%, 2007 941 959,820
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TransDigm Holding Co., 8.375%, 2011 995 995,000
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$4,161,020
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Agency - Other - 1.0%
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Financing Corp., 10.35%, 2018 $3,600 $5,296,291
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Airlines - 0.3%
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Continental Airlines, Inc., 7.568%, 2006 $575 $472,730
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Continental Airlines, Inc., 7.566%, 2020 1,077 877,481
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$1,350,211
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Apparel Manufacturers - 0%
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WestPoint Stevens, Inc., 7.875%, 2005 - 2008** $3,550 $71,000
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Asset Backed & Securitized - 4.5%
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Airplane Pass-Through Trust, 10.875%, 2019** $222 $1,111
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Amresco Commercial Mortgage Funding I, 7%, 2029 3,000 3,232,031
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Asset Securitization Corp., 8.0037%, 2026 2,000 1,994,221
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Asset Securitization Corp., 7.525%, 2029 1,586 1,338,053
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Commercial Mortgage Acceptance Corp., 5.44%, 2013 3,535 3,151,150
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Credit Suisse First Boston Mortgage, 6.75%, 2030## 2,000 1,783,200
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First Union-Lehman Brothers Bank of America, 0.5505%, 2028^^ 82,997 1,960,545
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First Union-Lehman Brothers Commercial Mortgage Trust,
7%, 2014 850 911,923
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First Union-Lehman Brothers Commercial Mortgage Trust,
7.5%, 2029 3,000 3,031,875
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Morgan Stanley Capital I, Inc., 7.6943%, 2010 2,000 2,066,367
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Mortgage Capital Funding, Inc., 0.912%, 2031^^ 25,225 719,238
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TIAA Real Estate CDO Ltd., 7.17%, 2032## 4,221 4,512,512
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$24,702,226
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Automotive - 1.5%
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Dana Corp., 9%, 2011 $1,195 $1,359,313
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Eagle-Picher Industries, Inc., 9.75%, 2013 905 966,088
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Ford Motor Credit Co., 7%, 2013 952 955,481
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General Motors Acceptance Corp., 8%, 2031 1,363 1,378,037
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Metaldyne Corp., 11%, 2012 610 506,300
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TRW Automotive, Inc., 9.375%, 2013 781 872,768
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TRW Automotive, Inc., 11%, 2013 84 97,860
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Tenneco Automotive, Inc., 10.25%, 2013 1,715 1,903,650
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$8,039,497
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Banks & Credits Cos. - 0.1%
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RBS Capital Trust II, 6.425%, 2049 $829 $788,731
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Broadcast & Cable TV - 2.8%
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CSC Holdings, Inc., 8.125%, 2009 $3,450 $3,622,500
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Charter Communications, Inc., 8.625%, 2009 3,030 2,484,600
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Continental Cablevision, Inc., 9.5%, 2013 2,390 2,670,875
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DIRECTV Holdings LLC, 8.375%, 2013 335 370,175
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Lenfest Communications, Inc., 10.5%, 2006 1,900 2,159,607
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Mediacom Broadband LLC, 11%, 2013 2,400 2,538,000
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TCI Communications, Inc., 9.8%, 2012 1,169 1,479,443
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$15,325,200
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Building - 0.8%
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American Standard Cos., Inc., 7.375%, 2008 $1,005 $1,092,938
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Atrium Cos., Inc., 10.5%, 2009 1,070 1,120,825
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Jacuzzi Brands, Inc., 9.625%, 2010 510 545,700
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Williams Scotsman, Inc., 9.875%, 2007 1,650 1,608,750
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Williams Scotsman, Inc., 10%, 2008 205 221,400
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$4,589,613
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Business Services - 0.9%
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Iron Mountain, Inc., 7.75%, 2015 $3,000 $2,977,500
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Xerox Corp., 7.625%, 2013 1,995 1,966,627
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$4,944,127
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Chemicals - 1.9%
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Equistar Chemicals LP, 10.625%, 2011 $710 $779,225
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Huntsman International LLC, 10.125%, 2009 1,950 1,998,750
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IMC Global, Inc., 10.875%, 2013 1,745 2,085,275
-------------------------------------------------------------------------------------------------
JohnsonDiversey, Inc., "B", 9.625%, 2012 2,000 2,140,000
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JohnsonDiversey, Inc., 0% to 2007, 10.67% to 2013 1,470 1,087,800
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Lyondell Chemical Co., 11.125%, 2012 1,690 1,850,550
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Nalco Co., 7.75%, 2011## 690 721,050
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$10,662,650
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Consumer Goods & Services - 0.3%
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Kindercare Learning Centers, Inc., 9.5%, 2009 $656 $669,120
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Samsonite Corp., 10.75%, 2008 925 962,000
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$1,631,120
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Containers - 0.3%
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Owens-Brockway Glass Container, Inc., 8.875%, 2009 $660 $693,000
-------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.25%, 2013 745 741,275
-------------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 190 171,000
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$1,605,275
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Defense Electronics - 0.3%
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L-3 Communications Holdings, Inc., 7.625%, 2012 $1,480 $1,528,100
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Energy - Independent - 0.4%
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Chesapeake Energy Corp., 7.5%, 2014## $2,165 $2,208,300
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Entertainment - 1.1%
-------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $1,224 $1,266,840
-------------------------------------------------------------------------------------------------
News Media Holdings, Inc., 7.7%, 2025 530 596,175
-------------------------------------------------------------------------------------------------
News Media Holdings, Inc., 6.55%, 2033 538 541,412
-------------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 1,500 1,500,000
-------------------------------------------------------------------------------------------------
Turner Broadcasting System, Inc., 8.375%, 2013 1,784 2,090,097
-------------------------------------------------------------------------------------------------
$5,994,524
-------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 0.1%
-------------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 $360 $390,600
-------------------------------------------------------------------------------------------------
Forest & Paper Products - 1.0%
-------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8.5%, 2013 $1,680 $1,730,400
-------------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 8.5%, 2011 500 532,500
-------------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 9.5%, 2013 2,940 3,160,500
-------------------------------------------------------------------------------------------------
$5,423,400
-------------------------------------------------------------------------------------------------
Gaming & Lodging - 2.3%
-------------------------------------------------------------------------------------------------
GEO Group, Inc., 8.25%, 2013 $1,120 $1,092,000
-------------------------------------------------------------------------------------------------
Hilton Hotels Corp., 7.625%, 2012 1,100 1,171,500
-------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.375%, 2011 1,675 1,809,000
-------------------------------------------------------------------------------------------------
Park Place Entertainment Corp., 8.875%, 2008 1,550 1,685,625
-------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 900 884,250
-------------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd., 8%, 2010 1,195 1,278,650
-------------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 3,000 3,150,000
-------------------------------------------------------------------------------------------------
Venetian Casino Resort LLC, 11%, 2010 1,550 1,780,563
-------------------------------------------------------------------------------------------------
$12,851,588
-------------------------------------------------------------------------------------------------
Industrial - 0.2%
-------------------------------------------------------------------------------------------------
MSW Energy Holdings, 7.375%, 2010## $1,045 $1,029,325
-------------------------------------------------------------------------------------------------
Insurance - Property & Casualty - 0.2%
-------------------------------------------------------------------------------------------------
Fund American Cos., Inc., 5.875%, 2013 $1,351 $1,344,129
-------------------------------------------------------------------------------------------------
Machinery & Tools - 1.8%
-------------------------------------------------------------------------------------------------
AGCO Corp., 9.5%, 2008 $1,750 $1,898,750
-------------------------------------------------------------------------------------------------
AMSTED Industries, Inc., 10.25%, 2011## 1,865 2,014,200
-------------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## 2,185 2,294,250
-------------------------------------------------------------------------------------------------
Terex Corp., 9.25%, 2011 1,405 1,513,888
-------------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012## 2,430 2,284,200
-------------------------------------------------------------------------------------------------
$10,005,288
-------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.3%
-------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc., 8.125%, 2012 $1,147 $1,212,953
-------------------------------------------------------------------------------------------------
Mariner Health Care, Inc., 8.25%, 2013## 255 249,900
-------------------------------------------------------------------------------------------------
$1,462,853
-------------------------------------------------------------------------------------------------
Metals & Mining - 0.2%
-------------------------------------------------------------------------------------------------
Peabody Energy Corp., 6.875%, 2013 $355 $357,663
-------------------------------------------------------------------------------------------------
U.S. Steel Corp., 9.75%, 2010 858 945,945
-------------------------------------------------------------------------------------------------
$1,303,608
-------------------------------------------------------------------------------------------------
Mortgage Backed - 9.3%
-------------------------------------------------------------------------------------------------
Fannie Mae, 6%, 2016 - 2033 $15,029 $15,440,241
-------------------------------------------------------------------------------------------------
Fannie Mae, 5.989%, 2020 4 3,571
-------------------------------------------------------------------------------------------------
Fannie Mae, 6.5%, 2031 - 2032 7,680 7,957,445
-------------------------------------------------------------------------------------------------
Fannie Mae, 5.5%, 2033 22,524 22,346,825
-------------------------------------------------------------------------------------------------
Fannie Mae, 5%, 2034 5,639 5,429,021
-------------------------------------------------------------------------------------------------
$51,177,103
-------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.6%
-------------------------------------------------------------------------------------------------
AmeriGas Partners LP, 8.875%, 2011 $3,235 $3,429,100
-------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 1.3%
-------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.625%, 2010 $2,890 $2,918,900
-------------------------------------------------------------------------------------------------
Southern Natural Gas Co., Inc., 8.875%, 2010 1,650 1,790,250
-------------------------------------------------------------------------------------------------
Williams Cos., Inc., 7.125%, 2011 2,100 2,121,000
-------------------------------------------------------------------------------------------------
$6,830,150
-------------------------------------------------------------------------------------------------
Personal Computers & Peripherals - 0.2%
-------------------------------------------------------------------------------------------------
Jabil Circuit, Inc., 5.875%, 2010 $1,042 $1,074,056
-------------------------------------------------------------------------------------------------
Pharmaceuticals - 0.2%
-------------------------------------------------------------------------------------------------
Schering-Plough Corp., 6.5%, 2033 $996 $989,785
-------------------------------------------------------------------------------------------------
Pollution Control - 0.5%
-------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 $2,500 $2,550,000
-------------------------------------------------------------------------------------------------
Printing & Publishing - 0.9%
-------------------------------------------------------------------------------------------------
Dex Media East LLC, 9.875%, 2009 $1,500 $1,695,000
-------------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013## 1,500 1,651,875
-------------------------------------------------------------------------------------------------
Media News Group, Inc., 6.875%, 2013 1,700 1,640,500
-------------------------------------------------------------------------------------------------
$4,987,375
-------------------------------------------------------------------------------------------------
Retailers - 0.8%
-------------------------------------------------------------------------------------------------
Gap, Inc., 10.55%, 2008 $1,070 $1,292,025
-------------------------------------------------------------------------------------------------
J. Crew Operating Corp., 10.375%, 2007 1,100 1,100,000
-------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.5%, 2011 1,250 1,350,000
-------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.25%, 2013 825 845,625
-------------------------------------------------------------------------------------------------
$4,587,650
-------------------------------------------------------------------------------------------------
Supermarkets - 0.3%
-------------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 $1,650 $1,757,250
-------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 1.7%
-------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 11%, 2010 $1,251 $1,369,845
-------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 8.5%, 2012## 385 377,300
-------------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 1,800 1,836,000
-------------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 1,745 1,683,925
-------------------------------------------------------------------------------------------------
Dobson Communications Corp., 8.875%, 2013 500 387,500
-------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 520 523,900
-------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.75%, 2010 98 90,160
-------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.875%, 2010 1,175 1,177,938
-------------------------------------------------------------------------------------------------
Western Wireless Corp., 9.25%, 2013 1,735 1,787,050
-------------------------------------------------------------------------------------------------
$9,233,618
-------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 1.1%
-------------------------------------------------------------------------------------------------
MCI, Inc., 5.908%, 2007 $119 $115,133
-------------------------------------------------------------------------------------------------
MCI, Inc., 6.688%, 2009 119 111,563
-------------------------------------------------------------------------------------------------
MCI, Inc., 7.735%, 2014 102 92,693
-------------------------------------------------------------------------------------------------
Qwest Corp., 13.5%, 2010## 2,500 2,881,250
-------------------------------------------------------------------------------------------------
Verizon New York, Inc., 6.875%, 2012 2,542 2,734,043
-------------------------------------------------------------------------------------------------
$5,934,682
-------------------------------------------------------------------------------------------------
Tobacco - 0.1%
-------------------------------------------------------------------------------------------------
R.J. Reynolds Tobacco Holdings, Inc., 7.25%, 2012 $818 $760,740
-------------------------------------------------------------------------------------------------
U.S. Government Agencies - 6.4%
-------------------------------------------------------------------------------------------------
Fannie Mae, 5%, 2007^ $5,105 $5,327,343
-------------------------------------------------------------------------------------------------
Fannie Mae, 6%, 2008^ 3,672 3,954,535
-------------------------------------------------------------------------------------------------
Freddie Mac, 7%, 2005^ 6,100 6,431,224
-------------------------------------------------------------------------------------------------
Freddie Mac, 6%, 2011^ 5,005 5,351,121
-------------------------------------------------------------------------------------------------
Small Business Administration, 4.34%, 2024 8,168 7,818,308
-------------------------------------------------------------------------------------------------
Small Business Administration, 4.77%, 2024 6,386 6,204,398
-------------------------------------------------------------------------------------------------
$35,086,929
-------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 9.9%
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 10.75%, 2005^ $8,000 $8,829,064
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 12%, 2013^ 7,500 9,957,128
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 10.625%, 2015^ 3,350 5,019,767
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 9.875%, 2015^ 5,025 7,216,764
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 6.875%, 2006^ 8,000 8,660,624
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.375%, 2007^ 6,701 7,222,722
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.625%, 2008^ 6,543 7,200,003
-------------------------------------------------------------------------------------------------
$54,106,072
-------------------------------------------------------------------------------------------------
Utilities - Electric Power - 3.2%
-------------------------------------------------------------------------------------------------
CMS Energy Corp., 8.5%, 2011 $2,000 $2,035,000
-------------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 1,185 986,513
-------------------------------------------------------------------------------------------------
DPL, Inc., 6.875%, 2011 1,673 1,673,000
-------------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 9.875%, 2010## 1,150 1,207,500
-------------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 6.875%, 2011 1,500 1,230,000
-------------------------------------------------------------------------------------------------
PG&E Corp., 6.875%, 2008## 405 425,250
-------------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 7.75%, 2007 3,101 3,225,040
-------------------------------------------------------------------------------------------------
Pacific Gas & Electric Co., 6.05%, 2034 479 449,058
-------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25%, 2010 370 390,350
-------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.5%, 2013 430 455,800
-------------------------------------------------------------------------------------------------
System Energy Resources, Inc., 5.129%, 2014## 2,757 2,701,474
-------------------------------------------------------------------------------------------------
TXU Corp., 6.375%, 2006 2,727 2,890,565
-------------------------------------------------------------------------------------------------
$17,669,550
-------------------------------------------------------------------------------------------------
Total U.S. Bonds $337,830,934
-------------------------------------------------------------------------------------------------
Foreign Bonds - 32.5%
-------------------------------------------------------------------------------------------------
Australia - 0.8%
-------------------------------------------------------------------------------------------------
Burns Philp Capital Property Ltd., 9.75%, 2012 (Food &
Non-Alcoholic Beverages) $2,000 $2,060,000
-------------------------------------------------------------------------------------------------
Government of Australia, 6.25%, 2015 (International
Market Sovereign)^ AUD 3,011 2,214,506
-------------------------------------------------------------------------------------------------
$4,274,506
-------------------------------------------------------------------------------------------------
Austria - 1.7%
-------------------------------------------------------------------------------------------------
Republic of Austria, 5.5%, 2007 (International Market
Sovereign) EUR 5,859 $7,691,744
-------------------------------------------------------------------------------------------------
Republic of Austria, 5%, 2012 (International Market
Sovereign) 772 995,528
-------------------------------------------------------------------------------------------------
Republic of Austria, 4.65%, 2018 (International Market
Sovereign) 358 438,355
-------------------------------------------------------------------------------------------------
$9,125,627
-------------------------------------------------------------------------------------------------
Belgium - 0.9%
-------------------------------------------------------------------------------------------------
Kingdom of Belgium, 3.75%, 2009 (International Market
Sovereign) EUR 1,810 $2,228,984
-------------------------------------------------------------------------------------------------
Kingdom of Belgium, 5%, 2012 (International Market
Sovereign) 1,973 2,537,672
-------------------------------------------------------------------------------------------------
$4,766,656
-------------------------------------------------------------------------------------------------
Brazil - 1.6%
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 2.125%, 2012 (Emerging Market
Sovereign) $728 $594,755
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 (Emerging Market
Sovereign) 6,651 5,923,183
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 2.0625%, 2024 (Emerging
Market Sovereign) 749 576,730
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 11%, 2040 (Emerging Market
Sovereign) 1,993 1,783,735
-------------------------------------------------------------------------------------------------
$8,878,403
-------------------------------------------------------------------------------------------------
Bulgaria - 0.3%
-------------------------------------------------------------------------------------------------
Republic of Bulgaria, 8.25%, 2015 (Emerging Market
Sovereign)## $1,604 $1,800,490
-------------------------------------------------------------------------------------------------
Canada - 2.0%
-------------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 8.3%, 2005 (Forest & Paper
Products) $2,592 $2,691,685
-------------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 (Chemicals) 1,350 1,471,500
-------------------------------------------------------------------------------------------------
EnCana Holdings Finance Corp., 5.8%, 2014 (Energy -
Independent) 1,348 1,373,329
-------------------------------------------------------------------------------------------------
Government of Canada, 5.5%, 2009 - 2010 (International
Market Sovereign) CAD 6,054 4,693,775
-------------------------------------------------------------------------------------------------
Government of Canada, 5.25%, 2012 (International Market
Sovereign) 369 280,291
-------------------------------------------------------------------------------------------------
Government of Canada, 8%, 2023 (International Market
Sovereign) 224 218,064
-------------------------------------------------------------------------------------------------
$10,728,644
-------------------------------------------------------------------------------------------------
Chile - 0.6%
-------------------------------------------------------------------------------------------------
AES Corp., 7.5%, 2014 (Utilities - Electric Power)## $281 $252,900
-------------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013
(Utilities - Electric Power) 1,288 1,333,113
-------------------------------------------------------------------------------------------------
Enersis S.A., 7.375%, 2014 (Utilities - Electric Power)## 1,656 1,577,459
-------------------------------------------------------------------------------------------------
$3,163,472
-------------------------------------------------------------------------------------------------
Colombia - 0.3%
-------------------------------------------------------------------------------------------------
Republic of Colombia, 10.75%, 2013 (Emerging Market
Sovereign) $1,475 $1,537,688
-------------------------------------------------------------------------------------------------
Denmark - 1.0%
-------------------------------------------------------------------------------------------------
Kingdom of Denmark, 7%, 2007 (International Market
Sovereign) DKK 11,863 $2,180,062
-------------------------------------------------------------------------------------------------
Kingdom of Denmark, 6%, 2009 (International Market
Sovereign) 16,161 2,928,553
-------------------------------------------------------------------------------------------------
Kingdom of Denmark, 5%, 2013 (International Market
Sovereign) 3,511 599,354
-------------------------------------------------------------------------------------------------
$5,707,969
-------------------------------------------------------------------------------------------------
Finland - 1.9%
-------------------------------------------------------------------------------------------------
Republic of Finland, 2.75%, 2006 (International Market
Sovereign) EUR 4,222 $5,167,276
-------------------------------------------------------------------------------------------------
Republic of Finland, 3%, 2008 (International Market
Sovereign) 4,489 5,410,485
-------------------------------------------------------------------------------------------------
$10,577,761
-------------------------------------------------------------------------------------------------
France - 2.4%
-------------------------------------------------------------------------------------------------
Crown European Holdings S.A., 9.5%, 2011 (Containers) $2,580 $2,799,300
-------------------------------------------------------------------------------------------------
Republic of France, 4.75%, 2007 - 2012 (International
Market Sovereign) EUR 5,270 6,745,712
-------------------------------------------------------------------------------------------------
Republic of France, 4%, 2009 (International Market
Sovereign) 1,681 2,086,858
-------------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 (Chemicals)## $1,045 799,425
-------------------------------------------------------------------------------------------------
Vivendi Universal S.A., 6.25%, 2008 (Advertising &
Broadcasting) 915 956,175
-------------------------------------------------------------------------------------------------
$13,387,470
-------------------------------------------------------------------------------------------------
Germany - 3.8%
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 4%, 2007 (International
Market Sovereign) EUR 2,998 $3,761,739
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 3.5%, 2008 (International
Market Sovereign) 9,552 11,707,138
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 5.25%, 2010 (International
Market Sovereign) 2,111 2,778,861
-------------------------------------------------------------------------------------------------
Kreditanstalt fur Wiederaufbau, 3.25%, 2008
(International Market Agencies) 2,244 2,732,893
-------------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 (Chemicals) 100 127,052
-------------------------------------------------------------------------------------------------
$21,107,683
-------------------------------------------------------------------------------------------------
Ireland - 2.3%
-------------------------------------------------------------------------------------------------
Eircom Funding PLC, 8.25%, 2013 (Telecommunications -
Wireline) $810 $826,200
-------------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 (Forest & Paper
Products) 970 1,052,450
-------------------------------------------------------------------------------------------------
Republic of Ireland, 4.25%, 2007 (International Market
Sovereign) EUR 5,547 7,016,801
-------------------------------------------------------------------------------------------------
Republic of Ireland, 3.25%, 2009 (International Market
Sovereign) 3,123 3,759,687
-------------------------------------------------------------------------------------------------
$12,655,138
-------------------------------------------------------------------------------------------------
Japan - 0.8%
-------------------------------------------------------------------------------------------------
Mizuho Financial Group, Inc., 5.79%, 2014 (Banks & Credit
Companies)## $1,898 $1,825,903
-------------------------------------------------------------------------------------------------
UFJ Finance Aruba AEC, 6.75%, 2013 (Banks & Credit
Companies) 2,700 2,762,386
-------------------------------------------------------------------------------------------------
$4,588,289
-------------------------------------------------------------------------------------------------
Kazakhstan - 0.6%
-------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 10.125%, 2007 (Banks &
Credit Companies)## $123 $133,455
-------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 10.125%, 2007 (Banks &
Credit Companies)+ 128 138,880
-------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 8.5%, 2013 (Banks &
Credit Companies) 190 185,250
-------------------------------------------------------------------------------------------------
Kazkommerts International B.V., 8.5%, 2013 (Banks &
Credit Companies)## 949 934,765
-------------------------------------------------------------------------------------------------
Turanalem Finance B.V., 8%, 2014 (Banks & Credit
Companies)## 2,012 1,810,800
-------------------------------------------------------------------------------------------------
$3,203,150
-------------------------------------------------------------------------------------------------
Luxembourg - 0.4%
-------------------------------------------------------------------------------------------------
Millicom International Cellular S.A., 10%, 2013
(Telecommunications - Wireless)## $865 $890,950
-------------------------------------------------------------------------------------------------
Telecom Italia S.p.A., 5.25%, 2013 (Telecommunications -
Wireline)## 1,418 1,371,322
-------------------------------------------------------------------------------------------------
$2,262,272
-------------------------------------------------------------------------------------------------
Malaysia - 0.5%
-------------------------------------------------------------------------------------------------
Petroliam Nasional Berhad, 7.75%, 2015 (Emerging Market
Agencies) $970 $1,109,719
-------------------------------------------------------------------------------------------------
Petroliam Nasional Berhad, 7.875%, 2022 (Emerging Market
Agencies)## 1,357 1,489,069
-------------------------------------------------------------------------------------------------
$2,598,788
-------------------------------------------------------------------------------------------------
Mexico - 2.3%
-------------------------------------------------------------------------------------------------
BBVA Bancomer Capital Trust I, 10.5%, 2011 (Banks &
Credit Companies)## $1,000 $1,092,500
-------------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 (Telecommunications -
Wireless) 654 680,160
-------------------------------------------------------------------------------------------------
Pemex Finance Ltd., 9.69%, 2009 (Emerging Market
Agencies) 915 1,050,127
-------------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 8.625%, 2022
(Emerging Market Agencies) 5,105 5,360,250
-------------------------------------------------------------------------------------------------
Petroleos Mexicanos, 9.5%, 2027 (Emerging Market
Agencies) 1,416 1,600,080
-------------------------------------------------------------------------------------------------
United Mexican States, 8%, 2022 (Emerging Market
Sovereign) 889 924,560
-------------------------------------------------------------------------------------------------
United Mexican States, 7.5%, 2033 (Emerging Market
Sovereign) 1,804 1,749,880
-------------------------------------------------------------------------------------------------
$12,457,557
-------------------------------------------------------------------------------------------------
Netherlands - 2.0%
-------------------------------------------------------------------------------------------------
Hurricane Finance B.V., 9.625%, 2010 (Oils) $735 $749,700
-------------------------------------------------------------------------------------------------
Kingdom of Netherlands, 3.75%, 2009 (International Market
Sovereign) EUR 4,895 6,018,393
-------------------------------------------------------------------------------------------------
Kingdom of Netherlands, 5%, 2012 (International Market
Sovereign) 3,173 4,092,081
-------------------------------------------------------------------------------------------------
$10,860,174
-------------------------------------------------------------------------------------------------
New Zealand - 1.0%
-------------------------------------------------------------------------------------------------
Government of New Zealand, 7%, 2009 (International Market
Sovereign) NZD 2,425 $1,587,014
-------------------------------------------------------------------------------------------------
Government of New Zealand, 6.5%, 2013 (International
Market Sovereign)^ 6,408 4,109,886
-------------------------------------------------------------------------------------------------
$5,696,900
-------------------------------------------------------------------------------------------------
Panama - 0.4%
-------------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2029 (Emerging Market
Sovereign) $2,208 $2,412,240
-------------------------------------------------------------------------------------------------
Poland - 0.3%
-------------------------------------------------------------------------------------------------
PTC International Finance II S.A., 11.25%, 2009
(Telecommunications - Wireless) $1,316 $1,414,700
-------------------------------------------------------------------------------------------------
Portugal - 0.4%
-------------------------------------------------------------------------------------------------
Republic of Portugal, 5.45%, 2013 (International Market
Sovereign) EUR 1,777 $2,350,811
-------------------------------------------------------------------------------------------------
Qatar - 0.6%
-------------------------------------------------------------------------------------------------
State of Qatar, 9.75%, 2030 (Emerging Market Sovereign)+ $2,292 $3,082,740
-------------------------------------------------------------------------------------------------
Russia - 1.4%
-------------------------------------------------------------------------------------------------
Gaz Capital S.A., 8.625%, 2034 (Utilities - Gas)## $1,410 $1,378,275
-------------------------------------------------------------------------------------------------
Gazprom OAO, 9.625%, 2013 (Utilities - Gas)## 1,020 1,048,050
-------------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 9.75%, 2008 (Telecommunications
- Wireless)## 1,042 1,068,050
-------------------------------------------------------------------------------------------------
Russian Federation, 3%, 2008 - 2011 (Emerging Market
Sovereign) 954 741,240
-------------------------------------------------------------------------------------------------
Russian Federation, 11%, 2018 (Emerging Market Sovereign) 721 905,216
-------------------------------------------------------------------------------------------------
Siberian Oil Co. (SIBNEFT), 10.75%, 2009 (Energy -
Integrated) 750 742,500
-------------------------------------------------------------------------------------------------
Tyumen Oil Co., 11%, 2007 (Energy - Integrated) 1,514 1,669,185
-------------------------------------------------------------------------------------------------
$7,552,516
-------------------------------------------------------------------------------------------------
Singapore - 0.2%
-------------------------------------------------------------------------------------------------
Flextronics International Ltd., 6.5%, 2013 (Electronics) $1,145 $1,110,650
-------------------------------------------------------------------------------------------------
Spain - 1.1%
-------------------------------------------------------------------------------------------------
Kingdom of Spain, 6%, 2008 (International Market
Sovereign) EUR 1,600 $2,143,726
-------------------------------------------------------------------------------------------------
Kingdom of Spain, 5.35%, 2011 (International Market
Sovereign) 3,014 3,977,667
-------------------------------------------------------------------------------------------------
$6,121,393
-------------------------------------------------------------------------------------------------
Sweden - 0.3%
-------------------------------------------------------------------------------------------------
Spintab AB, 5%, 2008 (Banks & Credit Companies) SEK 12,700 $1,760,976
-------------------------------------------------------------------------------------------------
Ukraine - 0.2%
-------------------------------------------------------------------------------------------------
Ukraine Cabinet of Ministers, 6.875%, 2011 (Emerging
Market Sovereign)## $1,000 $947,500
-------------------------------------------------------------------------------------------------
United Kingdom - 0.4%
-------------------------------------------------------------------------------------------------
United Kingdom Treasury, 7.25%, 2007 (International
Market Sovereign) GBP 826 $1,616,081
-------------------------------------------------------------------------------------------------
United Kingdom Treasury, 5%, 2012 (International Market
Sovereign) 298 540,221
-------------------------------------------------------------------------------------------------
$2,156,302
-------------------------------------------------------------------------------------------------
Total Foreign Bonds $178,288,465
-------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $506,575,214) $516,119,399
-------------------------------------------------------------------------------------------------
Convertible Bonds - 0.3%
-------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 0.3%
-------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 5.25%, 2010
(Identified Cost, $1,436,036) $1,500 $1,441,875
-------------------------------------------------------------------------------------------------
Stocks - 0.2%
-------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
-------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.1%
-------------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 5,720 $446,160
-------------------------------------------------------------------------------------------------
Machinery & Tools - 0%
-------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp.* 119 $1,589
-------------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
-------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 59 $1,298
-------------------------------------------------------------------------------------------------
Telephone Services - 0.1%
-------------------------------------------------------------------------------------------------
MCI, Inc.* 44,340 $658,449
-------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $3,018,813) $1,107,496
-------------------------------------------------------------------------------------------------
Warrants - 0%
-------------------------------------------------------------------------------------------------
Basic Industry - Other - 0%
-------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp., Expire 5/23/06* 760 $608
-------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0%
-------------------------------------------------------------------------------------------------
Ono Finance PLC, Expire 2/15/11* 1,000 $0
-------------------------------------------------------------------------------------------------
Business Services - 0%
-------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd., Expire 1/15/07* 1,625 $0
-------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd., Expire 1/15/07* 750 0
-------------------------------------------------------------------------------------------------
$0
-------------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
-------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc., Expire 12/19/08* 3 $4
-------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $176,974) $612
-------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 13.4%
-------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio 73,233,925 $73,233,925
-------------------------------------------------------------------------------------------------
Portfolio of Investments (unaudited) - continued
Repurchase Agreements - 3.1%
-------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
-------------------------------------------------------------------------------------------------
Morgan Stanley Repurchase Agreement, dated 5/28/04, due
6/01/04, total to be received $16,982,962 (secured by
various U.S. Treasury and Federal Agency obligations in a
jointly traded account), at Cost $16,981 $16,981,000
-------------------------------------------------------------------------------------------------
Total Investments(+) (Identified Cost, $601,421,962) $608,884,307
-------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (11.1)% (60,677,542)
-------------------------------------------------------------------------------------------------
Net Assets - 100.0% $548,206,765
-------------------------------------------------------------------------------------------------
(+) As of May 31, 2004, one security representing $446,160 and 0.08% of net assets was fair valued
in accordance with the policies adopted by the Board of Trustees.
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
^ All or a portion of this security is on loan.
^^ Interest only security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollar JPY = Japanese Yen
CAD = Canadian Dollar KRW = Korean Won
DKK = Danish Krone NZD = New Zealand Dollar
EUR = Euro SEK = Swedish Krona
GBP = British Pound
SEE NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES (unaudited)
-----------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 5/31/04
ASSETS
Investments, at value, including $71,800,306 of securities
on loan (identified cost, $601,421,962) $608,884,307
-----------------------------------------------------------------------------------------------------
Cash 87,449
-----------------------------------------------------------------------------------------------------
Foreign currency, at value (identified cost, $863) 882
-----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange contracts 399,073
-----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange contracts
subject to master netting agreements 184,411
-----------------------------------------------------------------------------------------------------
Receivable for investments sold 3,021,338
-----------------------------------------------------------------------------------------------------
Interest receivable 10,228,041
-----------------------------------------------------------------------------------------------------
Other assets 17,491
-----------------------------------------------------------------------------------------------------
Total assets $622,822,992
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payable to dividend disbursing agent $210,583
-----------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 359,171
-----------------------------------------------------------------------------------------------------
Payable for investments purchased 137,303
-----------------------------------------------------------------------------------------------------
Payable for treasury shares reacquired 247,622
-----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 73,233,925
-----------------------------------------------------------------------------------------------------
Payable to affiliates
-----------------------------------------------------------------------------------------------------
Management fee 37,785
-----------------------------------------------------------------------------------------------------
Transfer agent and dividend disbursing costs 17,475
-----------------------------------------------------------------------------------------------------
Administrative fee 673
-----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 371,690
-----------------------------------------------------------------------------------------------------
Total liabilities $74,616,227
-----------------------------------------------------------------------------------------------------
Net assets $548,206,765
-----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $609,167,161
-----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 7,573,597
-----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (55,852,685)
-----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (12,681,308)
-----------------------------------------------------------------------------------------------------
Net assets $548,206,765
-----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(62,734,983 issued, less 4,601,344 treasury shares) 58,133,639
-----------------------------------------------------------------------------------------------------
Net asset value per share
(net assets of $548,206,765/58,133,639 shares of beneficial
interest outstanding) $9.43
-----------------------------------------------------------------------------------------------------
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 SIX MONTHS ENDED 5/31/04
NET INVESTMENT INCOME (LOSS)
Income
-----------------------------------------------------------------------------------------------------
Interest $16,977,486
-----------------------------------------------------------------------------------------------------
Dividends 1,995
-----------------------------------------------------------------------------------------------------
Total investment income $16,979,481
-----------------------------------------------------------------------------------------------------
Expenses
-----------------------------------------------------------------------------------------------------
Management fee $1,728,017
-----------------------------------------------------------------------------------------------------
Trustees' compensation 45,639
-----------------------------------------------------------------------------------------------------
Transfer agent and dividend disbursing costs 50,713
-----------------------------------------------------------------------------------------------------
Administrative fee 34,948
-----------------------------------------------------------------------------------------------------
Investor communication expense 101,817
-----------------------------------------------------------------------------------------------------
Custodian fee 158,477
-----------------------------------------------------------------------------------------------------
Printing 18,249
-----------------------------------------------------------------------------------------------------
Postage 15,007
-----------------------------------------------------------------------------------------------------
Auditing fees 22,650
-----------------------------------------------------------------------------------------------------
Legal fees 4,325
-----------------------------------------------------------------------------------------------------
Miscellaneous 77,555
-----------------------------------------------------------------------------------------------------
Total expenses $2,257,397
-----------------------------------------------------------------------------------------------------
Fees paid indirectly (3,692)
-----------------------------------------------------------------------------------------------------
Net expenses $2,253,705
-----------------------------------------------------------------------------------------------------
Net investment income $14,725,776
-----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
-----------------------------------------------------------------------------------------------------
Investment transactions $11,158,475
-----------------------------------------------------------------------------------------------------
Futures contracts 162,070
-----------------------------------------------------------------------------------------------------
Foreign currency transactions (4,724,424)
-----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency
transactions $6,596,121
-----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
-----------------------------------------------------------------------------------------------------
Investments $(16,849,095)
-----------------------------------------------------------------------------------------------------
Futures contracts (239,779)
-----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 2,635,230
-----------------------------------------------------------------------------------------------------
Net unrealized loss on investments and foreign currency
translation $(14,453,644)
-----------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments and foreign
currency $(7,857,523)
-----------------------------------------------------------------------------------------------------
Increase in net assets from operations $6,868,253
-----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT 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.
SIX MONTHS ENDED YEAR ENDED
5/31/04 11/30/03
(UNAUDITED)
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $14,725,776 $29,269,302
-------------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency
transactions 6,596,121 14,807,237
-------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (14,453,644) 15,713,313
-------------------------------------------------------------- ------------ ------------
Increase in net assets from operations $6,868,253 $59,789,852
-------------------------------------------------------------- ------------ ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(16,146,858) $(31,796,703)
-------------------------------------------------------------- ------------ ------------
Net decrease in net assets from trust share transactions $(4,414,412) $(12,374,600)
-------------------------------------------------------------- ------------ ------------
Total increase (decrease) in net assets $(13,693,017) $15,618,549
-------------------------------------------------------------- ------------ ------------
NET ASSETS
At beginning of period $561,899,782 $546,281,233
-------------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions in
excess of net investment income of $12,681,308 and
$11,260,226, respectively) $548,206,765 $561,899,782
-------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the trust's financial performance for the semiannual period
and the past 5 fiscal years. Certain information reflects financial results for a single trust share. The total returns in the
table represent the rate by which an investor would have earned (or lost) on an investment in the trust (assuming reinvestment
of all distributions) held for the entire period.
SIX MONTHS YEAR ENDED 11/30
ENDED -----------------------------------------------------------------------
5/31/04 2003 2002 2001 2000 1999
(UNAUDITED)
Net asset value, beginning of period $9.58 $9.09 $9.17 $9.20 $9.71 $10.39
------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#(S)(S)
Net investment income $0.25 $0.49 $0.52 $0.67 $0.72 $0.72
------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments and
foreign currency (0.12) 0.53 (0.02) (0.01) (0.45) (0.65)
---------------------------------- --------- ------ ------ ------ ------ ------
Total from investment operations $0.13 $1.02 $0.50 $0.66 $0.27 $0.07
---------------------------------- --------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.28) $(0.53) $(0.49) $(0.64) $(0.61) $(0.68)
------------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.09) (0.05) (0.17) (0.07)
---------------------------------- --------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.28) $(0.53) $(0.58) $(0.69) $(0.78) $(0.75)
---------------------------------- --------- ------ ------ ------ ------ ------
Net asset value, end of period $9.43 $9.58 $9.09 $9.17 $9.20 $9.71
---------------------------------- --------- ------ ------ ------ ------ ------
Per share market value, end of
period $8.37 $8.78 $8.26 $8.35 $8.44 $8.06
---------------------------------- --------- ------ ------ ------ ------ ------
Total return at market value (%) (1.68)++ 13.02 5.99 6.92 14.66 (11.88)
------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA:
Expenses## 0.80+ 0.83 0.85 0.91 0.93 0.88
------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.21+ 5.21 5.80 7.18 7.53 7.17
------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 26 129 137 98 113 121
------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $548,207 $561,900 $546,281 $556,614 $561,105 $632,594
------------------------------------------------------------------------------------------------------------------------------
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
(S)(S) As required, effective December 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
November 30, 2002 was to decrease net investment income per share by $0.02, increase net realized gains and losses per
share by $0.02, and decrease the ratio of net investment income to average net assets by 0.24%. Per share, ratios, and
supplemental data for periods prior to December 1, 2001 have not been restated to reflect this change in presentation.
SEE NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
-------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Charter Income Trust (the trust) is a non-diversified Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a closed-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The trust can invest in foreign securities. Investments in foreign securities
are vulnerable to the effects of changes in the relative values of the local
currency and the U.S. dollar and to the effects of changes in each country's
legal, political, and economic environment.
INVESTMENT VALUATIONS - Bonds and other fixed income securities (other than
short-term obligations) in the trust'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 trust'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. 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 trust'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.
REPURCHASE AGREEMENTS - The trust may enter into repurchase agreements with
institutions that the trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The trust
requires that the securities collateral in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the trust to
obtain those securities in the event of a default under the repurchase
agreement. The trust monitors, on a daily basis, the value of the collateral
to ensure that its value, including accrued interest, is greater than amounts
owed to the trust under each such repurchase agreement. The trust, along with
other affiliated entities of Massachusetts Financial Services Company (MFS),
may utilize a joint trading account for the purpose of entering into one or
more repurchase agreements.
FOREIGN CURRENCY TRANSLATION - Purchases and sales of foreign investments,
income, and expenses are converted into U.S. dollars based upon currency
exchange rates prevailing on the respective dates of such transactions. Gains
and losses attributable to foreign currency exchange rates on sales of
securities are recorded for financial statement purposes as net realized gains
and losses on investments. Gains and losses attributable to foreign exchange
rate movements on income and expenses are recorded for financial statement
purposes as foreign currency transaction gains and losses. That portion of
both realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
DEFERRED TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan)
independent Trustees may elect to defer receipt of all or a portion of their
annual compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the trust or other MFS funds selected
by the Trustee. Deferred amounts represent an unsecured obligation of the
trust until distributed in accordance with the Plan. Included in other assets,
and accrued expenses and other liabilities, is $12,739 of Deferred Trustees'
Compensation.
FUTURES CONTRACTS - The trust 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 trust 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 trust 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 trust. The trust's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. 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 trust relative
position in one or more currencies without buying and selling portfolio
assets. Investments in index contracts or contracts on related options for
purposes other than hedging, may be made when the trust has cash on hand and
wishes to participate in anticipated market appreciation while the cash is
being invested. Should interest or exchange rates or securities prices move
unexpectedly, the trust may not achieve the anticipated benefits of the
futures contracts and may realize a loss.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the trust with indemnification against Borrower default. The
trust bears the risk of loss with respect to the investment of cash
collateral. 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 trust and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The trust may enter
into forward foreign currency exchange contracts for hedging purposes as well
as for non-hedging purposes. For hedging purposes, the trust may enter into
contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. The trust may also use contracts
in a manner intended to protect foreign currency-denominated securities from
declines in value due to unfavorable exchange rate movements. For non-hedging
purposes, the trust may enter into contracts with the intent of changing the
relative exposure of the trust's portfolio of securities to different
currencies to take advantage of anticipated changes. The forward foreign
currency exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded as unrealized until
the contract settlement date. On contract settlement date, the gains or losses
are recorded as realized gains or losses on foreign currency transactions.
DOLLAR ROLL TRANSACTIONS - The trust enters into dollar roll transactions,
with respect to mortgage backed securities issued by GNMA, FNMA, and FHLMC, in
which the trust 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. The trust's
total return is enhanced through either a reduced purchase price on the buy,
or receipt of an income fee from the broker.
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 accounting principles generally accepted in the United States
of America. All discount is accreted for tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date. Some securities may be
purchased on a "when-issued" or "forward delivery" basis, which means that the
securities will be delivered to the trust at a future date, usually beyond
customary settlement time.
FEES PAID INDIRECTLY - The trust's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the trust. This amount, for the six months ended May 31, 2004, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The trust
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, mortgage-backed securities, derivatives,
real estate investment trusts, defaulted bonds, capital losses, and amortization
and accretion on debt securities.
The tax character of distributions declared for the years ended
November 30, 2003 and November 30, 2002 was as follows:
11/30/03 11/03/02
Distributions declared from:
----------------------------------------------------------------------------
Ordinary income $31,796,703 $29,555,338
----------------------------------------------------------------------------
Tax return of capital -- 5,548,996
----------------------------------------------------------------------------
Total distributions declared $31,796,703 $35,104,334
----------------------------------------------------------------------------
As of November 30, 2003, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $(55,912,985)
------------------------------------------------------
Unrealized appreciation 17,852,838
------------------------------------------------------
Other temporary differences (13,621,644)
------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on:
EXPIRATION DATE
November 30, 2008 $(10,216,164)
------------------------------------------------------
November 30, 2009 (21,791,609)
------------------------------------------------------
November 30, 2010 (23,905,212)
------------------------------------------------------
Total $(55,912,985)
------------------------------------------------------
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities.
The management fee is computed daily and paid monthly at an annual rate of
0.32% of the trust's average daily net assets and 4.57% of investment income.
The trust pays 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 trust, all of whom
receive remuneration for their services to the trust from MFS. Certain
officers and Trustees of the trust are officers or directors of MFS and MFS
Service Center, Inc. (MFSC). The trust has an unfunded, defined benefit plan
for retired Independent Trustees and an unfunded retirement benefit deferral
plan for certain current Independent Trustees. Included in Trustees'
compensation is $3,091 as a result of the change in the trust's unfunded
retirement benefit deferral plan for certain current Independent Trustees and
a pension expense of $4,016 for retired Independent Trustees for the six
months ended May 31, 2004.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. 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 trust paid MFS an administrative fee up to the following
annual percentage rates of the trust's average daily net assets:
First $2 billion 0.0175%
------------------------------------------------------
Next $2.5 billion 0.0130%
------------------------------------------------------
Next $2.5 billion 0.0005%
------------------------------------------------------
In excess of $7 billion 0.0000%
------------------------------------------------------
Effective April 1, 2004, the trust paid MFS an administrative fee up to the
following annual percentage rates of the trust'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 six months ended May 31, 2004, the trust paid MFS $34,948, equivalent
to 0.0124% of average daily net assets, to partially reimburse MFS for the
costs of providing administrative services.
TRANSFER AGENT - Included in transfer agent and dividend disbursing costs is a
fee paid to MFSC, a wholly owned subsidiary of MFS, for its services as
registrar and dividend disbursing agent for the trust. The agreement provides
that the trust will pay MFSC an account maintenance fee of no more than $9.00
and a dividend services fee of $0.75 per reinvestment. These fees amounted to
$42,358 for the six months ended May 31, 2004. Also included in transfer agent
and dividend disbursing costs are out-of-pocket expenses, paid to MFSC, which
amounted to $1,635 for the six months ended May 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 $28,813,452 $18,124,434
------------------------------------------------------------------------------
Investments (non-U.S. government
securities) $111,347,516 $137,582,924
------------------------------------------------------------------------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $606,963,399
------------------------------------------------------------------
Gross unrealized appreciation $16,475,397
------------------------------------------------------------------
Gross unrealized depreciation (14,554,489)
------------------------------------------------------------------
Net unrealized appreciation $1,920,908
------------------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. The Trustees have
authorized the repurchases by the trust of up to 10% annually of its own
shares of beneficial interest. The trust repurchased and retired 513,900
shares of beneficial interest during the six months ended May 31, 2004 at an
average price per share of $8.59 and a weighted average discount of 9.96% per
share. The trust repurchased and retired 1,445,000 shares of beneficial
interest during the year ended November 30, 2003 at an average price per share
of $8.56 and a weighted average discount of 9.10% per share. Transactions in
trust shares were as follows:
Six months ended Year ended
5/31/04 11/30/03
SHARES AMOUNT SHARES AMOUNT
Treasury shares reacquired (513,900) $(4,414,412) (1,445,000) $(12,374,600)
------------------------------------------------------------------------------------------------------------
(6) LINE OF CREDIT
The trust and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate 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 trust for the six months ended May 31, 2004, was $2,645, and
is included in miscellaneous expense. The trust had no significant borrowings
during the period.
(7) FINANCIAL INSTRUMENTS
The trust trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options, forward foreign currency
exchange contracts, swap agreements, and futures contracts. The notional or
contractual amounts of these instruments represent the investment the trust
has in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the
risks associated with these instruments is meaningful only when all related
and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
------------
SALES
------------
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
6/16/04 AUD 3,293,367 $2,386,790 $2,347,113 $39,673
6/16/04 DKK 36,019,642 5,745,467 5,912,708 (167,241)
6/16/04 EUR 71,982,831 87,788,846 87,893,434 (104,588)
6/17/04 GBP 630,586 1,114,245 1,153,686 (39,441)
6/15/04-6/16/04 NZD 9,374,728 6,115,644 5,882,439 233,205
6/16/04 SEK 15,508,519 2,044,918 2,080,649 (35,731)
------------ ------------ --------
$105,195,910 $105,270,029 $(74,123)
============ ============ ========
------------
PURCHASES
------------
6/16/04 AUD 244,190 $185,584 $174,029 $(11,555)
6/16/04 EUR 10,173,705 12,333,534 12,422,434 88,900
6/15/04 JPY 301,747,498 2,730,747 2,739,557 8,810
6/04/04 KRW 834,427,500 710,320 716,131 5,811
6/16/04 NZD 203,102 128,044 127,429 (615)
6/16/04 SEK 8,839,994 1,163,315 1,185,989 22,674
----------- ----------- --------
$17,251,544 $17,365,569 $114,025
=========== =========== ========
At May 31, 2004, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $184,411
with Merrill Lynch International.
At May 31, 2004, the trust had sufficient cash and/or securities to cover any
commitments under these contracts.
Futures Contracts
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION
U.S. Treasury Notes 10 Year Futures September 2004 160 Short $(136,909)
--------------------------------------------------------------------------------------------------------------
At May 31, 2004, the trust had sufficient cash and/or securities to cover any
margin requirements under these contracts.
(8) RESTRICTED SECURITIES
The trust may invest not more than 20% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At May 31, 2004,
the trust owned the following restricted securities, excluding securities
issued under Rule 144A, constituting 0.59% of net assets which may not be
publicly sold without registration under the Securities Act of 1933. The trust
does not have the right to demand that such securities be registered. The
value of these securities is determined by valuations furnished by dealers or
by a pricing service, or if not available, in good faith at the direction of
the Trustees.
DATE OF SHARE/PRINCIPAL
DESCRIPTION ACQUISITION AMOUNT COST VALUE
Kazkommerts International B.V. 4/14/03 128,000 $139,853 $138,880
--------------------------------------------------------------------------------------------------------------
State of Qatar 4/10/03 2,292,000 3,213,870 3,082,740
--------------------------------------------------------------------------------------------------------------
$3,221,620
--------------------------------------------------------------------------------------------------------------
(9) 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 fund sales. 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 administered by an independent
distribution consultant. The agreement with the SEC is reflected in an order
of the SEC. The settlement order states that MFS failed to adequately disclose
to the Boards and Trustees and to shareholders of the MFS funds the specifics
of its preferred arrangements with certain brokerage firms selling MFS fund
shares. The settlement order states that MFS had in place policies designed to
obtain best execution of all fund trades. As part of the settlement, MFS has
retained an independent compliance consultant to review the completeness of
its disclosure to fund trustees and to fund shareholders of strategic
alliances between MFS or its affiliates and broker-dealers and other financial
advisers who support the sale of fund shares. The brokerage allocation
practices which were the subject of this proceeding were discontinued by MFS
in November 2003.
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 fund prospectuses regarding
market timing and related matters (the "February Settlements"). These
regulators alleged that prospectus language for certain MFS funds was false
and misleading because, although the prospectuses for those funds in the
regulators' view indicated that the funds prohibited market timing, MFS did
not limit trading activity in 11 domestic large cap stock, high grade bond and
money market 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 of the MFS funds
offered to retail investors ("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 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, Sun Life Financial Inc., various MFS funds, the
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 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 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 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. The lawsuits seek unspecified compensatory damages.
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 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 the Retail Funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the
funds, and will pay $50 million to compensate certain MFS funds based upon the
amount of brokerage commissions allocated in recognition of 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 funds
may pursue claims on behalf of such funds against any party that may have
liability to the funds in respect thereof.
While these developments primarily relate to MFS' open-end funds, there can be
no assurance that these developments, or the adverse publicity associated with
these developments, will not result in an increase to the market discount of
the Trust's shares or other adverse consequences.
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TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust 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
John W. Ballen(3) Trustee and August 2001 until Massachusetts Financial
(born 09/12/59) President February 2004 Services Company, Chief
Executive Officer and
Director (until February
2004)
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
Kevin J. Parke(3) Trustee January 2002 until Massachusetts Financial
(born 12/14/59) February 2004 Services Company, President,
Chief Investment Officer and
Director (until February
2004)
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 (telecom-
munications), Director;
Telesat (satellite
communications), Director
Jeffrey L. Shames(3) Trustee October 1993 until Massachusetts Financial
(born 06/02/55) February 2004 Services Company, Chairman
(until February 2004)
INDEPENDENT TRUSTEES
J. Atwood Ives Chairman February 1992 Private investor; KeySpan
(born 05/01/36) Corporation (energy related
services), Director; Eastern
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; CBL & Associates
Properties, Inc. (real estate
investment trust), Director
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
Ward Smith Trustee October 1992 Private investor
(born 09/13/30)
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
John W. Ballen(3) President and August 2001 until Massachusetts Financial
(born 09/12/59) Trustee February 2004 Services Company, Chief
Executive Officer and
Director (until February
2004)
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
Stephen E. Cavan(3) Secretary and Clerk December 1989 Massachusetts Financial
(born 11/06/53) until Services Company, Senior Vice
March 2004 President, General Counsel
and Secretary (until March
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)
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)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 CRA Business Strategies Group
(born 03/07/44) Compliance Officer (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
series/the fund. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are
elected for fixed terms. The Board of Trustees is currently divided into three classes, each having a
term of three years. Each year the term of one class expires. Each Trustee's term of office expires on
the date of the third annual meeting following the election to office of the Trustee's class. Each
Trustee will serve until next elected or his or her earlier death, resignation, retirement or removal.
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 109 funds within the MFS Family of
Funds.
-----------------------------------------------------------------------------------------------------
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
PORTFOLIO MANAGER
Joseph C. Flaherty, Jr.
-------------------------------------------------------------------------------
CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS
-------------------------------------------------------------------------------
INVESTOR INFORMATION
Transfer Agent, Registrar and Dividend Disbursing Agent
Call 1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern
time
Write to: State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
A general description of the MFS funds' proxy voting policies 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.
NUMBER OF SHAREHOLDERS
As of May 31, 2004, our records indicate that there are 4,607 registered
shareholders and approximately 37,115 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the trust, please write or
call:
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
1-800-637-2304
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street
Boston, MA 02116-3741
(C) 2004 MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116 MCR-SEM-7/04 71M
ITEM 2. CODE OF ETHICS.
Applicable for semi-annual reports if the registrant has amended the code of
ethics during the period covered by the report or has granted a waiver,
including an implicit waiver, from a provision of the code of ethics.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not Applicable for semi-annual reports.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not Applicable for semi-annual reports.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not Applicable for semi-annual reports.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable at this time. [Applicable for periods ending on or after July 9,
2004 (beginning with Form N-CSRs filed at the end of September, 2004 for July
31, 2004 reporting period.)]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not Applicable for semi-annual reports.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable at this time. [Required for closed-end funds for periods ending
on or after June 15, 2004 (beginning with N-CSR's filed at the end of August,
2004 for June 30, 2004 reporting period.)]
ITEM 9. 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 for nominees to
the Registrant's Board, to the Board. Shareholders may mail written
communications to the Board to the attention of the Board of Trustees, [name of
series of the Registrant], Massachusetts Financial Services Company, 500
Boylston Street, Boston, MA 02116, c/o Frank Tarantino, Independent Chief
Compliance Officer of the Fund. Shareholder communications must (i) be in
writing and be signed by the shareholder, (ii) identify the series of the
Registrant to which it relates, and (iii) identify the class and number of
shares held by the shareholder.
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures 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 registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 11. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) [**An amendment to the code of ethics, 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: The amendment is attached hereto.**][**APPLICABLE IF THE
REGISTRANT HAS AMENDED ITS CODE OF ETHICS DURING THE PERIOD COVERED BY
REPORT**]
(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.
(3) Any written solicitation to purchase securities under 23c-1 under the
Act (17 C.F.R. 270.23c-1) sent or given during the period covered by
the report by or on behalf of the registrant to 10 or more persons. Not
applicable at this time. [For closed-end funds for periods ending on or
after June 15, 2004 (beginning with N-CSR's filed at the end of August
2004 for June 30, 2004 reporting period.)]
(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 CHARTER INCOME TRUST
By (Signature and Title)* ROBERT J. MANNING
----------------------------------------
Robert J. Manning, President
Date: July 23, 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: July 23, 2004
By (Signature and Title)* RICHARD M. HISEY
----------------------------------------
Richard M. Hisey, Treasurer (Principal
Financial Officer and Accounting Officer)
Date: July 23, 2004
* Print name and title of each signing officer under his or her signature.