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
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Date of reporting period: November 31, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) CHARTER INCOME TRUST 11/30/04
ANNUAL REPORT
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[logo] M F S(R)
INVESTMENT MANAGEMENT
ANNUAL REPORT
LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 5
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MANAGEMENT REVIEW 6
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PERFORMANCE SUMMARY 8
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DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN 11
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RESULTS OF SHAREHOLDER MEETING 12
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PORTFOLIO OF INVESTMENTS 13
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FINANCIAL STATEMENTS 26
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NOTES TO FINANCIAL STATEMENTS 31
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 44
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TRUSTEES AND OFFICERS 45
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PROXY VOTING POLICIES AND
INFORMATION 50
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QUARTERLY PORTFOLIO DISCLOSURE 50
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FEDERAL TAX INFORMATION 51
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CONTACT INFORMATION BACK COVER
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
For most investors, the main factor in determining long-term success is asset
allocation - how they spread their money among stocks, bonds, and cash. In
fact, the total returns of investors may be more influenced by their asset
allocation strategy than by their security selection within each asset class.
The principle behind asset allocation is simple: by diversifying across a
variety of types of securities, investors reduce the overall risk of their
portfolio because gains in one area are likely to offset losses in another.
One of the dangers of not having an asset allocation plan is the temptation to
simply chase performance, by moving money into whichever asset class appears
to be outperforming at the moment. The problem with this approach is that by
the time a particular area of the market comes into favor, investors may have
already missed some of the best performance. We would suggest that one way to
benefit from swings in the market is to acquire a diversified portfolio so
that investors hold a range of asset classes before the market swings in their
direction.
UNDERSTAND YOUR EMOTIONS
It usually takes a bear market for people to appreciate the benefits of
diversification. At MFS, we believe proper asset allocation is important in
all market environments. But we understand that there are emotional components
of investment decisions that sometimes keep investors from achieving their
long term goals. The three common behaviors that negatively impact investment
decisions are overconfidence, looking backwards, and loss aversion.
o Overconfidence. After experiencing gains in the market, particularly during
a bull market, investors have a natural tendency to overestimate their own
abilities. During the global bull market of the late 1990s, for example, a
large number of investors traded their own stocks and made significant
profits. However, most of these same investors later handed back those
profits - and then some - because they focused more on short-term blips in
the market and less on the fundamental factors that affect a company's
long-term prospects.
o Looking backwards. Although security prices are determined by expectations
about the future, many investors make choices based on the recent past.
Investors who have achieved momentary success in the market tend to take on
too much risk, believing that better- than-average returns can be easily
duplicated. On the other hand, those who have had negative experiences tend
to become overly cautious and take on too little risk. Recent historical
experience tends to dictate an investor's frame of reference and may lead to
irrational decisions.
o Loss aversion. Simply put, investors would rather avoid the immediate pain
of losses than enjoy the future pleasure of gains. As a result, some
investors tend to overreact to short-term downturns in the market by seeking
to mitigate their losses, rather than remaining invested to benefit from the
long-term growth potential of the stock and bond markets.
THINK LIKE A PROFESSIONAL INVESTOR
Asset allocation helps reduce the emotional factors that tend to affect the
long-term returns of investors. Professional investors - those who manage
assets for money management firms, pension funds, and endowments - have tended
to outperform the average retirement investor because they focus on asset
allocation. For example, the investment performance of the average 401(k)
participant has lagged these professional investors by more than two
percentage points a year, on average, over the past 10 years.(1)
We think asset allocation is one of the most important decisions for
investors. A study of the performance of 91 large U.S. corporate pension plans
with assets of more than $100 million over a 10-year period beginning in 1974
concluded that asset allocation policies accounted for 93.6% of their returns,
while individual security selection and the timing of their investments
accounted for only 6.4% for their overall performance.(2)
Professional investors target a realistic level of return based on the amount
of risk they are willing to take, then set allocations to meet their goals. On
average, U.S. professional investors allocate 35% to 40% of their assets to
domestic equity stocks; 20% to 30% to fixed income issues; 10% to
international stocks; and between 10% and 20% to other investment classes such
as real estate.(3) And within those categories, they hold a broad range of
styles and asset classes.
In contrast, 401(k) participants who held company stock in their retirement
plans at the end of 2002 had roughly 42% of their retirement assets in company
stock while the rest was allocated to either growth or value stock funds.(4)
These participants virtually ignored the broad range of equity, fixed-income,
and international offerings provided by their retirement plans.
ALLOCATE, DIVERSIFY, REBALANCE
We recommend working with a professional adviser to find an optimal mix of
investments based on your individual goals. In our view, a disciplined asset
allocation strategy is composed of three simple steps: allocate, diversify
and rebalance.
o Allocate. Investors should work with their financial adviser to specify
their long-term goals and tolerance for risk. Then investors should allocate
their assets across the major asset classes - stocks, bonds, and cash - to
help them pursue an investment return that is consistent with their risk
tolerance level.
o Diversify. By diversifying their assets, investors trade some performance in
the top performing categories for a more predictable and stable portfolio.
At the same time, investors should include different investment styles and
market capitalizations of stocks and a range of fixed-income investments, as
well as U.S. and non-U.S. securities. Because security subclasses tend to
move in and out of favor during various market and economic environments, a
broad portfolio increases the benefits of diversification.
o Rebalance. We suggest that investors consult with their professional
advisers periodically to rebalance their portfolios to maintain the
percentages that they have dedicated to each asset class. Allocations can
shift as markets rise and fall, making for a riskier or more conservative
portfolio than an investor originally intended. For example, a portfolio of
50% stocks and 50% bonds at the start of 2000 would have shifted to 32%
stocks and 68% bonds at the end of 2002 because of the weak stock market.(5)
In short, these three simple concepts - allocate, diversify and rebalance -
help take emotion out of the investment process and help prevent investors
from trying to outguess the market. An asset allocation strategy cannot turn a
down market cycle into a good one, but it is an invaluable tool to manage risk
and keep investors on track toward reaching their long-term investment goals.
A DISCIPLINED INVESTMENT PROCESS IS PARAMOUNT
Disciplined diversification has helped investors pursue long-term, above-
average results through the years. Since 1924, when we invented the mutual
fund, MFS(R) has strived to give investors the products and tools they need to
maintain well-diversified portfolios. MFS provides a variety of products in
each asset class as well as a family of asset allocation funds. These asset
allocation portfolios cover a range from conservative to moderate, growth, and
aggressive growth allocations, each with a strategy based on a distinct level
of risk. We recommend developing a comprehensive financial plan with an
investment advisor who is familiar with your risk tolerance, your individual
goals, and your financial situation.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management
December 15, 2004
Asset allocation and diversification can not guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
(1) Source: Watson Wyatt
(2) "Determinants of Portfolio Performance," in Financial Analysts Journal,
January/February 1995, by Gary P. Brinson, L. Randolph Hood, and
Gilbert L. Beebower
(3) Source: Greenwich Associates
(4) Source: Hewitt Associates
(5) Source: Lipper Inc.
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PORTFOLIO COMPOSITION
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PORFOLIO STRUCTURE*
Bonds 88.1%
Cash & Other Net Assets 11.8%
Stocks 0.1%
MARKET SECTORS*
International Sovereigns 19.0%
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High Yield Corporates 17.8%
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Emerging Markets Debt 14.8%
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High Grade Corporates 13.9%
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Cash & Other Net Assets 11.8%
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Mortgage Backed 10.1%
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U.S. Government Agencies 7.8%
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Commercial Mortgage Backed 4.7%
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Domestic Equity 0.1%
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CREDIT QUALITY**
AAA 46.8%
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AA 2.2%
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A 3.5%
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BBB 15.1%
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BB 19.5%
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B 10.1%
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CCC 0.6%
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CC 0.1%
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Other 2.1%
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PORTFOLIO FACTS
Average Duration 4.4
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Average Life 7.9 Yrs
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Average Maturity*** 11.9 Yrs
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Average Quality A
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Average Quality Short Term Bonds A-1
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COUNTRY WEIGHTINGS
United States 62.3%
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Germany 4.7%
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Brazil 3.1%
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Russia 3.0%
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Mexico 2.9%
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United Kingdom 2.7%
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Netherlands 2.0%
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Ireland 2.0%
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Finland 1.9%
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Other 15.4%
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* For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a
rating by Standard & Poor's, it will be based on the ratings assigned by
Fitch, Inc. If not rated by any of the three agencies, the security is
considered not rated, except for U.S. Treasuries and mortgage-backed
securities, which are included in the "AAA"-rating category.
*** The average maturity shown is calculated using the final stated maturity
on the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 11/30/04.
The portfolio is actively managed, and current holdings may be different.
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MANAGEMENT REVIEW
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SUMMARY OF RESULTS
For the one year ended November 30, 2004, the MFS Charter Income Trust - at
net asset value and at NYSE price - outperformed the Lehman Brothers Aggregate
Bond Index and the Citigroup World Government Bond Non-Dollar Hedged Index
while lagging the J.P. Morgan Emerging Market Bond Index Global and the Lehman
Brothers High Yield Index. The trust seeks to provide a high level of current
income by allocating approximately one-third of its assets to each of the
following sectors of the fixed income securities markets: (i) securities
issued or guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities and related options; (ii) debt
securities issued by foreign governments, their political subdivisions and
other foreign issuers; and (iii) corporate fixed income securities (including
investment grade and below investment grade securities), some of which may
involve equity features. The actual weighting of investments at different
times may vary depending on the portfolio manager's views of the relative
merits of investing in each of these sectors of the fixed income securities
markets.
MARKET ENVIRONMENT
In 2004, many measures of global economic growth, including employment and
corporate spending, continued to improve, although we feel that record-high oil
prices, concerns about rising interest rates, and a turbulent geopolitical
environment affected global markets. The U.S. Federal Reserve Board raised
interest rates four times during the period, and in our view, set expectations
for an ongoing series of modest rate hikes. During the reporting period, the
U.S. dollar fell significantly against the Euro and other major currencies. This
trend would have a negative impact on the relative performance of any fund which
was overweight in dollar dominated assets versus its benchmark. Alternatively,
it would help funds which were underweight.
CONTRIBUTORS TO PERFORMANCE
On the positive side, our yield exposure among U.S. issues - holding high
yielding issues - contributed to performance. Currency exposure, gained
primarily by owning bonds denominated in foreign currencies, also proved
positive. Issue selection in the sovereign, industrial, and asset-backed sectors
helped relative results. To a lesser extent, allocation in the industrial sector
also contributed..
DETRACTORS FROM PERFORMANCE
On the negative side, sector positioning in the supranational and mortgage
sectors detracted from relative results. To a lesser extent, credit exposure
to the "B"- and "CCC"-rated bonds held back results; although this exposure
was offset somewhat by a positive contribution from our exposure to the higher
rated "BBB" and "BB" bonds. While our yield exposure to U.S. issues proved
positive, our yield exposure among Euro-area issues detracted from relative
results. At the issue level, some U.S. Treasury securities and government
agency issues proved disappointing.
Note to Shareholders: Richard O. Hawkins, CFA, became the portfolio manager of
MFS(R) Charter Income Trust on July 1, 2004. Mr. Hawkins is a Senior Vice
President of MFS Investment Management and has been with the firm since 1988.
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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PERFORMANCE SUMMARY THROUGH 11/30/04
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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 more or less than those shown. Past performance
is no guarantee of future results.
PRICE SUMMARY
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Year ended 11/30/04
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Date Price
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Net asset value 11/30/2003 $9.58
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11/30/2004 $9.71
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New York Stock Exchange Price 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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11/30/2004 $8.71
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* For the period from December 1, 2003 through November 30, 2004.
TOTAL RETURN VS BENCHMARKS
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Year ended 11/30/04
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New York Stock Exchange price** 5.52%
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Net asset value** 7.81%
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Citigroup World Government Bond Non-dollar Hedged Index 5.43%
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J.P. Morgan EMBI Global 12.20%
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Lehman Brothers Aggregate Bond Index 4.44%
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Lehman Brothers High Yield Index 11.98%
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** Includes reinvestment of dividend and capital gain distributions.
INDEX DEFINITIONS
Citigroup World Government Bond Non-dollar Hedged Index - measures the
government bond markets around the world, ex-U.S.
J.P. Morgan EMBI Global - tracks debt instruments in the emerging markets
(includes a broader array of countries than the EMBI Plus).
Lehman Brothers Aggregate Bond Index - measures the U.S. investment grade,
fixed rate bond market, with index components for government and corporate
securities, mortgage pass-through securities, and asset-backed securities.
Lehman Brothers High Yield Index - measures the universe of non-investment
grade, fixed rate debt. Pay-in-kind (PIK) bonds, Eurobonds, and debt issues
from countries designated as emerging markets (e.g., Argentina, Brazil,
Venezuela, etc.) are excluded.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The trust's shares may trade at a discount to net asset value. Shareholders do
not have the right to cause the trust to repurchase their shares at net asset
value. The trust's shares also may trade at a premium to their net asset
value. When trust shares trade at a premium, buyers pay more than the asset
value of the underlying trust shares, and shares purchased at a premium would
receive less than the amount paid for them in the event of the trust's
liquidation. As a result, the total return that is calculated based on the net
asset value and New York Stock Exchange price can be different.
The trust's monthly distributions may include a return of capital to
shareholders. Distributions that are treated for federal income tax purposes as
a return of capital will reduce each shareholder's basis in his or her shares
and, to the extent the return of capital exceeds such basis, will be treated as
gain to the shareholder from a sale of shares. Returns of shareholder capital
have the effect of reducing the trust's assets and increasing the trust's
expense ratio.
KEY RISK CONSIDERATIONS
The portfolio may invest in derivative securities, which may include futures
and options. These types of instruments can increase share price fluctuation.
The portfolio may invest in foreign and/or emerging markets securities, which
involves risks relating to interest rates, currency exchange rates, economic,
and political conditions.
The portfolio may invest in government-guaranteed securities. These guarantees
apply to the underlying securities only and not to the prices and yields of
the portfolio.
The portfolio will invest in high yield or lower-rated securities, which may
provide greater returns but are subject to greater-than-average risk.
The portfolio may invest a relatively high percentage of its assets in one or
more issuers, thereby making it more susceptible to any single economic,
political, or regulatory occurrence.
The portfolio may focus 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.
The portfolio's value will fluctuate in response to market conditions and
issuer, regulatory, economic, or political developments. In general, fixed
income securities will decline when interest rates rise and will increase when
interest rates fall. Many fixed income securities also involve credit risk,
which is the risk that issuers may fail to make timely principal or interest
payments. In addition, fixed income securities with longer maturity dates will
be subject to greater price fluctuations than those with shorter maturity
periods. These risks should be considered prior to investing.
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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RESULTS OF SHAREHOLDER MEETING (unaudited) - 11/30/04
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At the annual meeting of shareholders of MFS Charter Income Trust, which was
held on October 7, 2004, the following actions were taken:
ITEM 1. To elect Trustees.
NUMBER OF SHARES
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NOMINEE FOR WITHHOLD AUTHORITY
Lawrence H. Cohn, M.D. 52,548,105.352 2,215,437.058
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Robert J. Manning 52,640,514.168 2,123,028.242
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Lawrence T. Perera 52,613,856.922 2,149,685.488
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Elaine R. Smith 52,631,741.035 2,131,801.375
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ITEM 2. To ratify the selection of Ernst & Young LLP independent registered
public accounting firm for the current fiscal year.
NUMBER OF SHARES
For 53,646,994.274
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Against 692,443.500
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Abstain 424,104.636
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PORTFOLIO OF INVESTMENTS - 11/30/04
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The Portfolio of Investments is a complete list of all securities owned by your trust. It is
categorized by broad-based asset classes.
Bonds - 96.4%
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ISSUER PAR AMOUNT $ VALUE
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Advertising & Broadcasting - 1.6%
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Allbritton Communications Co., 7.75%, 2012 $555,000 $571,650
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DIRECTV Holdings LLC, 8.375%, 2013 1,710,000 1,919,475
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Echostar DBS Corp., 6.375%, 2011 2,195,000 2,244,387
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Lamar Media Corp., 7.25%, 2013 1,390,000 1,501,200
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News America Holdings, 7.7%, 2025 1,140,000 1,324,306
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News America, Inc., 6.55%, 2033 538,000 563,643
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Paxson Communications Corp., 0% to 2006, 12.25% to 2009 580,000 522,000
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Young Broadcasting, Inc., 8.5%, 2008 355,000 379,850
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$9,026,511
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Aerospace - 0.1%
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TransDigm Holding Co., 8.375%, 2011 $495,000 $529,650
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Agency - Other - 1.0%
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Financing Corp., 10.35%, 2018 $3,600,000 $5,418,706
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Airlines - 0.4%
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Continental Airlines, Inc., 7.566%, 2020 $1,073,054 $840,325
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Delta Air Lines, Inc., 7.379%, 2010 1,218,652 1,179,137
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$2,019,462
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Asset Backed & Securitized - 4.7%
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Airplane Pass-Through Trust, 10.875%, 2019* $222,233 $1,111
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Amresco Commercial Mortgage Funding I, 7%, 2029 3,000,000 3,151,169
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Asset Securitization Corp., 8.2895%, 2026 2,000,000 2,092,522
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Asset Securitization Corp., 7.525%, 2029 1,586,134 1,352,179
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Commercial Mortgage Acceptance Corp., 5.44%, 2013## 3,535,000 3,545,021
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Credit Suisse First Boston Mortgage, 6.75%, 2030## 2,000,000 1,897,681
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Crest 2004-1A Ltd., 7%, 2040## 2,000,000 1,940,510
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DLJ Commercial Mortgage Corp., 6.04%, 2031 2,000,000 1,999,695
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First Union-Lehman Brothers Bank of America,
0.7291%, 2028^^ 80,461,020 1,744,234
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First Union-Lehman Brothers Commercial Mortgage Trust, 7%, 2029## 850,000 947,565
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First Union-Lehman Brothers Commercial Mortgage Trust,
7.5%, 2029 3,000,000 3,429,492
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Mortgage Capital Funding, Inc., 1.0312%, 2031^^ 23,246,135 553,479
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TIAA Retail Estate CDO Ltd., 7.17%, 2032## 3,214,007 3,405,121
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$26,059,779
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Automotive - 1.0%
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Affinia Group, Inc., 9%, 2014## $75,000 $77,250
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DaimlerChrysler N.A. Holdings Corp., 8.5%, 2031 400,000 482,516
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Ford Motor Credit Co., 7%, 2013 1,752,000 1,827,905
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Navistar International Corp., 7.5%, 2011 730,000 788,400
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TRW Automotive, Inc., 9.375%, 2013 781,000 909,865
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TRW Automotive, Inc., 11%, 2013 84,000 101,640
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Tenneco Automotive, Inc., 10.25%, 2013 270,000 317,925
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Tenneco Automotive, Inc., 8.625%, 2014## 105,000 109,200
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Visteon Corp., 7%, 2014 1,280,000 1,193,600
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$5,808,301
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Banks & Credit Companies - 2.7%
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Abbey National Capital Trust I, 8.963% to 2030,
5.235% to 2049 $1,500,000 $2,039,740
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BBVA Bancomer Capital Trust I, 10.5%, 2011## 656,000 706,020
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Banco Mercantil del Norte S.A., 5.875%, 2014## 207,000 213,210
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HBOS Capital Funding LP, 6.071% to 2014, 4.31% to 2049## 1,330,000 1,410,574
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J.P. Morgan Chase & Co., 5.125%, 2014 1,100,000 1,095,567
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Kazkommerts International B.V., 10.125%, 2007 128,000 140,000
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Kazkommerts International B.V., 10.125%, 2007## 873,000 954,844
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Kazkommerts International B.V., 8.5%, 2013 57,000 60,278
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Kazkommerts International B.V., 8.5%, 2013## 266,000 281,295
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Mizuho Financial Group, Inc., 5.79%, 2014## 1,898,000 1,958,759
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RBS Capital Trust II, 6.425% to 2034, 4.3525% to 2049 829,000 864,035
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Turanalem Finance B.V., 8%, 2014## 2,590,000 2,551,150
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UFJ Finance Aruba AEC, 6.75%, 2013 1,300,000 1,432,725
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Woori Bank, 5.75%, 2014## 1,144,000 1,185,470
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$14,893,667
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Broadcast & Cable TV - 2.0%
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CSC Holdings, Inc., 8.125%, 2009 $1,050,000 $1,141,875
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Charter Communications, Inc., 8.625%, 2009 580,000 481,400
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Continental Cablevision, Inc., 9.5%, 2013 2,390,000 2,600,535
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Cox Communications, Inc., 4.625%, 2013 1,750,000 1,630,289
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Lenfest Communications, Inc., 10.5%, 2006 1,900,000 2,085,227
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Mediacom Broadband LLC, 9.5%, 2013 280,000 273,700
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Rogers Cable, Inc., 5.5%, 2014 1,500,000 1,398,750
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TCI Communications, Inc., 9.8%, 2012 1,169,000 1,484,435
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$11,096,211
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Brokerage & Asset Managers - 1.3%
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Goldman Sachs Group, Inc., 5.7%, 2012 $2,680,000 $2,817,208
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Morgan Stanley Dean Witter, Inc., 6.6%, 2012 2,537,000 2,802,358
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Morgan Stanley Group, Inc., 5.3%, 2013 1,800,000 1,835,982
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$7,455,548
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Building - 0.5%
-------------------------------------------------------------------------------------------------
American Standard Cos., Inc., 7.375%, 2008 $1,105,000 $1,209,975
-------------------------------------------------------------------------------------------------
Atrium Cos., Inc., 10.5%, 2009 320,000 336,000
-------------------------------------------------------------------------------------------------
Building Materials Corp. of America, 7.75%, 2014## 660,000 673,200
-------------------------------------------------------------------------------------------------
Jacuzzi Brands, Inc., 9.625%, 2010 510,000 581,400
-------------------------------------------------------------------------------------------------
$2,800,575
-------------------------------------------------------------------------------------------------
Business Services - 0.2%
-------------------------------------------------------------------------------------------------
Iron Mountain, Inc., 7.75%, 2015 $265,000 $268,975
-------------------------------------------------------------------------------------------------
Xerox Corp., 7.625%, 2013 920,000 1,009,700
-------------------------------------------------------------------------------------------------
$1,278,675
-------------------------------------------------------------------------------------------------
Chemicals - 1.2%
-------------------------------------------------------------------------------------------------
Acetex Corp., 10.875%, 2009 $350,000 $381,500
-------------------------------------------------------------------------------------------------
BCP Caylux Holdings Luxembourg S.A., 9.625%, 2014## 365,000 409,712
-------------------------------------------------------------------------------------------------
Hercules, Inc., 6.75%, 2029 1,095,000 1,130,587
-------------------------------------------------------------------------------------------------
Huntsman International LLC, 10.125%, 2009 545,000 574,975
-------------------------------------------------------------------------------------------------
IMC Global, Inc., 10.875%, 2013 480,000 604,800
-------------------------------------------------------------------------------------------------
Kronos International, Inc., 8.875%, 2009 EUR 100,000 142,498
-------------------------------------------------------------------------------------------------
Lyondell Chemical Co., 11.125%, 2012 $1,190,000 1,407,175
-------------------------------------------------------------------------------------------------
Nalco Co., 7.75%, 2011 690,000 743,475
-------------------------------------------------------------------------------------------------
Nova Chemicals Corp., 6.5%, 2012 830,000 874,613
-------------------------------------------------------------------------------------------------
Rhodia S.A., 8.875%, 2011 325,000 318,500
-------------------------------------------------------------------------------------------------
Rockwood Specialties Group, Inc., 7.5%, 2014## 60,000 61,500
-------------------------------------------------------------------------------------------------
$6,649,335
-------------------------------------------------------------------------------------------------
Construction - 0.2%
-------------------------------------------------------------------------------------------------
D.R. Horton, Inc., 8%, 2009 $935,000 $1,047,200
-------------------------------------------------------------------------------------------------
Consumer Cyclical - 0.3%
-------------------------------------------------------------------------------------------------
GEO Group, Inc., 8.25%, 2013 $1,120,000 $1,187,200
-------------------------------------------------------------------------------------------------
KinderCare Learning Centers, Inc., 9.5%, 2009 656,000 663,380
-------------------------------------------------------------------------------------------------
$1,850,580
-------------------------------------------------------------------------------------------------
Consumer Goods & Services - 0.1%
-------------------------------------------------------------------------------------------------
K2, Inc., 7.375%, 2014## $560,000 $613,200
-------------------------------------------------------------------------------------------------
Containers - 0.4%
-------------------------------------------------------------------------------------------------
Crown European Holdings S.A., 9.5%, 2011 $530,000 $600,225
-------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.875%, 2009 660,000 712,800
-------------------------------------------------------------------------------------------------
Owens-Brockway Glass Container, Inc., 8.25%, 2013 500,000 543,750
-------------------------------------------------------------------------------------------------
Pliant Corp., 13%, 2010 190,000 182,400
-------------------------------------------------------------------------------------------------
$2,039,175
-------------------------------------------------------------------------------------------------
Defense Electronics - 0.2%
-------------------------------------------------------------------------------------------------
L3 Communications Corp., 5.875%, 2015## $830,000 $821,700
-------------------------------------------------------------------------------------------------
Electronics - 0.2%
-------------------------------------------------------------------------------------------------
Flextronics International Ltd., 6.5%, 2013 $1,145,000 $1,156,450
-------------------------------------------------------------------------------------------------
Emerging Market Quasi-Sovereign - 2.1%
-------------------------------------------------------------------------------------------------
Pemex Finance Ltd., 9.69%, 2009 $869,250 $995,291
-------------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 8.625%, 2022 2,553,000 2,910,420
-------------------------------------------------------------------------------------------------
Petroleos Mexicanos, 9.5%, 2027 3,717,000 4,562,618
-------------------------------------------------------------------------------------------------
Petroliam Nasional Berhad, 7.75%, 2015 1,363,000 1,644,241
-------------------------------------------------------------------------------------------------
Petronas Capital Ltd., 7.875%, 2022## 1,357,000 1,645,685
-------------------------------------------------------------------------------------------------
$11,758,255
-------------------------------------------------------------------------------------------------
Emerging Market Sovereign - 8.1%
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8%, 2014 $12,381,327 $12,443,233
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 3.0625%, 2024 749,000 666,610
-------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 11%, 2040 3,562,000 4,098,081
-------------------------------------------------------------------------------------------------
Republic of Colombia, 8.25%, 2014 1,650,000 1,691,250
-------------------------------------------------------------------------------------------------
Republic of Colombia, 11.75%, 2020 485,000 606,978
-------------------------------------------------------------------------------------------------
Republic of Panama, 9.375%, 2023 - 2029 1,745,000 1,971,505
-------------------------------------------------------------------------------------------------
Republic of Panama, 8.875%, 2027 1,541,000 1,619,976
-------------------------------------------------------------------------------------------------
Republic of Peru, 9.875%, 2015 1,961,000 2,279,663
-------------------------------------------------------------------------------------------------
Republic of South Africa, 8.5%, 2017 3,308,000 4,110,190
-------------------------------------------------------------------------------------------------
Russian Federation, 3%, 2008 - 2011 1,684,000 1,399,317
-------------------------------------------------------------------------------------------------
Russian Federation, 11%, 2018 3,374,000 4,552,201
-------------------------------------------------------------------------------------------------
State of Qatar, 9.75%, 2030 3,792,000 5,451,000
-------------------------------------------------------------------------------------------------
United Mexican States, 8.125%, 2019 1,500,000 1,713,750
-------------------------------------------------------------------------------------------------
United Mexican States, 8%, 2022 889,000 991,235
-------------------------------------------------------------------------------------------------
United Mexican States, 7.5%, 2033 1,804,000 1,879,768
-------------------------------------------------------------------------------------------------
$45,474,757
-------------------------------------------------------------------------------------------------
Energy - Independent - 0.9%
-------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7.5%, 2014 $335,000 $370,175
-------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875%, 2016 925,000 975,875
-------------------------------------------------------------------------------------------------
Forest Oil Corp., 7.75%, 2014 550,000 598,125
-------------------------------------------------------------------------------------------------
Kerr-McGee Corp., 6.95%, 2024 1,800,000 1,943,177
-------------------------------------------------------------------------------------------------
Plains Exploration & Production Co., 7.125%, 2014 625,000 687,500
-------------------------------------------------------------------------------------------------
Vintage Petroleum, Inc., 8.25%, 2012 550,000 610,500
-------------------------------------------------------------------------------------------------
$5,185,352
-------------------------------------------------------------------------------------------------
Energy - Integrated - 0.8%
-------------------------------------------------------------------------------------------------
Amerada Hess Corp., 7.3%, 2031 $1,645,000 $1,784,045
-------------------------------------------------------------------------------------------------
Siberian Oil Co., 10.75%, 2009 414,000 439,875
-------------------------------------------------------------------------------------------------
Tyumen Oil Co., 11%, 2007 2,164,000 2,488,600
-------------------------------------------------------------------------------------------------
$4,712,520
-------------------------------------------------------------------------------------------------
Entertainment - 1.0%
-------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $349,000 $359,470
-------------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014## 675,000 725,625
-------------------------------------------------------------------------------------------------
Six Flags, Inc., 9.75%, 2013 550,000 544,500
-------------------------------------------------------------------------------------------------
Turner Broadcasting System, Inc., 8.375%, 2013 1,784,000 2,159,873
-------------------------------------------------------------------------------------------------
Walt Disney Co., 6.375%, 2012 1,700,000 1,870,520
-------------------------------------------------------------------------------------------------
$5,659,988
-------------------------------------------------------------------------------------------------
Food & Non-Alcoholic Beverages - 0.2%
-------------------------------------------------------------------------------------------------
Burns, Philp & Co. Ltd., 9.75%, 2012 $340,000 $376,550
-------------------------------------------------------------------------------------------------
Seminis Vegetable Seeds, Inc., 10.25%, 2013 360,000 406,800
-------------------------------------------------------------------------------------------------
Smithfield Foods, Inc., 7%, 2011 160,000 169,600
-------------------------------------------------------------------------------------------------
Smithfield Foods, Inc., 7%, 2011## 390,000 413,400
-------------------------------------------------------------------------------------------------
$1,366,350
-------------------------------------------------------------------------------------------------
Forest & Paper Products - 0.8%
-------------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 7.75%, 2011 $915,000 $956,175
-------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8.5%, 2013 460,000 508,300
-------------------------------------------------------------------------------------------------
Georgia Pacific Corp., 9.375%, 2013 995,000 1,159,175
-------------------------------------------------------------------------------------------------
Graphic Packaging International, Inc., 8.5%, 2011 500,000 553,750
-------------------------------------------------------------------------------------------------
MDP Acquisitions PLC, 9.625%, 2012 515,000 587,100
-------------------------------------------------------------------------------------------------
Norske Skog Canada Ltd., 7.375%, 2014 695,000 721,063
-------------------------------------------------------------------------------------------------
$4,485,563
-------------------------------------------------------------------------------------------------
Gaming & Lodging - 1.8%
-------------------------------------------------------------------------------------------------
Aztar Corp., 7.875%, 2014 $640,000 $702,400
-------------------------------------------------------------------------------------------------
Boyd Gaming Corp., 6.75%, 2014 680,000 715,700
-------------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.125%, 2011 730,000 843,150
-------------------------------------------------------------------------------------------------
Hilton Hotels Corp., 7.625%, 2012 1,100,000 1,274,230
-------------------------------------------------------------------------------------------------
Host Marriott LP, 7.125%, 2013 550,000 588,500
-------------------------------------------------------------------------------------------------
MGM Mirage, Inc., 8.375%, 2011 1,675,000 1,880,188
-------------------------------------------------------------------------------------------------
Mandalay Resort Group, 9.375%, 2010 550,000 636,625
-------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc., 8.75%, 2013 295,000 317,863
-------------------------------------------------------------------------------------------------
Royal Caribbean Cruises Ltd., 8%, 2010 990,000 1,118,700
-------------------------------------------------------------------------------------------------
Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 1,135,000 1,299,575
-------------------------------------------------------------------------------------------------
Station Casinos, Inc., 6.5%, 2014 600,000 622,500
-------------------------------------------------------------------------------------------------
$9,999,431
-------------------------------------------------------------------------------------------------
Industrial - 0.2%
-------------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $335,000 $368,500
-------------------------------------------------------------------------------------------------
Valmont Industries, Inc., 6.875%, 2014## 730,000 753,725
-------------------------------------------------------------------------------------------------
Williams Scotsman, Inc., 10%, 2008 205,000 227,550
-------------------------------------------------------------------------------------------------
$1,349,775
-------------------------------------------------------------------------------------------------
Insurance - Property & Casualty - 0.2%
-------------------------------------------------------------------------------------------------
Fund American Cos., Inc., 5.875%, 2013 $1,351,000 $1,355,123
-------------------------------------------------------------------------------------------------
International Market Quasi-Sovereign - 0.5%
-------------------------------------------------------------------------------------------------
Kreditanstalt fur Wiederaufbau, 3.25%, 2008 EUR 2,244,000 $3,033,457
-------------------------------------------------------------------------------------------------
International Market Sovereign - 18.2%
-------------------------------------------------------------------------------------------------
Canada Housing Trust, 4.65%, 2009 CAD 260,000 $226,064
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 4%, 2007 EUR 2,998,000 4,115,098
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 3.5%, 2008 6,874,000 9,357,473
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 5.25%, 2010 3,531,000 5,179,711
-------------------------------------------------------------------------------------------------
Federal Republic of Germany, 6.25%, 2030 720,000 1,227,172
-------------------------------------------------------------------------------------------------
Government of Australia, 8.75%, 2008 AUD 1,731,000 1,501,242
-------------------------------------------------------------------------------------------------
Government of Australia, 6.25%, 2015 2,357,000 1,966,283
-------------------------------------------------------------------------------------------------
Government of Canada, 5.5%, 2010 CAD 1,761,000 1,596,942
-------------------------------------------------------------------------------------------------
Government of Canada, 5.25%, 2012 369,000 330,210
-------------------------------------------------------------------------------------------------
Government of Canada, 8%, 2023 224,000 259,741
-------------------------------------------------------------------------------------------------
Government of New Zealand, 7%, 2009 NZD 1,373,000 1,023,548
-------------------------------------------------------------------------------------------------
Government of New Zealand, 6.5%, 2013^ 7,651,000 5,669,886
-------------------------------------------------------------------------------------------------
Kingdom of Belgium, 3.75%, 2009 EUR 924,000 1,267,390
-------------------------------------------------------------------------------------------------
Kingdom of Belgium, 5%, 2012 1,973,000 2,879,347
-------------------------------------------------------------------------------------------------
Kingdom of Denmark, 5%, 2013 DKK 2,144,000 418,796
-------------------------------------------------------------------------------------------------
Kingdom of Netherlands, 5.75%, 2007 EUR 3,164,000 4,496,720
-------------------------------------------------------------------------------------------------
Kingdom of Netherlands, 3.75%, 2009 4,770,000 6,539,715
-------------------------------------------------------------------------------------------------
Kingdom of Spain, 6%, 2008 1,600,000 2,336,136
-------------------------------------------------------------------------------------------------
Kingdom of Spain, 5.35%, 2011 2,834,000 4,206,538
-------------------------------------------------------------------------------------------------
Kingdom of Sweden, 4.5%, 2015 SEK 7,185,000 1,096,845
-------------------------------------------------------------------------------------------------
Republic of Austria, 5.5%, 2007 EUR 3,282,000 4,705,915
-------------------------------------------------------------------------------------------------
Republic of Austria, 5%, 2012 922,000 1,345,135
-------------------------------------------------------------------------------------------------
Republic of Austria, 4.65%, 2018 358,000 505,827
-------------------------------------------------------------------------------------------------
Republic of Finland, 2.75%, 2006 EUR 3,927,000 5,252,841
-------------------------------------------------------------------------------------------------
Republic of Finland, 3%, 2008 3,829,000 5,127,655
-------------------------------------------------------------------------------------------------
Republic of France, 4.75%, 2007 4,665,000 6,541,626
-------------------------------------------------------------------------------------------------
Republic of France, 4%, 2009 1,681,000 2,327,906
-------------------------------------------------------------------------------------------------
Republic of Ireland, 4.25%, 2007 6,952,000 9,659,630
-------------------------------------------------------------------------------------------------
Republic of Portugal, 5.45%, 2013 478,000 718,059
-------------------------------------------------------------------------------------------------
United Kingdom Treasury, 7.25%, 2007 GBP 826,000 1,701,135
-------------------------------------------------------------------------------------------------
United Kingdom Treasury, 5.75%, 2009 1,091,000 2,198,946
-------------------------------------------------------------------------------------------------
United Kingdom Treasury, 5%, 2012 2,934,000 5,751,534
-------------------------------------------------------------------------------------------------
$101,531,066
-------------------------------------------------------------------------------------------------
Machinery & Tools - 0.8%
-------------------------------------------------------------------------------------------------
AGCO Corp., 9.5%, 2008 $1,750,000 $1,868,125
-------------------------------------------------------------------------------------------------
Case New Holland, Inc., 6%, 2009## 550,000 539,000
-------------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011## 240,000 265,800
-------------------------------------------------------------------------------------------------
Manitowoc Co., Inc., 10.5%, 2012 510,000 586,500
-------------------------------------------------------------------------------------------------
Terex Corp., 9.25%, 2011 525,000 593,250
-------------------------------------------------------------------------------------------------
United Rentals, Inc., 6.5%, 2012 340,000 333,200
-------------------------------------------------------------------------------------------------
$4,185,875
-------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.8%
-------------------------------------------------------------------------------------------------
AmerisourceBergen Corp., 7.25%, 2012 $550,000 $603,625
-------------------------------------------------------------------------------------------------
Fisher Scientific International, Inc., 8.125%, 2012 1,147,000 1,277,471
-------------------------------------------------------------------------------------------------
HCA, Inc., 8.75%, 2010 1,100,000 1,250,116
-------------------------------------------------------------------------------------------------
HCA, Inc., 6.375%, 2015 725,000 718,409
-------------------------------------------------------------------------------------------------
InSight Health Services Corp., 9.875%, 2011 360,000 365,400
-------------------------------------------------------------------------------------------------
Mariner Health Care, Inc., 8.25%, 2013## 255,000 305,222
-------------------------------------------------------------------------------------------------
$4,520,243
-------------------------------------------------------------------------------------------------
Metals & Mining - 1.0%
-------------------------------------------------------------------------------------------------
Foundation PA Coal Co., 7.25%, 2014## $750,000 $802,500
-------------------------------------------------------------------------------------------------
IMCO Recycling, Inc., 9%, 2014## 60,000 61,950
-------------------------------------------------------------------------------------------------
International Steel Group, Inc., 6.5%, 2014 2,100,000 2,231,250
-------------------------------------------------------------------------------------------------
Peabody Energy Corp., 6.875%, 2013 355,000 381,625
-------------------------------------------------------------------------------------------------
Peabody Energy Corp., 5.875%, 2016 850,000 843,625
-------------------------------------------------------------------------------------------------
U.S. Steel Corp., 9.75%, 2010 858,000 986,700
-------------------------------------------------------------------------------------------------
$5,307,650
-------------------------------------------------------------------------------------------------
Mortgage Backed - 10.1%
-------------------------------------------------------------------------------------------------
Fannie Mae, 6%, 2016 - 2034 $9,716,268 $10,125,244
-------------------------------------------------------------------------------------------------
Fannie Mae, 5.9956%, 2020 3,509 3,509
-------------------------------------------------------------------------------------------------
Fannie Mae, 6.5%, 2031 - 2033 5,998,669 6,298,778
-------------------------------------------------------------------------------------------------
Fannie Mae, 5.5%, 2033 - 2034 31,074,455 31,484,626
-------------------------------------------------------------------------------------------------
Fannie Mae, 5%, 2034 5,465,687 5,406,553
-------------------------------------------------------------------------------------------------
Freddie Mac, 6%, 2034 3,008,569 3,106,896
-------------------------------------------------------------------------------------------------
$56,425,606
-------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.8%
-------------------------------------------------------------------------------------------------
AmeriGas Partners LP, 8.875%, 2011 $1,190,000 $1,297,100
-------------------------------------------------------------------------------------------------
Gazprom OAO, 9.625%, 2013## 1,510,000 1,751,600
-------------------------------------------------------------------------------------------------
Gazprom OAO, 8.625%, 2034## 1,410,000 1,579,200
-------------------------------------------------------------------------------------------------
$4,627,900
-------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 1.3%
-------------------------------------------------------------------------------------------------
CenterPoint Energy Resources Corp., 7.875%, 2013 $1,600,000 $1,880,579
-------------------------------------------------------------------------------------------------
El Paso Energy Corp., 7.625%, 2010 570,000 618,450
-------------------------------------------------------------------------------------------------
Enterprise Products Partners LP, 6.375%, 2013 2,800,000 2,972,329
-------------------------------------------------------------------------------------------------
Magellan Midstream Partners LP, 5.65%, 2016 311,000 310,444
-------------------------------------------------------------------------------------------------
Southern Natural Gas Co., Inc., 8.875%, 2010 550,000 620,125
-------------------------------------------------------------------------------------------------
Williams Cos., Inc., 8.75%, 2032 800,000 924,000
-------------------------------------------------------------------------------------------------
$7,325,927
-------------------------------------------------------------------------------------------------
Oil Services - 0.4%
-------------------------------------------------------------------------------------------------
Grant Prideco, Inc., 9%, 2009 $550,000 $611,875
-------------------------------------------------------------------------------------------------
GulfMark Offshore, Inc., 7.75%, 2014## 435,000 463,275
-------------------------------------------------------------------------------------------------
Hornbeck Offshore Services, Inc., 6.125%, 2014## 230,000 227,125
-------------------------------------------------------------------------------------------------
Pride International, Inc., 7.375%, 2014## 580,000 642,350
-------------------------------------------------------------------------------------------------
$1,944,625
-------------------------------------------------------------------------------------------------
Oils - 0.4%
-------------------------------------------------------------------------------------------------
CITGO Petroleum Corp., 6%, 2011## $550,000 $555,500
-------------------------------------------------------------------------------------------------
Hurricane Finance B.V., 9.625%, 2010 735,000 819,525
-------------------------------------------------------------------------------------------------
Premcor Refining Group, Inc., 7.5%, 2015 550,000 599,500
-------------------------------------------------------------------------------------------------
$1,974,525
-------------------------------------------------------------------------------------------------
Pollution Control - 0.1%
-------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 7.875%, 2013 $550,000 $554,125
-------------------------------------------------------------------------------------------------
Printing & Publishing - 0.3%
-------------------------------------------------------------------------------------------------
Dex Media East LLC, 9.875%, 2009 $730,000 $820,338
-------------------------------------------------------------------------------------------------
Dex Media West LLC, 9.875%, 2013 327,000 377,685
-------------------------------------------------------------------------------------------------
MediaNews Group, Inc., 6.875%, 2013 515,000 527,875
-------------------------------------------------------------------------------------------------
$1,725,898
-------------------------------------------------------------------------------------------------
Real Estate - 0.3%
-------------------------------------------------------------------------------------------------
HRPT Properties Trust, 6.25%, 2016 $1,324,000 $1,372,969
-------------------------------------------------------------------------------------------------
Restaurants - 0.3%
-------------------------------------------------------------------------------------------------
YUM! Brands, Inc., 8.875%, 2011 $1,500,000 $1,841,072
-------------------------------------------------------------------------------------------------
Retailers - 0.7%
-------------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 $210,000 $227,850
-------------------------------------------------------------------------------------------------
Gap, Inc., 10.3%, 2008 1,120,000 1,369,200
-------------------------------------------------------------------------------------------------
Limited Brands, Inc., 5.25%, 2014 1,100,000 1,079,951
-------------------------------------------------------------------------------------------------
Rite Aid Corp., 9.5%, 2011 470,000 515,825
-------------------------------------------------------------------------------------------------
Saks, Inc., 7%, 2013 915,000 928,725
-------------------------------------------------------------------------------------------------
$4,121,551
-------------------------------------------------------------------------------------------------
Supermarkets - 0.1%
-------------------------------------------------------------------------------------------------
Roundy's, Inc., 8.875%, 2012 $475,000 $522,500
-------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 2.2%
-------------------------------------------------------------------------------------------------
AT&T Wireless Services, Inc., 8.75%, 2031 $1,500,000 $1,960,995
-------------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 375,000 408,750
-------------------------------------------------------------------------------------------------
Cingular Wireless LLC, 6.5%, 2011 1,700,000 1,876,802
-------------------------------------------------------------------------------------------------
Crown Castle International Corp., 7.5%, 2013 365,000 391,463
-------------------------------------------------------------------------------------------------
Innova S. de R.L., 9.375%, 2013 654,000 740,655
-------------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 9.75%, 2008## 1,552,000 1,676,160
-------------------------------------------------------------------------------------------------
Mobile TeleSystems OJSC, 8.375%, 2010## 500,000 516,250
-------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 7.375%, 2015 1,360,000 1,496,000
-------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 6.375%, 2014 550,000 536,250
-------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 7.5%, 2015## 595,000 617,313
-------------------------------------------------------------------------------------------------
Rural Cellular Corp., 8.25%, 2012 225,000 235,688
-------------------------------------------------------------------------------------------------
Vimpel-Communications, 10%, 2009## 1,621,000 1,783,100
-------------------------------------------------------------------------------------------------
$12,239,426
-------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 2.8%
-------------------------------------------------------------------------------------------------
AT&T Corp., 9.05%, 2011 $550,000 $627,000
-------------------------------------------------------------------------------------------------
AT&T Corp., 9.75%, 2031 1,005,000 1,164,544
-------------------------------------------------------------------------------------------------
Citizens Communications Co., 9.25%, 2011 1,045,000 1,214,812
-------------------------------------------------------------------------------------------------
Citizens Communications Co., 6.25%, 2013 845,000 839,719
-------------------------------------------------------------------------------------------------
Deutsche Telekom International Finance B.V., 8.75%, 2030 1,500,000 1,926,340
-------------------------------------------------------------------------------------------------
Eircom Funding PLC, 8.25%, 2013 810,000 899,100
-------------------------------------------------------------------------------------------------
Qwest Corp., 7.875%, 2011## 1,100,000 1,174,250
-------------------------------------------------------------------------------------------------
Qwest Corp., 9.125%, 2012## 550,000 625,625
-------------------------------------------------------------------------------------------------
Qwest Services Corp., 14%, 2010## 230,000 272,550
-------------------------------------------------------------------------------------------------
SBC Communications, Inc., 5.1%, 2014 2,500,000 2,477,608
-------------------------------------------------------------------------------------------------
Telecom Italia Capital, 5.25%, 2013 1,418,000 1,416,254
-------------------------------------------------------------------------------------------------
Verizon New York, Inc., 6.875%, 2012 2,542,000 2,810,356
-------------------------------------------------------------------------------------------------
$15,448,158
-------------------------------------------------------------------------------------------------
Tobacco - 0.2%
-------------------------------------------------------------------------------------------------
R.J. Reynolds Tobacco Holdings, Inc., 7.25%, 2012 $818,000 $834,360
-------------------------------------------------------------------------------------------------
Transportation - Services - 0.3%
-------------------------------------------------------------------------------------------------
Stena AB, 7%, 2016## $330,000 $323,400
-------------------------------------------------------------------------------------------------
TFM S.A. de C.V., 12.5%, 2012 1,225,000 1,396,500
-------------------------------------------------------------------------------------------------
$1,719,900
-------------------------------------------------------------------------------------------------
U.S. Government Agencies - 6.7%
-------------------------------------------------------------------------------------------------
Fannie Mae, 5%, 2007 $5,105,000 $5,285,273
-------------------------------------------------------------------------------------------------
Fannie Mae, 6%, 2008 - 2011 8,677,000 9,426,796
-------------------------------------------------------------------------------------------------
Freddie Mac, 7%, 2005 6,100,000 6,265,420
-------------------------------------------------------------------------------------------------
Small Business Administration, 4.34%, 2024 8,022,510 7,753,533
-------------------------------------------------------------------------------------------------
Small Business Administration, 4.77%, 2024 6,248,570 6,206,900
-------------------------------------------------------------------------------------------------
Small Business Administration, 5.19%, 2024 2,500,000 2,541,569
-------------------------------------------------------------------------------------------------
$37,479,491
-------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 9.6%
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 10.75%, 2005 $8,000,000 $8,458,128
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 12%, 2013 7,500,000 9,697,268
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 10.625%, 2015 3,350,000 5,101,946
-------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 9.875%, 2015 5,025,000 7,353,575
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 6.875%, 2006 $8,000,000 $8,457,816
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.375%, 2007### 3,397,776 3,620,656
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.625%, 2008 6,634,964 7,266,307
-------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 2%, 2014 3,494,078 3,588,551
-------------------------------------------------------------------------------------------------
$53,544,247
-------------------------------------------------------------------------------------------------
Utilities - Electric Power - 4.3%
-------------------------------------------------------------------------------------------------
CMS Energy Corp., 8.5%, 2011 $320,000 $364,000
-------------------------------------------------------------------------------------------------
Calpine Corp., 8.75%, 2013## 435,000 333,862
-------------------------------------------------------------------------------------------------
CenterPoint Energy, Inc., 7.25%, 2010 750,000 832,411
-------------------------------------------------------------------------------------------------
DPL, Inc., 6.875%, 2011 1,673,000 1,819,387
-------------------------------------------------------------------------------------------------
Duke Capital Corp., 8%, 2019 2,300,000 2,749,788
-------------------------------------------------------------------------------------------------
Dynegy Holdings, Inc., 9.875%, 2010## 240,000 271,200
-------------------------------------------------------------------------------------------------
Empresa Nacional de Electricidad S.A., 8.35%, 2013 2,805,000 3,154,660
-------------------------------------------------------------------------------------------------
Enersis S.A., 7.375%, 2014 1,233,000 1,275,632
-------------------------------------------------------------------------------------------------
FirstEnergy Corp., 6.45%, 2011 2,745,000 2,950,019
-------------------------------------------------------------------------------------------------
MSW Energy Holdings LLC, 7.375%, 2010 1,045,000 1,102,475
-------------------------------------------------------------------------------------------------
Nevada Power Co., 5.875%, 2015## 1,140,000 1,145,700
-------------------------------------------------------------------------------------------------
NorthWestern Corp., 5.875%, 2014## 995,000 1,015,007
-------------------------------------------------------------------------------------------------
PSEG Energy Holdings LLC, 7.75%, 2007 1,046,000 1,119,220
-------------------------------------------------------------------------------------------------
Pacific Gas & Electric Co., 6.05%, 2034 479,000 482,758
-------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.5%, 2013 430,000 493,425
-------------------------------------------------------------------------------------------------
System Energy Resources, Inc., 5.129%, 2014## 2,757,000 2,748,150
-------------------------------------------------------------------------------------------------
TECO Energy, Inc., 7.5%, 2010 550,000 609,125
-------------------------------------------------------------------------------------------------
TXU Corp., 6.5%, 2024## 1,753,000 1,714,264
-------------------------------------------------------------------------------------------------
$24,181,083
-------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $515,846,906) $538,373,493
-------------------------------------------------------------------------------------------------
Stocks - 0.1%
-------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
-------------------------------------------------------------------------------------------------
Apparel Manufacturers - 0.1%
-------------------------------------------------------------------------------------------------
Sind Holdings, Inc.* 5,720 $478,764
-------------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
-------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 6 $192
-------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $2,127,667) $478,956
-------------------------------------------------------------------------------------------------
Warrants - 0%
-------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd. (Business Services)* 1,625 $0
-------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd. (Business Services)* 750 0
-------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Specialty Chemicals)* 11 18
-------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Machinery & Tools)* 760 342
-------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $39,014) $360
-------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 0.7%
-------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 3,876,287 $3,876,287
-------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.5%
-------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
-------------------------------------------------------------------------------------------------
Goldman Sachs, 2.06%, dated 11/30/2004, due 12/01/2004,
total to be received $13,783,789 (secured by various U.S.
Treasury and Federal Agency obligations in a jointly traded
account), at Cost $13,783,000 $13,783,000
-------------------------------------------------------------------------------------------------
Total Investments (+) (Identified Cost, $535,672,874) $556,512,096
-------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.3% 1,928,331
-------------------------------------------------------------------------------------------------
Net Assets - 100.0% $558,440,427
-------------------------------------------------------------------------------------------------
* Non-income producing security.
^ All or a portion of this security is on loan.
^^ Interest only security.
## SEC Rule 144A restriction.
### Security segregated as collateral for open futures contracts.
(+) As of November 30, 2004, the fund had one security representing $478,764 and 0.1% of net assets
that was fair valued in accordance with the policies adopted by the Board of Trustees.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollar GBP = British Pound
CAD = Canadian Dollar JPY = Japanese Yen
DKK = Danish Krone NZD = New Zealand Dollar
EUR = Euro SEK = Swedish Krona
SEE NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
-----------------------------------------------------------------------------------------------------
This statement represents your trust's balance sheet, which details the assets
and liabilities composing the total value of your trust.
AT 11/30/04
ASSETS
Investments, at value, including $3,800,481 of securities on
loan (identified cost, $535,672,874) $556,512,096
-----------------------------------------------------------------------------------------------------
Cash 771,455
-----------------------------------------------------------------------------------------------------
Foreign currency, at value (identified cost, $103) 106
-----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange contracts 468,334
-----------------------------------------------------------------------------------------------------
Receivable for forward foreign currency exchange contracts
subject to master netting agreements 10,430
-----------------------------------------------------------------------------------------------------
Receivable for investments sold 5,042,514
-----------------------------------------------------------------------------------------------------
Interest receivable 8,293,880
-----------------------------------------------------------------------------------------------------
Other assets 18,192
-----------------------------------------------------------------------------------------------------
Total assets $571,117,007
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payable to dividend disbursing agent $208,831
-----------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 3,862,105
-----------------------------------------------------------------------------------------------------
Payable for daily variation margin on open futures contracts 130,715
-----------------------------------------------------------------------------------------------------
Payable for investments purchased 3,768,416
-----------------------------------------------------------------------------------------------------
Payable for treasury shares reacquired 402,808
-----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 3,876,287
-----------------------------------------------------------------------------------------------------
Payable to affiliates
-----------------------------------------------------------------------------------------------------
Management fee 18,360
-----------------------------------------------------------------------------------------------------
Transfer agent and dividend disbursing costs 11,310
-----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 397,748
-----------------------------------------------------------------------------------------------------
Total liabilities $12,676,580
-----------------------------------------------------------------------------------------------------
Net assets $558,440,427
-----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $604,471,159
-----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 17,625,337
-----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (56,429,556)
-----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (7,226,513)
-----------------------------------------------------------------------------------------------------
Net assets $558,440,427
-----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding
(62,114,283 shares issued, less 4,601,344 treasury shares) 57,512,939
-----------------------------------------------------------------------------------------------------
Net asset value per share (net assets of
$558,440,427/57,512,939 shares of beneficial interest
outstanding) $9.71
-----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
-----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------------------------
This statement describes how much your trust received in investment income and paid in expenses.
It also describes any gains and/or losses generated by trust operations.
FOR YEAR ENDED 11/30/04
NET INVESTMENT INCOME
Income
-----------------------------------------------------------------------------------------------------
Interest $33,151,797
-----------------------------------------------------------------------------------------------------
Dividends 1,995
-----------------------------------------------------------------------------------------------------
Foreign taxes withheld (5,840)
-----------------------------------------------------------------------------------------------------
Total investment income $33,147,952
-----------------------------------------------------------------------------------------------------
Expenses
-----------------------------------------------------------------------------------------------------
Management fee $3,442,576
-----------------------------------------------------------------------------------------------------
Trustees' compensation 85,833
-----------------------------------------------------------------------------------------------------
Transfer agent and dividend disbursing costs 105,556
-----------------------------------------------------------------------------------------------------
Administrative fee 50,690
-----------------------------------------------------------------------------------------------------
Custodian fee 333,127
-----------------------------------------------------------------------------------------------------
Printing 59,249
-----------------------------------------------------------------------------------------------------
Postage 202,011
-----------------------------------------------------------------------------------------------------
Auditing fees 45,500
-----------------------------------------------------------------------------------------------------
Legal fees 20,362
-----------------------------------------------------------------------------------------------------
Miscellaneous 168,058
-----------------------------------------------------------------------------------------------------
Total expenses $4,512,962
-----------------------------------------------------------------------------------------------------
Fees paid indirectly (15,153)
-----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (1,801)
-----------------------------------------------------------------------------------------------------
Net expenses $4,496,008
-----------------------------------------------------------------------------------------------------
Net investment income $28,651,944
-----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
-----------------------------------------------------------------------------------------------------
Investment transactions $25,242,935
-----------------------------------------------------------------------------------------------------
Futures contracts (162,971)
-----------------------------------------------------------------------------------------------------
Foreign currency transactions (11,131,378)
-----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $13,948,586
-----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
-----------------------------------------------------------------------------------------------------
Investments $(3,472,216)
-----------------------------------------------------------------------------------------------------
Futures contracts (32,070)
-----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign currencies (897,618)
-----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(4,401,904)
-----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $9,546,682
-----------------------------------------------------------------------------------------------------
Change in net assets from operations $38,198,626
-----------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS OF CHANGES IN NET ASSETS
-------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets
resulting from operations, any distributions, and any shareholder
transactions.
FOR YEARS ENDED 11/30 2004 2003
CHANGE IN NET ASSETS
OPERATIONS
Net investment income $28,651,944 $29,269,302
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 13,948,586 14,807,237
-------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation (4,401,904) 15,713,313
------------------------------------------------------------- -------------- -----------
Change in net assets from operations $38,198,626 $59,789,852
------------------------------------------------------------- -------------- -----------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(31,836,028) $(31,796,703)
-------------------------------------------------------------------------------------------------------
TRUST SHARE (PRINCIPAL) TRANSACTIONS
Cost of shares reacquired (9,821,953) (12,374,600)
------------------------------------------------------------- -------------- -----------
Total change in net assets $(3,459,355) $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 $7,226,513 and
$11,260,226, respectively) $558,440,427 $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 past 5 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. This information has been audited by the trust's independent registered public accounting firm, whose
report, together with the trust's financial statements, are included in this report.
FOR YEARS ENDED 11/30 2004 2003 2002 2001 2000
Net asset value, beginning of period $9.58 $9.09 $9.17 $9.20 $9.71
------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.49 $0.49 $0.52 $0.67 $0.72
------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments and foreign currency 0.19 0.53 (0.02) (0.01) (0.45)
------------------------------------------------ ------- ------ ------ ------ ------
Total from investment operations $0.68 $1.02 $0.50 $0.66 $0.27
------------------------------------------------ ------- ------ ------ ------ ------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.55) $(0.53) $(0.49) $(0.64) $(0.61)
------------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.09) (0.05) (0.17)
------------------------------------------------ ------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.55) $(0.53) $(0.58) $(0.69) $(0.78)
------------------------------------------------ ------- ------ ------ ------ ------
Net asset value, end of period $9.71 $9.58 $9.09 $9.17 $9.20
------------------------------------------------ ------- ------ ------ ------ ------
Per share market value, end of period $8.71 $8.78 $8.26 $8.35 $8.44
------------------------------------------------ ------- ------ ------ ------ ------
Total return at market value (%) 5.52 13.02 5.99 6.92 14.66
------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.80 0.83 0.85 0.91 0.93
------------------------------------------------------------------------------------------------------------------------------
Net investment income(SS) 5.11 5.21 5.80 7.18 7.53
------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 70 129 137 98 113
------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $558,440 $561,900 $546,281 $556,614 $561,105
------------------------------------------------------------------------------------------------------------------------------
(S) Effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the trust for its proportional share of
Independent Chief Compliance Officer service fees paid to Tarantino LLC. If this fee had been incurred by the trust, the
net investment income per share and the ratios would have been:
Net investment income $0.49^ $-- $-- $-- $--
------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS:
Expenses## 0.80^ -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
Net investment income 5.11^ -- -- -- --
------------------------------------------------------------------------------------------------------------------------------
(SS) As required, effective December 1, 2001, the trust has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the 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.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from fees paid indirectly.
^ The reimbursement impact per share amount and ratios were less than $0.01 and 0.01%, respectively.
SEE NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Charter Income Trust (the fund) is a non-diversified trust that is
organized as a 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 U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
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 $13,440 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's 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 Ginnie Mae, Fannie Mae,
and Freddie Mac, 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. During the period between the sale and repurchase in a
dollar roll transaction the trust will not be entitled to receive payments on
the securities sold but is compensated by interest earned on the proceeds of
the initial sale and by a lower purchase price on the securities to be
repurchased which enhances the trust total return. The trust accounts for
dollar roll transactions as purchases and sales. If certain criteria are met
these dollar roll transactions may be considered a financing transaction
whereby the difference in the sales price and the future purchase price is
recorded as an adjustment to interest income.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade 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. Interest
income is recorded on the accrual basis. All premium and discount is amortized
or accreted for financial statement purposes in accordance with U.S. generally
accepted accounting principles. All discount is accreted for tax reporting
purposes as required by federal income tax regulations. Dividends received in
cash are recorded on the ex-dividend date. Dividend and interest payments
received in additional securities are recorded on the ex-dividend or ex-
interest date in an amount equal to the value of the security on such date.
The trust may enter into "TBA" (to be announced) purchase commitments to
purchase securities for a fixed unit price at a future date. Although the unit
price has been established, the principal value has not been finalized.
However, the principal amount of the commitments will not fluctuate more than
0.01%. The trust holds, and maintains until settlement date, cash or high-
grade debt obligations in an amount sufficient to meet the purchase price, or
the trust may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to settlement date, which is in addition to the risk
of decline in the value of the trust's other assets. Unsettled TBA purchase
commitments are valued at the current market value of the underlying
securities. The trust may enter into "TBA" (to be announced) sale commitments
to hedge its portfolio positions or to sell mortgage-backed securities it owns
under delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
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 year ended November 30, 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 foreign currency transactions, straddle loss deferrals,
derivatives, defaulted bonds, and amortization and accretion on debt
securities.
The tax character of distributions declared for the years ended
November 30, 2004 and November 30, 2003 was as follows:
11/30/04 11/30/03
Distributions declared from:
--------------------------------------------------------------------------------
Ordinary income $31,836,028 $31,796,703
--------------------------------------------------------------------------------
During the year ended November 30, 2004, accumulated distributions in excess
of net investment income decreased by $7,217,797, accumulated net realized
loss on investments and foreign currency transactions increased by $7,929,336,
and paid-in capital increased by $711,539 due to differences between book and
tax accounting for foreign currency transactions, amortization and accretion
on debt securities, and defaulted bonds. This change had no effect on the net
assets or net asset value per share.
As of November 30, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $862,961
----------------------------------------------------------
Capital loss carryforward (47,072,742)
----------------------------------------------------------
Unrealized appreciation (depreciation) 11,572,675
----------------------------------------------------------
Other temporary differences (11,393,626)
----------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration as follows:
EXPIRATION DATE
November 30, 2008 $(1,375,921)
----------------------------------------------------------
November 30, 2009 (21,791,609)
----------------------------------------------------------
November 30, 2010 (23,905,212)
----------------------------------------------------------
Total $(47,072,742)
----------------------------------------------------------
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The trust has an investment advisory agreement with 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 the trust's
daily gross investment income. Management fees incurred for the year ended
November 30, 2004 were an effective rate of 0.61% of average daily net assets
on an annualized basis
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 current Independent Trustees. Included in Trustees' compensation is
$9,334 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 $7,958 for retired Independent Trustees for the year ended November 30,
2004.
This trust and certain other MFS funds (the "funds") have entered into a
services agreement (the "Agreement") which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. MFS has agreed to
reimburse each of the funds for a proportional share of substantially all of
the payments made by the funds to Tarantino LLC and also to provide office
space and other administrative support and supplies to the ICCO. The funds can
terminate the Agreement with Tarantino LLC at any time under the terms of the
Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment 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 year ended November 30, 2004, the trust paid MFS $50,690 equivalent to
0.009% 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
$85,225 for the year ended November 30, 2004. Also included in transfer agent
and dividend disbursing costs are out-of-pocket expenses, paid to MFSC, which
amounted to $6,609 for the year ended November 30, 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 $59,126,203 $41,686,762
--------------------------------------------------------------------------------
Investments (non-U.S. government securities) $314,980,823 $353,454,687
--------------------------------------------------------------------------------
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 $539,784,608
----------------------------------------------------------
Gross unrealized appreciation $25,612,253
----------------------------------------------------------
Gross unrealized depreciation (8,884,765)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $16,727,488
----------------------------------------------------------
(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 repurchase by the trust of up to 10% annually of its own shares
of beneficial interest. The trust repurchased and retired 1,134,600 shares of
beneficial interest during the year ended November 30, 2004 at an average
price per share of $8.66 and a weighted average discount of 9.74% 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:
Year ended 11/30/04 Year ended 11/30/03
SHARES AMOUNT SHARES AMOUNT
Treasury shares reacquired (1,134,600) $(9,821,953) (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 Federal
Reserve funds rate plus 0.50%. In addition, a commitment fee, based on the
average daily, unused portion of the line of credit, is allocated among the
participating funds at the end of each calendar quarter. The commitment fee
allocated to the trust for the year ended November 30, 2004 was $4,384, and is
included in miscellaneous expense. The trust had no significant borrowings
during the year ended November 30, 2004.
(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 forward foreign currency exchange contracts 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
CONTRACTS TO NET UNREALIZED
DELIVER/ IN EXCHANGE CONTRACTS APPRECIATION
SETTLEMENT DATE RECEIVE FOR AT VALUE (DEPRECIATION)
12/13/04 - 12/15/04 AUD 5,038,318 $3,624,283 $3,885,974 $(261,691)
2/14/05 DKK 29,160,541 5,066,992 5,216,788 (149,796)
1/19/05 - 2/14/05 EUR 77,056,549 99,860,639 102,413,702 (2,553,063)
1/12/05 GBP 5,922,070 10,906,079 11,283,446 (377,367)
12/13/04 NZD 11,426,305 7,663,623 8,164,603 (500,980)
2/14/05 SEK 2,018,612 289,317 300,373 (11,056)
------------ ------------ -----------
$127,410,933 $131,264,886 $(3,853,953)
============ ============ ===========
PURCHASES
12/13/04 AUD 696,877 $540,718 $537,536 $(3,182)
1/05/05 - 2/14/05 DKK 26,544,190 4,677,013 4,748,595 71,582
1/19/05 - 2/14/05 EUR 11,322,516 14,731,254 15,049,641 318,387
1/05/05 - 1/12/05 GBP 918,478 1,705,560 1,750,408 44,848
1/05/05 JPY 575,260,000 5,600,000 5,595,030 (4,970)
12/13/04 NZD 2,091,901 1,461,239 1,494,756 33,517
------------ ------------ -----------
$28,715,784 $29,175,966 $460,182
============ ============ ===========
At November 30, 2004, forward foreign currency purchases and sales under
master netting agreements excluded above amounted to a net receivable of
$10,430 with Merrill Lynch International.
At November 30, 2004, the trust had sufficient cash and/or securities to cover
any commitments under these contracts.
Futures Contracts
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
U.S. Treasury Notes 10 Year December 2004 400 Short $198,076
---------------------------------------------------------------------------------------------------
U.S. Treasury Notes 2 Year March 2005 334 Short (79,657)
---------------------------------------------------------------------------------------------------
U.S. Treasury Long Bond March 2005 131 Long (47,619)
---------------------------------------------------------------------------------------------------
$70,800
---------------------------------------------------------------------------------------------------
At November 30, 2004, the trust had sufficient cash and/or securities to cover
any margin requirements under these contracts.
(8) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the
Securities and Exchange Commission ("SEC") regarding disclosure of brokerage
allocation practices in connection with MFS fund sales (the term "MFS funds"
means the open-end registered management investment companies sponsored by
MFS). Under the terms of the settlement, in which MFS neither admitted nor
denied any wrongdoing, MFS agreed to pay (one dollar) $1.00 in disgorgement
and $50 million in penalty to certain MFS funds, pursuant to a plan developed
by an independent distribution consultant. The brokerage allocation practices
which were the subject of this proceeding were discontinued by MFS in November
2003. The agreement with the SEC is reflected in an order of the SEC. Pursuant
to the SEC order, on July 28, 2004, MFS transferred these settlement amounts
to the SEC, and those MFS funds entitled to these settlement amounts accrued
an estimate of their pro rata portion of these amounts. Once the final
distribution plan is approved by the SEC, these amounts will be distributed by
the SEC to the affected MFS funds. The SEC settlement order states that MFS
failed to adequately disclose to the Boards of Trustees and to shareholders of
the MFS funds the specifics of its preferred arrangements with certain
brokerage firms selling MFS fund shares. The SEC settlement order states that
MFS had in place policies designed to obtain best execution of all MFS fund
trades. As part of the settlement, MFS retained an independent compliance
consultant to review the completeness of its current policies and practices
regarding disclosure to MFS fund trustees and to MFS fund shareholders of
strategic alliances between MFS or its affiliates and broker-dealers and other
financial advisers who support the sale of MFS fund shares.
In addition, in February, 2004, MFS reached agreement with the SEC, the New
York Attorney General ("NYAG") and the Bureau of Securities Regulation of the
State of New Hampshire ("NH") to settle administrative proceedings alleging
false and misleading information in certain MFS open-end retail fund ("MFS
retail funds") prospectuses regarding market timing and related matters (the
"February Settlements"). These regulators alleged that prospectus language for
certain MFS retail funds was false and misleading because, although the
prospectuses for those funds in the regulators' view indicated that they
prohibited market timing, MFS did not limit trading activity in 11 domestic
large cap stock, high grade bond and money market retail funds. MFS' former
Chief Executive Officer, John W. Ballen, and former President, Kevin R. Parke,
also reached agreement with the SEC in which they agreed to, among other
terms, monetary fines and temporary suspensions from association with any
investment adviser or registered investment company. Messrs. Ballen and Parke
have resigned their positions with, and will not be returning to, MFS and the
MFS funds. Under the terms of the February Settlements, MFS and the executives
neither admit nor deny wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain MFS retail funds,
which has been funded by MFS and of which $50 million is characterized as a
penalty. This pool will be distributed in accordance with a methodology
developed by an independent distribution consultant in consultation with MFS
and the Board of Trustees of the MFS retail funds, and acceptable to the SEC.
MFS has further agreed with NYAG to reduce its management fees in the
aggregate amount of approximately $25 million annually over the next five
years, and not to increase certain management fees during this period. MFS has
also paid an administrative fine to NH in the amount of $1 million, which will
be used for investor education purposes (NH retained $250,000 and $750,000 was
contributed to the North American Securities Administrators Association's
Investor Protection Trust). In addition, under the terms of the February
Settlements, MFS is in the process of adopting certain governance changes and
reviewing its policies and procedures.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center,
Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various
MFS funds, certain current and/or former Trustees of these MFS funds, and
certain officers of MFS have been named as defendants in multiple lawsuits
filed in federal and state courts. The lawsuits variously have been commenced
as class actions or individual actions on behalf of investors who purchased,
held or redeemed shares of the MFS funds during specified periods, as class
actions on behalf of participants in certain retirement plan accounts, or as
derivative actions on behalf of the MFS funds. The lawsuits relating to market
timing and related matters have been transferred to, and consolidated before,
the United States District Court for the District of Maryland, as part of a
multi-district litigation of market timing and related claims involving
several other fund complexes (In re Mutual Funds Investment Litigation (Alger,
Columbia, Janus, MFS, One Group, Putnam, Allianz Dresdner), No. 1:04-md-15863
(transfer began March 19, 2004)). The plaintiffs in these consolidated
lawsuits generally seek injunctive relief including removal of the named
Trustees, adviser and distributor, rescission of contracts and 12b-1 Plans,
disgorgement of fees and profits, monetary damages, punitive damages,
attorney's fees and costs and other equitable and declaratory relief. Four
lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District
of Massachusetts (Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584
(GAO) (March 25, 2004); Eddings v. Sun Life Financial Inc., et al., No.
04cv10764 (GAO) (April 15, 2004); Marcus Dumond, et al. v. Massachusetts
Financial Servs. Co., et al., No. 04cv11458 (GAO) (May 4, 2004); and Koslow v.
Sun Life Financial Inc., et al., No. 04cv11019 (GAO) (May 20, 2004)). The
plaintiffs in these lawsuits generally seek compensatory damages, punitive
damages, recovery of fees, rescission of contracts, an accounting,
restitution, declaratory relief, equitable and/or injunctive relief and
attorney's fees and costs. The various lawsuits generally allege that some or
all of the defendants (i) permitted or acquiesced in market timing and/or late
trading in some of the MFS funds, inadequately disclosed MFS' internal
policies concerning market timing and such matters, and received excessive
compensation as fiduciaries to the MFS funds, or (ii) permitted or acquiesced
in the improper use of fund assets by MFS to support the distribution of MFS
fund shares and inadequately disclosed MFS' use of fund assets in this manner.
The actions assert that some or all of the defendants violated the federal
securities laws, including the Securities Act of 1933 and the Securities
Exchange Act of 1934, the Investment Company Act of 1940 and the Investment
Advisers Act of 1940, the Employee Retirement Income Security Act of 1974, as
well as fiduciary duties and other violations of common law. Insofar as any of
the actions is appropriately brought derivatively on behalf of any of the MFS
funds, any recovery will inure to the benefit of the MFS funds. The defendants
are reviewing the allegations of the multiple complaints and will respond
appropriately. Additional lawsuits based on similar allegations may be filed
in the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS
has established a restitution pool in the amount of $225 million to compensate
certain shareholders of certain MFS retail funds for damages that they
allegedly sustained as a result of market timing or late trading in certain of
the MFS retail funds, and transferred $50 million for distribution to affected
MFS funds to compensate those funds based upon the amount of brokerage
commissions allocated in recognition of MFS fund sales. It is not clear
whether these amounts will be sufficient to compensate shareholders for all of
the damage they allegedly sustained, whether certain shareholders or putative
class members may have additional claims to compensation, or whether the
damages that may be awarded in any of the actions will exceed these amounts.
In the event the MFS funds incur any losses, costs or expenses in connection
with such lawsuits, the Boards of Trustees of the affected MFS funds may
pursue claims on behalf of such funds against any party that may have
liability to the funds in respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments,
will not result in increased fund redemptions, reduced sales of fund shares,
or other adverse consequences to the MFS funds.
While these developments relate to MFS and the 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 MFS closed-end fund shares or other adverse consequences.
-------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------------------------------
To the Shareholders and Trustees of MFS Charter Income Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Charter Income Trust (the Fund), including the portfolio of investments, as of
November 30, 2004, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our procedures
included confirmation of securities owned at November 30, 2004, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Charter Income Trust at November 30, 2004, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and its financial highlights for each of the five
years in the period then ended, in conformity with U.S. generally accepted
accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
January 14, 2005
------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
------------------------------------------------------------------------------------------------------
The Trustees and officers of the trust, as of January 1, 2005, 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
------------------- ---------------- --------------- -----------------------------
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 05/01/36) of Trustees Enterprises (diversified
services company), Chairman,
Trustee and Chief Executive
Officer (until November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) Chief of Cardiac Surgery;
Harvard Medical School,
Professor of Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 05/30/42) products and service
provider), Vice Chairman/
Director (since April 2001);
Encinitos Ventures (private
investment company),
Principal (1997 to April
2001); Lincoln Electric
Holdings, Inc. (welding
equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company),
Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Michael Hegarty Trustee December 2004 Retired; AXA Financial
(born 12/21/44) (financial services and
insurance), Vice Chairman and
Chief Operating Officer
(until May 2001); The
Equitable Life Assurance
Society (insurance),
President and Chief Operating
Officer (until May 2001)
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
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing General
Partner (since 1993);
Cambridge Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Elaine R. Smith Trustee February 1992 Independent health care
(born 04/25/46) industry consultant
OFFICERS
Robert J. Manning(3) Advisory Trustee and December 2004 Massachusetts Financial
(born 10/20/63) President (Advisory Services Company, Chief
Trustee); Executive Officer, President,
February-December Chief Investment Officer and
2004 (Trustee) Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior Vice
President and Associate
General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/01/56) Services Company, Senior Vice
President, General Counsel
and Secretary (since April
2004); Hale and Door LLP (law
firm) (prior to April 2004)
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April 2003);
Brown Brothers Harriman &
Co., Senior Vice President
(November 2002 to April
2003); ING Groep N.V./Aeltus
Investment Management, Senior
Vice President (prior to
November 2002)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior Vice
President (since July 2002);
The Bank of New York, Senior
Vice President (September
2000 to July 2002); Lexington
Global Asset Managers, Inc.,
Executive Vice President and
Chief Financial Officer
(prior to September 2000);
Lexington Funds, Chief
Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel and
Assistant Secretary (since
June 2004); Affiliated
Managers Group, Inc., Chief
Legal Officer/Centralized
Compliance Program (January
to April 2004); Fidelity
Research & Management
Company, Assistant General
Counsel (prior to January
2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June 2004);
CRA Business Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior Vice
President
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.
Messrs. Ives and Sherratt and Ms. Lane are members of the trust's Audit Committee.
Each of the trust's Trustees and officers holds comparable positions with certain other funds of which
MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with
certain affiliates of MFS. Each Trustee serves as a board member of 99 funds within the MFS Family of
Funds.
In addition, the Trustees have appointed Robert J. Manning, Robert C. Pozen and Laurie J. Thomsen as
Advisory Trustees and have nominated each to be elected as Trustees by shareholders. If elected,
Messrs. Manning and Pozen would serve as interested Trustees while Ms. Thomsen would serve as an
independent Trustee. Information relating to Messrs. Manning and Pozen and Ms. Thomsen is continued in
the table below.
ADVISORY TRUSTEES
Robert J. Manning(3) Advisory Trustee and December 2004 Massachusetts Financial
(born 10/20/63) President (Advisory Services Company, Chief
Trustee); Executive Officer, President,
February-December Chief Investment Officer and
2004 (Trustee) Director
Robert C. Pozen(3) Advisory Trustee December 2004 Massachusetts Financial
(born 08/08/46) (Advisory Services Company, Chairman
Trustee); (since February 2004);
February-December Harvard Law School
2004 (Trustee) (education), John Olin
Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December
2002); Fidelity Investments,
Vice Chairman (June 2000 to
December 2001); Fidelity
Management & Research Company
(investment adviser),
President (March 1997 to July
2001); The Bank of New York
(financial services),
Director; Bell Canada
Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat (satellite
communications), Director
Laurie J. Thomsen Advisory Trustee December 2004 Private investor; Prism
(born 08/05/57) Venture Partners (venture
capital), Co-founder and
General Partner (until June
2004); St. Paul Travelers
Companies (commercial
property liability
insurance), Director
------------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as
the 1940 Act), which is the principal federal law governing investment companies like the fund, as
a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts
02116.
The Statement of Additional Information for the trust and further information about the Trustees are
available without charge upon request by calling 1-800-225-2606.
On October 29, 2004, Robert J. Manning, as Chief Executive Officer of the trust, certified to the New
York Stock Exchange that as of the date of his certification he was not aware of any violation by the
trust of the corporate governance listing standards of the New York Stock Exchange.
The trust filed with the Securities and Exchange Commission the certifications of its principal
executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2002
as an exhibit to the trust's Form N-CSR for the period covered by this report.
------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
INDEPENDENT REGISTERED PUBLIC
DISTRIBUTOR ACCOUNTING FIRM
MFS Fund Distributors, Inc. Ernst & Young LLP
500 Boylston Street, Boston, MA 200 Clarendon Street, Boston, MA 02116
02116-3741
PORTFOLIO MANAGER
Richard O. Hawkins
--------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
--------------------------------------------------------------------------------
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the trust voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
--------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
--------------------------------------------------------------------------------
The trust will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The trust's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The trust's Form N-Q is available on
the EDGAR database on the Commission's Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2005, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2004.
--------------------------------------------------------------------------------
CONTACT INFORMATION 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
NUMBER OF SHAREHOLDERS
As of November 30, 2004, our records indicate that there are 4,431 registered
shareholders and approximately 36,658 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
(C) 2005 MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116.
MCR-ANN-1/05 55M
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the
Registrant's principal executive officer and principal financial and accounting
officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Mr. J. Atwood Ives and Ms. Amy B. Lane, members of the Audit Committee, have
been determined by the Board of Trustees in their reasonable business judgment
to meet the definition of "audit committee financial expert" as such term is
defined in Form N-CSR. In addition, Mr. Ives and Ms. Lane are both
"independent" members of the Audit Committee as defined in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(a) THROUGH 4(d) AND 4(g):
The Board of Trustees has appointed Ernst & Young LLP ("E&Y") to serve as
independent accountants to the Registrant. The tables below set forth the audit
fees billed to the Registrant as well as fees for non-audit services provided
to the Registrant and/or to the Registrant's investment adviser, Massachusetts
Financial Services Company ("MFS") and to various entities either controlling,
controlled by, or under common control with MFS that provide ongoing services
to the Registrant ("MFS Related Entities").
For the fiscal years ended November 30, 2004 and 2003, audit fees billed to the
Registrant by E&Y were as follows:
Audit Fees
FEES BILLED BY E&Y: 2004 2003
---- ----
MFS Charter Income Trust 37,900 36,330
------ ------
TOTAL 37,900 36,330
For the fiscal years ended November 30, 2004 and 2003, fees billed by E&Y for
audit-related, tax and other services provided to the Registrant and for
audit-related, tax and other services provided to MFS and MFS Related Entities
that relate directly to the operations and financial reporting of the
Registrant were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY E&Y: 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ----
To Charter Income 0 0 11,600 6,870 183 0
Trust
To MFS and MFS Related 0 0 0 26,832 35,000 0
Entities of
Registrant*
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2004 2003
----
To Registrant, MFS and MFS 53,783 43,702
Related Entities#
* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly
to the operations and financial reporting of the Registrant (portions of which services also related to the
operations and financial reporting of other funds within the MFS Funds complex).
# This amount reflects the aggregate fees billed by E&Y for non-audit services rendered to the Registrant and
for non-audit services rendered to MFS and the MFS Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are
reasonably related to the performance of the audit or review of financial statements, but not reported under
"Audit Fees," including accounting consultations, agreed-upon procedure reports, attestation reports and
comfort letters.
(2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning,
including services relating to the filing or amendment of federal, state or local income tax returns,
regulated investment company qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services provided by E&Y other than those
reported under "Audit Fees", "Audit-Related Fees" and "Tax Fees."
For periods prior to May 6, 2003, the amounts shown above under "Audit-Related
Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services
that would have been subject to pre-approval if the Securities and Exchange
Commission's rules relating to pre-approval of non-audit services had been in
effect.
ITEM 4(e)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Funds and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the
Audit Committee and it is not practical to wait to seek pre-approval at the
next regular meeting of the Audit Committee, such pre-approval of services may
be referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 between such regular meetings of the Audit Committee. Any engagement
pre-approved by the Chair between regular meetings of the Audit Committee shall
be presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Funds and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after
the start of the engagement with respect to services other than audit review or
attest services, if certain conditions are satisfied).
ITEM 4(f): Not applicable.
ITEM 4(h): The Registrant's Audit Committee has considered whether the
provision by a Registrant's independent registered public accounting firm of
non-audit services to MFS and MFS Related Entities that were not pre-approved
by the Committee (because such services were provided prior to the
effectiveness of SEC rules requiring pre-approval or because such services did
not relate directly to the operations and financial reporting of the
Registrant) was compatible with maintaining the independence of the independent
registered public accounting firm as the Registrant's principal auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has an Audit Committee established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit
Committee are Messrs. J. Atwood Ives, William J. Poorvu and J. Dale Sherratt
and Ms. Amy B. Lane. Mr. Poorvu retired as a Trustee effective as of December
31, 2004.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments of the Registrant is included as part of the report
to shareholders of the Registrant under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of Trustees and the Board of Managers of the investment companies
(the "MFS Funds") advised by Massachusetts Financial Services Company ("MFS")
have delegated to MFS the right and obligation to vote proxies for shares that
are owned by the MFS Funds, in accordance with MFS' proxy voting policies and
procedures (the "MFS Proxy Policies"). The MFS Proxy Policies are set forth
below:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
SEPTEMBER 17, 2003, AS REVISED ON SEPTEMBER 20, 2004
Massachusetts Financial Services Company, MFS Institutional
Advisors, Inc. and MFS' other investment adviser subsidiaries
(collectively, "MFS") have adopted proxy voting policies and
procedures, as set forth below, with respect to securities owned by
the clients for which MFS serves as investment adviser and has the
power to vote proxies, including the registered investment companies
sponsored by MFS, other than the MFS Union Standard Equity Fund (the
"MFS Funds").
These policies and procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS
believes to be the best long-term economic interests of MFS' clients, and not
in the interests of any other party or in MFS' corporate interests, including
interests such as the distribution of MFS Fund shares, administration of 401(k)
plans, and institutional relationships.
MFS has carefully reviewed matters that in recent years have been
presented for shareholder vote by either management or shareholders of public
companies. Based on the guiding principle that all votes made by MFS on behalf
of its clients must be in what MFS believes to be the best long-term economic
interests of such clients, MFS has adopted proxy voting guidelines, which are
set forth below, that govern how MFS generally plans to vote on specific
matters presented for shareholder vote. In all cases, MFS will exercise its
discretion to vote these items in accordance with this guiding principle. These
underlying guidelines are simply that - guidelines. Each proxy item is
considered on a case-by-case basis, in light of all relevant facts and
circumstances, and there may be instances in which MFS may vote proxies in a
manner different from these guidelines.
As a general matter, MFS maintains a consistent voting position with
respect to similar proxy proposals made by various issuers. In addition, MFS
generally votes consistently on the same matter when securities of an issuer
are held by multiple client accounts. However, MFS recognizes that there are
gradations in certain types of proposals that might result in different voting
positions being taken with respect to the different proxy statements. There
also may be situations involving matters presented for shareholder vote that
are not clearly governed by the guidelines, such as proposed mergers and
acquisitions. Some items that otherwise would be acceptable will be voted
against the proponent when it is seeking extremely broad flexibility without
offering a valid explanation. MFS reserves the right to override the guidelines
with respect to a particular shareholder vote when such an override is, in MFS'
best judgment, consistent with the guiding principle of voting proxies in the
best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines and
regarding particular voting issues from its clients. Those comments are
reviewed and considered periodically, and these guidelines are reviewed each
year with MFS Equity Research Department management, the MFS Proxy Review Group
and the MFS Proxy Consultant and are revised as appropriate.
These policies and procedures are intended to address any potential
material conflicts of interest on the part of MFS or its affiliates that could
arise in connection with the voting of proxies on behalf of MFS' clients. MFS
shall be mindful of any and all potential material conflicts of interest that
could arise in the voting of these proxies, shall identify, analyze, document
and report on any such potential conflicts, and shall ultimately vote these
proxies in what MFS believes to be the best long-term economic interests of its
clients. The MFS Proxy Review Group is responsible for monitoring and reporting
on all potential conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
NON-SALARY COMPENSATION PROGRAMS
Managements have become increasingly creative and generous with
compensation programs involving common stock. The original stock option plans,
which called for the optionee to pay the money to exercise the option, are now
embellished with no risk benefits such as stock appreciation rights, the use of
unexercised options to "buy" stock, and restricted stock at bargain prices.
Stock option plans are supposed to reward results rather than tenure,
so the use of restricted stock at bargain prices is not favored. In some cases,
restricted stock is granted to the recipient at deep discounts to fair market
value, sometimes at par value. The holder cannot sell for a period of years,
but in the meantime is able to vote and receive dividends. Eventually the
restrictions lapse and the stock can be sold.
MFS votes against option programs for officers, employees or
non-employee directors that do not require an investment by the optionee, that
give "free rides" on the stock price, or that permit grants of restricted stock
at deep discounts to fair market value. MFS generally votes against stock
option plans that involve stock appreciation rights or the use of unexercised
options to "buy" stock.
MFS opposes plans that provide unduly generous compensation for
officers, directors or employees, or could result in excessive dilution to
other shareholders. As a general guideline, MFS votes against stock option
plans if all such plans for a particular company involve potential dilution, in
the aggregate, of more than 15%.
MFS votes in favor of stock option plans for non-employee directors as
long as they satisfy the requirements set forth above with respect to stock
option plans for employees. Stock option plans that include options for
consultants and other third parties not involved in the management of the
company generally are opposed by MFS.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy
proposals that would require shareholder approval of any severance packages for
executive officers that exceed certain predetermined thresholds. MFS votes in
favor of such shareholder proposals when they would require shareholder
approval of any severance package for an executive officer that exceeds a
certain percentage of such officer's annual compensation. When put to a vote,
MFS votes against very large golden parachutes.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital
appreciation in a stock, including a possible takeover and any proposal that
protects management from action by shareholders. These types of proposals take
many forms, ranging from "poison pills" and "shark repellents" to board
classification and super-majority requirements.
REINCORPORATION AND REORGANIZATION PROPOSALS
When presented with a proposal to reincorporate a company under the
laws of a different state, or to effect some other type of corporate
reorganization, MFS considers the underlying purpose and ultimate effect of
such a proposal in determining whether or not to support such a measure. While
MFS generally votes in favor of management proposals that it believes are in
the best long-term economic interests of its clients, MFS may oppose such a
measure if, for example, the intent or effect would be to create additional
inappropriate impediments to possible acquisitions or takeovers.
DILUTION
There are many reasons for issuance of stock and most are legitimate.
As noted above under "Non-Salary Compensation Programs", when a stock option
plan (either individually or when aggregated with other plans of the same
company) would substantially dilute the existing equity (e.g., by approximately
15% or more), MFS generally votes against the plan. In addition, MFS votes
against proposals where management is asking for authorization to issue common
or preferred stock with no reason stated (a "blank check") because the
unexplained authorization could work as a potential anti-takeover device.
CONFIDENTIAL VOTING
MFS votes in favor of proposals to ensure that shareholder voting
results are kept confidential. For example, MFS supports proposals that would
prevent management from having access to shareholder voting information that is
compiled by an independent proxy tabulation firm.
INDEPENDENCE OF BOARDS OF DIRECTORS AND COMMITTEES THEREOF
While MFS acknowledges the potential benefits of a company's inclusion
of directors who are "independent" from management, MFS generally opposes
shareholder proposals that would require that a majority (or a
"super-majority") of a company's board be comprised of "independent" directors.
Such proposals could inappropriately reduce a company's ability to engage in
certain types of transactions, could result in the exclusion of talented
directors who are not deemed "independent", or could result in the unnecessary
addition of additional "independent" directors to a company's board. However,
in view of the special role and responsibilities of various committees of a
board of directors, MFS supports proposals that would require that the Audit,
Nominating and Compensation Committees be comprised entirely of directors who
are deemed "independent" of the company.
INDEPENDENT AUDITORS
Recently, some shareholder groups have submitted proposals to limit
the non-audit activities of a company's audit firm. Some proposals would
prohibit the provision of any non-audit services (unless approved in advance by
the full board) whereas other proposals would cap non-audit fees so that such
fees do not exceed a certain percentage of the audit fees. MFS supports such
shareholder proposals that would cap non-audit fees at an amount deemed to be
not excessive.
BEST PRACTICES STANDARDS
Best practices standards are rapidly evolving in the corporate
governance areas as a result of recent corporate failures, the Sarbanes-Oxley
Act of 2002 and revised listing standards on major stock exchanges. MFS
generally support these changes. However, many issuers are not publicly
registered, are not subject to these enhanced listing standards or are not
operating in an environment that is comparable to that in the United States. In
reviewing proxy proposals under these circumstances, MFS votes for proposals
that enhance standards of corporate governance so long as we believe that --
within the circumstances of the environment within which the issuers operate -
the proposal is consistent with the best long-term economic interests of our
clients.
FOREIGN ISSUERS - SHARE BLOCKING
In accordance with local law or business practices, many foreign
companies prevent the sales of shares that have been voted for a certain period
beginning prior to the shareholder meeting and ending on the day following the
meeting ("share blocking"). Depending on the country in which a company is
domiciled, the blocking period may begin a stated number of days prior to the
meeting (e.g., one, three or five days) or on a date established by the
company. While practices vary, in many countries the block period can be
continued for a longer period if the shareholder meeting is adjourned and
postponed to a later date. Similarly, practices vary widely as to the ability
of a shareholder to have the "block" restriction lifted early (e.g., in some
countries shares generally can be "unblocked" up to two days prior to the
meeting whereas in other countries the removal of the block appears to be
discretionary with the issuer's transfer agent). Due to these restrictions, MFS
must balance the benefits to its clients of voting proxies against the
potentially serious portfolio management consequences of a reduced flexibility
to sell the underlying shares at the most advantageous time. For companies in
countries with potentially long block periods, the disadvantage of being unable
to sell the stock regardless of changing conditions generally outweighs the
advantages of voting at the shareholder meeting for routine items. Accordingly,
MFS generally will not vote those proxies in the absence of an unusual,
significant vote. Conversely, for companies domiciled in countries with very
short block periods, MFS generally will continue to cast votes in accordance
with these policies and procedures.
SOCIAL ISSUES
There are many groups advocating social change, and many have chosen
the publicly-held corporation as a vehicle for their agenda. Common among these
are resolutions requiring the corporation to refrain from investing or
conducting business in certain countries, to adhere to some list of goals or
principles (e.g., environmental standards) or to report on various activities.
MFS votes against such proposals unless their shareholder-oriented benefits
will outweigh any costs or disruptions to the business, including those that
use corporate resources to further a particular social objective outside the
business of the company or when no discernible shareholder economic advantage
is evident.
The laws of various states may regulate how the interests of certain
clients subject to those laws are voted. For example, the General Laws of The
Commonwealth of Massachusetts prohibit the investment of state funds, including
retirement system assets, in the following types of investments: (i) financial
institutions which directly or through any subsidiary have outstanding loans to
any individual or corporation engaged in manufacturing, distribution or sale of
firearms, munitions, rubber or plastic bullets, tear gas, armored vehicles or
military aircraft for use or deployment in any activity in Northern Ireland; or
(ii) any stocks, securities or obligations of any company so engaged.
Because of these statutory restrictions, it is necessary when voting
proxies for securities held in Massachusetts public pension accounts to support
the purpose of this legislation. Thus, on issues relating to these or similar
state law questions, it may be necessary to cast ballots differently for these
portfolios than MFS might normally do for other accounts.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY REVIEW GROUP
The administration of these policies and procedures is overseen by the
MFS Proxy Review Group, which includes senior MFS Legal Department officers and
MFS' Proxy Consultant. The MFS Proxy Review Group:
a. Reviews these policies and procedures at least annually and
recommends any amendments considered to be necessary or
advisable;
b. Determines whether any material conflicts of interest exist with
respect to instances in which (i) MFS seeks to override these
guidelines and (ii) votes not clearly governed by these
guidelines; and
c. Considers special proxy issues as they may arise from time to
time.
The current MFS Proxy Consultant is an independent proxy consultant
who performs these services exclusively for MFS.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Review Group is responsible for monitoring potential
material conflicts of interest on the part of MFS or its affiliates that could
arise in connection with the voting of proxies on behalf of MFS' clients. Any
attempt to influence MFS' voting on a particular proxy matter should be
reported to the MFS Proxy Review Group. The MFS Proxy Consultant will assist
the MFS Proxy Review Group in carrying out these responsibilities.
In cases where proxies are voted in accordance with these policies and
guidelines, no conflict of interest will be deemed to exist. In cases where (i)
MFS is considering overriding these policies and guidelines, or (ii) matters
presented for vote are not clearly governed by these policies and guidelines,
the MFS Proxy Review Group and the MFS Proxy Consultant will follow these
procedures:
a. Compare the name of the issuer of such proxy against a list of
significant current and potential (i) distributors of MFS Fund
shares, (ii) retirement plans administered by MFS, and (iii) MFS
institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant
Client List, then no material conflict of interest will be
deemed to exist, and the proxy will be voted as otherwise
determined by the MFS Proxy Review Group;
c. If the name of the issuer appears on the MFS Significant Client
List, then the MFS Proxy Review Group will carefully evaluate
the proposed votes in order to ensure that the proxy ultimately
is voted in what MFS believes to be the best long-term economic
interests of MFS' clients, and not in MFS' corporate interests;
and
d. For all potential material conflicts of interest identified
under clause (c) above, the MFS Proxy Review Group will
document: the name of the issuer, the issuer's relationship to
MFS, the analysis of the matters submitted for proxy vote, and
the basis for the determination that the votes ultimately were
cast in what MFS believes to be the best long-term economic
interests of MFS' clients, and not in MFS' corporate interests.
The MFS Proxy Review Group is responsible for creating and maintaining
the MFS Significant Client List, in consultation with MFS' distribution,
retirement plan administration and institutional business units. The MFS
Significant Client List will be reviewed and updated as necessary, but no less
frequently than quarterly.
3. GATHERING PROXIES
Nearly all proxies received by MFS originate at Automatic Data
Processing Corp. ("ADP"). ADP and issuers send proxies and related material
directly to the record holders of the shares beneficially owned by MFS'
clients, usually to the client's custodian or, less commonly, to the client
itself. Each client's custodian is responsible for forwarding all proxy
solicitation materials to MFS (except in the case of certain institutional
clients for which MFS does not vote proxies). This material will include proxy
cards, reflecting the proper shareholdings of Funds and of clients on the
record dates for such shareholder meetings, and proxy statements, the issuer's
explanation of the items to be voted upon.
MFS, on behalf of itself and the Funds, has entered into an agreement
with an independent proxy administration firm, Institutional Shareholder
Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy
Administrator performs various proxy vote processing and recordkeeping
functions for MFS' Fund and institutional client accounts. The Proxy
Administrator does not make recommendations to MFS as to how to vote any
particular item. The Proxy Administrator receives proxy statements and proxy
cards directly from various custodians, logs these materials into its database
and matches upcoming meetings with MFS Fund and client portfolio holdings,
which are input into the Proxy Administrator's system by an MFS holdings
datafeed. Through the use of the Proxy Administrator system, ballots and proxy
material summaries for the upcoming shareholders' meetings of over 10,000
corporations are available on-line to certain MFS employees, the MFS Proxy
Consultant and the MFS Proxy Review Group and most proxies can be voted
electronically. In addition to receiving the hard copies of materials relating
to meetings of shareholders of issuers whose securities are held by the Funds
and/or clients, the ballots and proxy statements can be printed from the Proxy
Administrator's system and forwarded for review.
4. ANALYZING PROXIES
After input into the Proxy Administrator system, proxies which are
deemed to be completely routine (e.g., those involving only uncontested
elections of directors, appointments of auditors, and/or employee stock
purchase plans)(1) are automatically voted in favor by the Proxy Administrator
without being sent to either the MFS Proxy Consultant or the MFS Proxy Review
Group for further review. Proxies that pertain only to merger and acquisition
proposals are forwarded initially to an appropriate MFS portfolio manager or
research analyst for his or her recommendation. All proxies that are reviewed
by either the MFS Proxy Consultant or a portfolio manager or analyst are then
forwarded with the corresponding recommendation to the MFS Proxy Review
Group.(2)
------------
(1) Proxies for foreign companies often contain significantly more voting items
than those of U.S. companies. Many of these items on foreign proxies
involve repetitive, non-controversial matters that are mandated by local
law. Accordingly, there is an expanded list of items that are deemed
routine (and therefore automatically voted in favor) for foreign issuers,
including the following: (i) receiving financial statements or other
reports from the board; (ii) approval of declarations of dividends; (iii)
appointment of shareholders to sign board meeting minutes; (iv) the
discharge of management and supervisory boards; and (v) approval of share
repurchase programs.
(2) From time to time, due to travel schedules and other commitments, an
appropriate portfolio manager or research analyst is not available to
provide a recommendation on a merger or acquisition proposal. If such a
recommendation cannot be obtained within a few business days prior to the
shareholder meeting, the MFS Proxy Review Group will determine the vote in
what MFS believes to be the best long-term economic interests of its
clients.
Recommendations with respect to voting on non-routine issues are
generally made by the MFS Proxy Consultant in accordance with the policies
summarized under "Voting Guidelines," and all other relevant materials. His or
her recommendation as to how each proxy proposal should be voted is indicated
on copies of proxy cards, including his or her rationale on significant items.
These cards are then forwarded to the MFS Proxy Review Group.
As a general matter, portfolio managers and investment analysts are
consulted and involved in developing MFS' substantive proxy voting guidelines,
but have little or no involvement in or knowledge of proxy proposals or voting
positions taken by MFS. This is designed to promote consistency in the
application of MFS' voting guidelines, to promote consistency in voting on the
same or similar issues (for the same or for multiple issuers) across all client
accounts, and to minimize or remove the potential that proxy solicitors,
issuers, and third parties might attempt to exert influence on the vote or
might create a conflict of interest that is not in what MFS believes to be the
best long-term economic interests of our clients. In limited, specific
instances (e.g., mergers), the MFS Proxy Consultant or the MFS Proxy Review
Group may consult with or seek recommendations from portfolio managers or
analysts. The MFS Proxy Review Group would ultimately determine the manner in
which all proxies are voted.
As noted above, MFS reserves the right to override the guidelines when
such an override is, in MFS' best judgment, consistent with the guiding
principle of voting proxies in the best long-term economic interests of MFS'
clients. Any such override of the guidelines shall be examined, explained and
reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
After the proxy card copies are reviewed, they are voted
electronically through the Proxy Administrator's system. In accordance with its
contract with MFS, the Proxy Administrator also generates a variety of reports
for the MFS Proxy Consultant and the MFS Proxy Review Group, and makes
available on-line various other types of information so that the MFS Proxy
Review Group and the MFS Proxy Consultant may monitor the votes cast by the
Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy
Consultant to monitor the proxy voting process. As noted above, when proxy
materials for clients are received, they are forwarded to the Proxy
Administrator and are input into the Proxy Administrator's system.
Additionally, through an interface with the portfolio holdings database of MFS,
the Proxy Administrator matches a list of all MFS Funds and clients who hold
shares of a company's stock and the number of shares held on the record date
with the Proxy Administrator's listing of any upcoming shareholder's meeting of
that company.
When the Proxy Administrator's system "tickler" shows that the date of
a shareholders' meeting is approaching, a Proxy Administrator representative
checks that the vote for MFS Funds and clients holding that security has been
recorded in the computer system. If a proxy card has not been received from the
client's custodian, the Proxy Administrator calls the custodian requesting that
the materials be forward immediately. If it is not possible to receive the
proxy card from the custodian in time to be voted at the meeting, MFS may
instruct the custodian to cast the vote in the manner specified and to mail the
proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these policies and procedures in effect from
time to time and will retain all proxy voting reports submitted to the Board of
Trustees and Board of Managers of the MFS Funds for a period of six years.
Proxy solicitation materials, including electronic versions of the proxy cards
completed by the MFS Proxy Consultant and the MFS Proxy Review Group, together
with their respective notes and comments, are maintained in an electronic
format by the Proxy Administrator and are accessible on-line by the MFS Proxy
Consultant and the MFS Proxy Review Group. All proxy voting materials and
supporting documentation, including records generated by the Proxy
Administrator's system as to proxies processed, the dates when proxies were
received and returned, and the votes on each company's proxy issues, are
retained for six years.
E. REPORTS
MFS FUNDS
Periodically, MFS will report the results of its voting to the Board
of Trustees and Board of Managers of the MFS Funds. These reports will include:
(i) a listing of how votes were cast; (ii) a review of situations where MFS did
not vote in accordance with the guidelines and the rationale therefor; (iii) a
review of the procedures used by MFS to identify material conflicts of
interest; and (iv) a review of these policies and the guidelines and, as
necessary or appropriate, any proposed modifications thereto to reflect new
developments in corporate governance and other issues. Based on these reviews,
the Trustees and Managers of the MFS Funds will consider possible modifications
to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has
requested that MFS furnish a record of votes cast. The report specifies the
proxy issues which have been voted for the client during the year and the
position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party
other than the client or its representatives (unless required by applicable
law) because we consider that information to be confidential and proprietary to
the client.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable at this time.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
=============================================================================================================
MFS Charter Income Trust
-------------------------------------------------------------------------------------------------------------
(D) MAXIMUM NUMBER
(C) TOTAL NUMBER OF (OR APPROXIMATE
SHARES PURCHASED AS DOLLAR VALUE) OF
(B) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET
(A) TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR BE PURCHASED UNDER
PRIOR SHARES PURCHASED PER SHARE PROGRAMS THE PLANS OR PROGRAMS
=============================================================================================================
12/01/03 - 12/31/03 106,100 8.82 106,100 5,882,834
-------------------------------------------------------------------------------------------------------------
01/01/04 - 01/31/04 1,600 8.87 1,600 5,881,234
-------------------------------------------------------------------------------------------------------------
02/01/04 - 02/28/04 0 n/a 0 5,881,234
-------------------------------------------------------------------------------------------------------------
03/01/04 - 03/31/04 0 n/a 0 5,853,984
-------------------------------------------------------------------------------------------------------------
04/01/04 - 04/30/04 234,700 8.64 234,700 5,619,284
-------------------------------------------------------------------------------------------------------------
05/01/04 - 05/31/04 171,500 8.37 171,500 5,447,484
-------------------------------------------------------------------------------------------------------------
06/01/04 - 06/30/04 0 n/a 0 5,447,484
-------------------------------------------------------------------------------------------------------------
07/01/04 - 07/31/04 204,000 8.64 204,000 5,243,784
-------------------------------------------------------------------------------------------------------------
08/01/04 - 08/31/04 57,200 8.71 57,200 5,186,584
-------------------------------------------------------------------------------------------------------------
09/01/04 - 09/30/04 170,600 8.81 170,600 5,015,984
-------------------------------------------------------------------------------------------------------------
10/01/04 - 10/31/04 0 n/a 0 5,015,984
-------------------------------------------------------------------------------------------------------------
11/01/04 - 11/30/04 188,900 8.70 188,900 4,827,084
-------------------------------------------------------------------------------------------------------------
TOTALS/YEAR 1,134,600 8.70 1,134,600
=============================================================================================================
Note: The Board of Trustees approves procedures to repurchase shares annually.
The notification to shareholders of the program is part of the semi-annual and
annual reports sent to shareholders. These annual programs begin on March 1st
of each year. The programs conform to the conditions of Rule 10b-18 of the
securities Exchange Act of 1934 and limit the aggregate number of shares that
may be purchased in each annual period (March 1 through the following February
28) to 10% of the Registrant's outstanding shares as of the first day of the
plan year (March 1). The aggregate number of shares available for purchase for
the March 1, 2004 plan year are 5,853,984.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act) as conducted within
90 days of the filing date of this Form N-CSR, the registrant's principal
financial officer and principal executive officer have concluded that
those disclosure controls and procedures provide reasonable assurance that
the material information required to be disclosed by the registrant on
this report is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules
and forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends
to satisfy the Item 2 requirements through filing of an exhibit: Code of
Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the Registrant to 10 or more persons. Not applicable.
(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: January 21, 2005
----------------
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: January 21, 2005
----------------
By (Signature and Title)* RICHARD M. HISEY
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Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: January 21, 2005
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* Print name and title of each signing officer under his or her signature.