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 811-5912
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MFS SPECIAL VALUE 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)
Stephen E. Cavan
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: October 31, 2003
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Date of reporting period: October 31, 2003
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds
ANNUAL REPORT 10/31/03
[graphic omitted]
MFS(R) SPECIAL VALUE TRUST
A path for pursuing opportunity
[logo] M F S(R)
INVESTMENT MANAGEMENT
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MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
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Privacy is a concern for every investor today. At MFS Investment Management(R)
and the MFS funds, we take this concern very seriously. We want you to
understand our policies about every MFS investment product and service that we
offer and how we protect the nonpublic personal information of investors who
have a direct relationship with us and our wholly owned subsidiaries.
Throughout our business relationship, you provide us with personal information;
we maintain information and records about you, your investments, and the
services you use. Examples of the nonpublic personal information we maintain
include
o data from investment applications and other forms
o share balances and transactional history with us, our affiliates, or others
o facts from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may share information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about MFS' privacy policy, please call 1-800-225-2606
any business day between 8 a.m. and 8 p.m. Eastern time.
Note: If you own MFS products or receive MFS services in the name of a third
party such as a bank or broker-dealer, their privacy policy may apply to you
instead of ours.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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MFS(R) SPECIAL VALUE TRUST
The trust seeks to maintain an annual distribution rate of 10% based on its
average daily net asset value (NAV), while seeking opportunities for capital
appreciation.
New York Stock Exchange Symbol: MFV
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To view MFS' statement concerning regulatory issues affecting the mutual fund
industry and the firm, please visit www.mfs.com.
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TABLE OF CONTENTS
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MFS PRIVACY POLICY
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LETTER FROM THE CHAIRMAN 1
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MFS ORIGINAL RESEARCH(R) 2
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MANAGEMENT REVIEW 3
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PERFORMANCE SUMMARY 6
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 8
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RESULTS OF SHAREHOLDER MEETINGS 9
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PORTFOLIO OF INVESTMENTS 10
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FINANCIAL STATEMENTS 21
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NOTES TO FINANCIAL STATEMENTS 25
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INDEPENDENT AUDITORS' REPORT 33
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TRUSTEES AND OFFICERS 34
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FEDERAL TAX INFORMATION 36
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CONTACT INFORMATION 37
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LETTER FROM THE CHAIRMAN
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Dear Shareholders,
[Photo of Jeffrey L. Shames]
In our view, the past year has been a promising one for investors. Financial
markets have improved steadily, spurred by indications of a global economic
recovery.
These developments make this an encouraging time for MFS and for our
shareholders. But we also think it's a time to reinforce the fundamentals of a
sound investment strategy.
At MFS, we think in any market environment the best approach for investors is
disciplined diversification. This method of investing involves three simple
steps. First, allocate your holdings across the major asset classes. Second,
diversify within each class so that you get exposure to different investment
styles, such as growth and value, and market sectors, such as government and
corporate bonds. Finally, to respond to the way market activity can shift the
value of your accounts, rebalance your accounts on a routine schedule, such as
once per year. Doing so will help you maintain your desired allocation across
each asset class.
These investing fundamentals are often lost when markets are on an upswing. At
such times, it's easy to be tempted to shift your holdings in the current,
"hottest" performing investment. History suggests, however, that it is difficult
to predict year after year what the best performing sector or market will be.
While it is true that the past cannot offer any guarantees for the future, the
markets historically have demonstrated the benefits of taking the prudent
approach and spreading your assets across a variety of holdings. For investors
with long-term goals such as college or retirement, a balanced approach usually
makes the most sense. As always, your investment professional can help you
identify an appropriate mix of investments for your needs.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman
MFS Investment Management(R)
November 20, 2003
The opinions expressed in this letter are those of MFS and no forecasts can be
guaranteed.
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MFS ORIGINAL RESEARCH(R)
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THE HUMAN SIDE OF MONEY MANAGEMENT
For nearly 80 years MFS has been offering investors clear paths to pursuing
specific investment objectives. Today, millions of individuals and thousands of
institutions all over the world look to MFS to manage their assets with insight
and care.
Our success, we believe, has to do with the fact that we see investors as people
with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES:
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers' ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain
first-hand knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies' customers and competitors
o developing our own proprietary estimates of companies' earnings
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MANAGEMENT REVIEW
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MARKET ENVIRONMENT
Accommodative global monetary policies, an improving global economic
environment, and low yields on government bonds created very favorable market
conditions for the trust. This reporting period included an extraordinary
confluence of events that ignited strong rallies in high-yield bonds, U.S.
stocks, and emerging market debt securities. We would not expect to see these
circumstances repeated in the near future.
Throughout the period, governments worldwide sought to stimulate sluggish local
economies by maintaining low interest rates. This stimulative policy, along with
increasing investor confidence, made it possible for cash-strapped companies to
obtain the access to capital they needed to fuel their businesses. At the same
time, U.S. economic conditions showed modest improvement that spilled over into
overseas markets. These factors helped investors regain lost confidence in
higher-risk securities such as high-yield bonds, U.S. stocks, and emerging
market debt. We would add that investor's income needs were probably not being
fulfilled from their conservative government investments.
PORTFOLIO COMPOSITION AS OF 10/31/03
High-Yield Corporates 48.3%
Domestic Equity 32.1%
Emerging Markets Debt 5.9%
Commercial Mortgage-Backed 4.5%
Cash & Other 4.1%
International Convertibles 2.0%
International Equity 1.9%
High-Grade Corporates 1.2%
The portfolio is actively managed, and current holdings may be different.
TRUST POSITIONING
Throughout the period, the top three investment allocations for the trust were
high-yield corporate bonds, U.S. stocks, and emerging market debt, and those
weightings changed very little from the beginning of the period.
The average quality of the trust's rated bonds at the end of the period was
"B-", with roughly 45% of the trust's fixed-income holdings invested in
securities with "B" and "CCC" ratings.
CONTRIBUTORS TO PERFORMANCE
The trust's high-yield securities, especially those in the lower-quality ranges,
made the strongest contributions to return. Historically, high-yield bonds have
tended to be more sensitive to economic conditions. When the economy began
exhibiting positive signs in early 2003, high-yield issuers found it easier to
access the capital markets to improve their liquidity and enhance their balance
sheets. This renewed access to capital helped allay investor concerns about the
group's ability to meet its future obligations, especially as the U.S. economy
continued to improve in 2003.
The trust's overweighting in the cable and telecommunications industries and its
bond investment selections in those groups added to strong returns. Both
industries had fallen deeply out of favor with investors in 2002. Fall-out from
the WorldCom scandal, structural problems, and limited access to capital
depressed bond prices. As the economy improved and the rate of corporate
defaults declined, access to the capital markets improved for companies with
high debt loads, and that improvement proved to be a watershed event for both
industries.
Adelphia and Charter Communications, two strong contributors to trust
performance, illustrate how important easing in the capital markets was.
Adelphia had significant corporate governance problems and filed for bankruptcy
during 2002. Charter Communications had accounting issues, and many investors
feared it would file for bankruptcy. However, when capital became available to
these companies and others like them, both Adelphia and Charter received the
financing they needed to preserve their businesses and meet their future
commitments. Other bonds that helped trust performance included those issued by
Sprint affiliate Alamosa and Rural Cellular.
Performance from the trust's U.S. stock holdings ran a close second to its
high-yield investments. Going into the period, we had purchased stock in
companies such as Tyco International, which had also experienced corporate
governance issues. Despite these problems, this large manufacturing conglomerate
owned a wide range of very profitable businesses. We became increasingly
attracted to the stock as its price approached a level that was well below what
analysts thought the company would receive if it had to sell all its businesses.
As a result, Tyco's stock made a significant contribution to trust performance
when the market rallied.
Other stocks that performed well during the period included financial services
company FleetBoston Financial, cable operator Comcast, satellite radio operator
Sirius, and scrap metal company Metals Management. Metals Management was sold
when it reached our price target.
DETRACTORS FROM TRUST PERFORMANCE
Not all of the trust's investments worked as well as those described above.
Fleming, a food services company, had relied heavily on sales revenues from its
relationship with K-Mart. K-Mart's bankruptcy filing ultimately led Fleming to
default on its bonds. Durango, a Mexican paper company, also defaulted on its
bonds during the reporting period. MMI, which makes fences and concrete
accessories used in construction, was hurt by the slow economy. Packaging and
tape manufacturer Fibermark experienced continued weakness in a number of its
products and operating issues at one of its domestic facilities. These issues
contributed to the decline in the price of the company's bonds.
Respectfully,
/s/ John F. Addeo
John F. Addeo
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
current only through the end of the period of the report as stated on the cover.
These views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
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PERFORMANCE SUMMARY FOR THE YEAR ENDED 10/31/03
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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 10/31/03
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Date Price
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Net asset value 10/31/2002 $7.50
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10/31/2003 $9.80
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New York Stock Exchange price 10/31/2002 $7.25
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10/30/2003 (high)* $10.44
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11/14/2002 (low)* $7.22
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10/31/2003 $10.40
*For the period November 1, 2002, through October 31, 2003.
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Year ended 10/31/03
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TOTAL RETURNS VS BENCHMARK
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New York Stock Exchange price* 58.07%
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Net asset value* 44.18%
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Lehman Brothers High Yield Index# 33.77%
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* Includes reinvestment of dividends and capital gains distributions.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
LEHMAN BROTHERS HIGH YIELD INDEX - Measures the performance of the high-yield
bond market.
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
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.
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.
The trust's target annual distribution rate is calculated based on the trust's
average daily net asset value, not a fixed share price, and the trust's dividend
amount will fluctuate with changes in the trust's average daily net asset value.
KEY RISK CONSIDERATIONS
The portfolio may invest in derivative securities, which may include futures and
options. These types of instruments can increase price flutuation.
Investments in high yield or lower-rated securities may provide greater returns
but are subject to greater-than-average risk.
Because the portfolio invests in a limited number of companies a change in one
security's value may have a more significant effect on the portfolio's value.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
These risks may increase share price volatility. Please see the prospectus for
further information on these and other risk considerations.
INVESTMENT POLICY (FOREIGN SECURITIES)
The trust limits investment in securities of foreign issuers which are not
traded on a U.S. exchange (excluding American Depository Receipts) to 10% of its
total assets. For purposes of determining this investment limitation, foreign
securities traded in U.S. markets which are well established and liquid (such as
Rule 144A and Yankee Bond markets) are considered as being equivalent to U.S.
exchange-traded securities, and therefore are not subject to this 10%
limitation.
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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MFS offers a Dividend Reinvestment and Cash Purchase Plan that allows you to
reinvest either all of the distributions paid by the trust or only the long-
term capital gains. Purchases are made at the market price unless that price
exceeds the net asset value (the shares are trading at a premium). If the shares
are trading at a premium, purchases will be made at a discounted price of either
the net asset value or 95% of the market price, whichever is greater. Twice each
year you can also buy shares. Investments in any amount over $100 can be made in
January and July on the 15th of the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee, you
can ask the firm or nominee to participate in the plan on your behalf. If the
nominee does not offer the plan, you may wish to request that your shares be
re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are bought
on the New York Stock Exchange or otherwise on the open market, each participant
pays a pro rata share of the commissions. The automatic reinvestment of
distributions does not relieve you of any income tax that may be payable (or
required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please have
available the name of the trust and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. Please call for additional details. When you
withdraw, you can receive the value of the reinvested shares in one of two ways:
a check for the value of the full and fractional shares, or a certificate for
the full shares and a check for the fractional shares.
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RESULTS OF SHAREHOLDER MEETING (unaudited) - 10/31/03
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At the annual meeting of shareholders of MFS Special Value Trust, which was held
on October 7, 2003, the following actions were taken:
ITEM 1. To elect a Board of Trustees.
NUMBER OF SHARES
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NOMINEE FOR WITHHOLD AUTHORITY
John W. Ballen 6,205,044.792 89,854.791
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William J. Poorvu 6,186,084.792 108,814.791
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J. Dale Sherratt 6,207,754.639 87,144.944
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Ward Smith 6,180,064.792 114,834.791
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ITEM 2. To ratify the selection of independent public accountants for the
current fiscal year.
NUMBER OF SHARES
Affirmative 6,183,331.225
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Against 46,363.000
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Abstain 65,205.358
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PORTFOLIO OF INVESTMENTS - 10/31/03
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The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized
by broad-based asset classes.
Bonds - 58.7%
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PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
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U.S. Bonds - 49.4%
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Advertising & Broadcasting - 2.5%
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Emmis Communications Corp., 0s to 2006, 12.5s to 2011 $343 $314,703
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Granite Broadcasting Corp., 10.375s, 2005 300 294,000
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LBI Media Holdings, Inc., 0s to 2008, 11s to 2013## 875 542,500
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XM Satellite Radio, Inc., 0s to 2005, 14s to 2009 225 192,937
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XM Satellite Radio, Inc., 12s, 2010 280 311,500
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$1,655,640
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Aerospace - 1.3%
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BE Aerospace, Inc., 8.875s, 2011 $475 $427,500
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Hexcel Corp., 9.875s, 2008 20 22,200
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Hexcel Corp., 9.75s, 2009 310 323,175
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K & F Industries, Inc., 9.625s, 2010 80 89,600
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$862,475
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Airlines - 1.1%
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Continental Airlines Pass-Through Trust, Inc., 8.307s, 2018 $302 $252,981
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Continental Airlines Pass-Through Trust, Inc., 6.795s, 2020 506 426,401
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Continental Airlines Pass-Through Trust, Inc., 7.566s, 2020 58 48,529
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$727,911
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Apparel Manufacturers - 0.1%
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Westpoint Stevens, Inc., 7.875s, 2005** $170 $19,550
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Westpoint Stevens, Inc., 7.875s, 2008** 640 73,600
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$93,150
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Automotive - 2.9%
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Advanced Accessory Systems LLC, 10.75s, 2011## $115 $123,050
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Collins & Aikman Products Co., 10.75s, 2011 275 231,000
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Dura Operating Corp., 9s, 2009 260 237,900
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Intermet Corp., 9.75s, 2009 325 325,812
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Metaldyne Corp., 11s, 2012 365 306,600
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Tenneco Automotive, Inc., 11.625s, 2009 290 300,875
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TRW Automotive Acquisition Corp., 11.75s, 2013## EUR 245 325,704
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TRW Automotive Acquisition Corp., 11s, 2013## $20 23,600
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Venture Holdings Trust, 11s, 2007** 375 22,500
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Venture Holdings Trust, 12s, 2009** 150 15
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$1,897,056
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Basic Industry - 0.6%
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Foamex LP/ Capital Corp., 10.75s, 2009 $425 $374,000
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Broadcast & Cable TV - 4.8%
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Adelphia Communications Corp., 10.25s, 2011** $750 $630,000
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Charter Communications Holdings, 8.625s, 2009 365 292,912
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Charter Communications Holdings, 0s to 2004, 9.92s to 2011 1,000 755,000
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CSC Holdings, Inc., 8.125s, 2009 50 52,000
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CSC Holdings, Inc., "B", 8.125s, 2009 155 161,200
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FrontierVision Holding LP, 11.875s, 2007** 300 300,375
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Insight Midwest, 9.75s, 2009 300 306,000
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Mediacom Broadband LLC, 11s, 2013 575 600,875
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$3,098,362
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Building - 1.7%
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Dayton Superior Corp., 10.75s, 2008## $340 $354,450
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Formica Corp., 10.875s, 2009** 850 148,750
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Interface, Inc., 9.5s, 2005 125 120,625
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Interface, Inc., 10.375s, 2010 180 190,800
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MMI Products, Inc., 11.25s, 2007 500 322,500
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$1,137,125
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Business Services - 0.6%
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Lucent Technologies, Inc., 6.45s, 2029 $500 $386,250
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Chemicals - 4.4%
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Equistar Chemicals LP, 10.625s, 2011## $210 $219,450
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Huntsman ICI Holdings, 10.125s, 2009 750 714,375
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IMC Global, Inc., 10.875s, 2013## 600 619,500
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Johnsondiversey Holdings, Inc., 0s to 2007, 10.67s to 2013## 250 186,250
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Koppers, Inc., 9.875s, 2013## 75 79,125
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Lyondell Chemical Co., 9.625s, 2007 250 253,750
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Lyondell Chemical Co., 10.875s, 2009 65 64,025
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Lyondell Chemical Co., 11.125s, 2012 90 94,500
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Rockwood Specialties Group, Inc., 10.625s, 2011## 300 322,500
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Sovereign Specialty Chemicals, 11.875s, 2010 320 318,400
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$2,871,875
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Consumer Goods & Services - 2.1%
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American Safety Razor Co., 9.875s, 2005 $500 $495,000
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Revlon Consumer Products Corp., 12s, 2005 140 137,200
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Samsonite Corp., 10.75s, 2008 400 420,000
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Sealy Mattress Co., 9.875s, 2007 275 283,937
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$1,336,137
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Containers - 1.0%
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Huntsman Packaging Corp., 13s, 2010 $230 $219,650
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Pliant Corp., 13s, 2010 425 405,875
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$625,525
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Corporate Asset-Backed - 4.5%
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Anthracite CDO Ltd., 6s, 2037## $450 $323,402
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DLJ Mortgage Acceptance Corp., 8s, 2003+ 803 803,000
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Falcon Auto Dealership LLC, 3.875s, 2023 (Interest Only) 707 134,423
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GMAC Commercial Mortgage Security, Inc., 6.02s, 2033 250 222,191
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Morgan Stanley Capital I, Inc., Class D, 7.709s, 2039 1,070 1,021,057
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Morgan Stanley Capital I, Inc., Class F, 7.709s, 2039 600 415,265
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$2,919,338
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Energy - Independent - 1.0%
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Belden & Blake Corp., 9.875s, 2007 $390 $368,550
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Continental Resources, Inc., 10.25s, 2008 300 294,750
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$663,300
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Entertainment - 1.1%
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Six Flags, Inc., 9.75s, 2013 $735 $720,300
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Forest & Paper Products - 1.0%
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Buckeye Technologies, Inc., 8s, 2010 $400 $378,000
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Fibermark, Inc., 10.75s, 2011 385 254,100
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$632,100
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Gaming & Lodging - 0.7%
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Corrections Corp. of America, 7.5s, 2011 $35 $36,575
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Resorts International Hotel, 11.5s, 2009 400 414,000
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$450,575
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Industrial - 0.9%
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Blount, Inc., 13s, 2009 $350 $334,250
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Motors & Gears, Inc., 10.75s, 2006 270 221,400
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$555,650
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Machinery & Tools - 1.1%
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Columbus McKinnon Corp., 8.5s, 2008 $225 $200,813
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Columbus McKinnon Corp., 10s, 2010## 20 21,200
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United Rentals North America, Inc., 7.75s, 2013## 500 498,750
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$720,763
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Medical & Health Technology & Services - 1.3%
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Alliance Imaging, Inc., 10.375s, 2011 $200 $211,500
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Beverly Enterprises, Inc., 9.625s, 2009 245 263,988
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Healthsouth Corp., 8.5s, 2008 260 230,100
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Universal Hospital Services, Inc., 10.125s, 2011## 140 145,250
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$850,838
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Metals & Mining - 0.7%
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Doe Run Resources Corp., 8.5s, 2008 $458 $160,323
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Kaiser Aluminum & Chemical Corp., 9.875s, 2049** 200 170,000
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Kaiser Aluminum & Chemical Corp., 12.75s, 2049** 465 69,750
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U.S. Steel Corp., 9.75s, 2010 50 52,750
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$452,823
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Natural Gas - Pipeline - 0.2%
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ANR Pipeline Co., 9.625s, 2021 $125 $141,250
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Oil Services - 0.3%
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Dresser, Inc., 9.375s, 2011 $185 $190,088
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Oils - 0.3%
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Citgo Petroleum Corp., 11.375s, 2011 $150 $169,500
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Printing & Publishing - 0.9%
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Hollinger International Publishing, Inc., 11.875s, 2011## $85 $93,500
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Mail-Well Corp., 8.75s, 2008 325 327,438
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R H Donnelley Finance Corp., 10.875s, 2012 150 178,875
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$599,813
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Stores - 2.3%
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Finlay Enterprises, Inc., 9s, 2008 $495 $496,856
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J.Crew Operating Corp., 10.375s, 2007 150 154,500
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J.Crew Operating Corp., 0s to 2005, 16s to 2008## 257 195,382
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PCA LLC, 11.875s, 2009 180 196,200
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Rite Aid Corp, 12.5s, 2006 40 46,600
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Rite Aid Corp., 9.5s, 2011 125 140,625
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Rite Aid Corp., 9.25s, 2013 250 268,750
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$1,498,913
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Supermarkets - 0.0%
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Fleming Cos., Inc., 9.25s, 2010** $125 $19,375
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Telecommunications - Wireline - 3.0%
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Qwest Capital Funding, Inc., 7.75s, 2006 $225 $223,875
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Qwest Services Corp., 13.5s, 2010## 600 700,500
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Qwest Services Corp., 8.875s, 2012## 110 124,300
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Time Warner Telecommunications LLC, 9.75s, 2008 340 348,500
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Worldcom, Inc., 7.5s, 2011** 1,580 580,650
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$1,977,825
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Utilities - Electric Power - 1.9%
-------------------------------------------------------------------------------------------------------
Dynegy, Inc., 6.875s, 2011 $585 $508,950
-------------------------------------------------------------------------------------------------------
NRG Energy, Inc., 6.5s, 2006** 358 171,684
-------------------------------------------------------------------------------------------------------
PSE&G Power LLC, 7.75s, 2007 50 50,500
-------------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.25s, 2010## 200 179,000
-------------------------------------------------------------------------------------------------------
Reliant Resources, Inc., 9.5s, 2013## 340 302,600
-------------------------------------------------------------------------------------------------------
$1,212,734
-------------------------------------------------------------------------------------------------------
Wireless Communications - 5.1%
-------------------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 0s to 2005, 12.87s to 2010 $750 $585,000
-------------------------------------------------------------------------------------------------------
Centennial Cellular Operating Co., 10.125s, 2013## 305 317,200
-------------------------------------------------------------------------------------------------------
Crown Castle International Corp., 0s to 2004,
10.375s to 2011 929 952,225
-------------------------------------------------------------------------------------------------------
MetroPCS, Inc., 10.75s, 2011## 335 331,650
-------------------------------------------------------------------------------------------------------
Nextel Communications, Inc., 9.95s, 2008 225 236,250
-------------------------------------------------------------------------------------------------------
Rural Cellular Corp., 9.75s, 2010 650 581,750
-------------------------------------------------------------------------------------------------------
Triton PCS, Inc., 8.75s, 2011 345 331,200
-------------------------------------------------------------------------------------------------------
$3,335,275
-------------------------------------------------------------------------------------------------------
Total U.S. Bonds $32,175,966
-------------------------------------------------------------------------------------------------------
Foreign Bonds - 9.3%
-------------------------------------------------------------------------------------------------------
Australia - 0.7%
-------------------------------------------------------------------------------------------------------
Burns Philip Capital Property Ltd., 9.75s, 2012 (Food &
Non Alcoholic Beverages)## $425 $433,500
-------------------------------------------------------------------------------------------------------
Brazil - 1.8%
-------------------------------------------------------------------------------------------------------
Banco Nacional de Desenvolvi, 8.754s, 2008 (Quasi-Government) $292 $284,700
-------------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 2.063s, 2012 579 486,360
-------------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8s, 2014 188 175,330
-------------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 2s, 2024 62 49,166
-------------------------------------------------------------------------------------------------------
Federal Republic of Brazil, 8.875s, 2024 254 210,185
-------------------------------------------------------------------------------------------------------
$1,205,741
-------------------------------------------------------------------------------------------------------
Bulgaria - 0.1%
-------------------------------------------------------------------------------------------------------
Republic of Bulgaria, 8.25s, 2015 $44 $50,050
-------------------------------------------------------------------------------------------------------
Canada - 0.7%
-------------------------------------------------------------------------------------------------------
Tembec Industry, Inc., 7.75s, 2012 (Forest & Paper Products) $500 $463,750
-------------------------------------------------------------------------------------------------------
Dominican Republic - 0.6%
-------------------------------------------------------------------------------------------------------
Dominican Republic, 9.04s, 2013## $489 $376,530
-------------------------------------------------------------------------------------------------------
Ecuador - 0.3%
-------------------------------------------------------------------------------------------------------
Republic of Ecuador, 7s, 2030 $300 $199,050
-------------------------------------------------------------------------------------------------------
France - 1.6%
-------------------------------------------------------------------------------------------------------
Crown European Holdings S.A., 10.875s, 2013 (Containers) $350 $399,000
-------------------------------------------------------------------------------------------------------
Rhodia S.A., 8.875s, 2011 (Chemicals)## 700 623,000
-------------------------------------------------------------------------------------------------------
$1,022,000
-------------------------------------------------------------------------------------------------------
Mexico - 0.5%
-------------------------------------------------------------------------------------------------------
Corparacion Durango S.A. de C.V., 13.75s, 2009 (Forest &
Paper Products)##** $258 $152,220
-------------------------------------------------------------------------------------------------------
Pemex Project Funding Master Trust, 8.625s, 2022 (Oil Services) 155 168,950
-------------------------------------------------------------------------------------------------------
$321,170
-------------------------------------------------------------------------------------------------------
Norway - 0.6%
-------------------------------------------------------------------------------------------------------
Ocean Rig Norway S.A., 10.25s, 2008 (Oil Services) $440 $400,400
-------------------------------------------------------------------------------------------------------
Panama - 0.4%
-------------------------------------------------------------------------------------------------------
Republic of Panama, 9.375s, 2029 $261 $296,235
-------------------------------------------------------------------------------------------------------
Philippines - 0.1%
-------------------------------------------------------------------------------------------------------
Republic of Philippines, 9.375s, 2017 $57 $60,491
-------------------------------------------------------------------------------------------------------
Poland - 0.8%
-------------------------------------------------------------------------------------------------------
PTC International Finance II S.A., 11.25s, 2009 (Wireless
Communications) $500 $546,250
-------------------------------------------------------------------------------------------------------
Russia - 0.8%
-------------------------------------------------------------------------------------------------------
AO Siberian Oil Co, 10.75s, 2009 (Energy - Integrated) $109 $116,358
-------------------------------------------------------------------------------------------------------
Gazprom, 9.625s, 2013 (Utilities - Gas)## 150 162,750
-------------------------------------------------------------------------------------------------------
Tyumen Oil Co., 11s, 2007 (Oil Services) 200 227,000
-------------------------------------------------------------------------------------------------------
$506,108
-------------------------------------------------------------------------------------------------------
Venezuela - 0.3%
-------------------------------------------------------------------------------------------------------
Republic of Venezuela, 10.75s, 2013## $227 $214,515
-------------------------------------------------------------------------------------------------------
Total Foreign Bonds $6,095,790
-------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $38,845,040) $38,271,756
-------------------------------------------------------------------------------------------------------
Stocks - 30.0%
-------------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
-------------------------------------------------------------------------------------------------------
U.S. Stocks - 28.4%
-------------------------------------------------------------------------------------------------------
Automotive - 0.9%
-------------------------------------------------------------------------------------------------------
Hayes Lemmerz International, Inc. 34,476 $561,614
-------------------------------------------------------------------------------------------------------
Banks & Credit Companies - 2.3%
-------------------------------------------------------------------------------------------------------
FleetBoston Financial Corp. 37,000 $1,494,430
-------------------------------------------------------------------------------------------------------
Basic Industry - 0.4%
-------------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp.* 16,980 $222,098
-------------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 5.0%
-------------------------------------------------------------------------------------------------------
Comcast Corp.* 30,400 $991,648
-------------------------------------------------------------------------------------------------------
Cumulus Media, Inc., "A"* 21,206 397,188
-------------------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc., "A"* 30,000 349,200
-------------------------------------------------------------------------------------------------------
Sirius Satellite Radio, Inc.* 647,247 1,521,031
-------------------------------------------------------------------------------------------------------
$3,259,067
-------------------------------------------------------------------------------------------------------
Business Services - 0.0%
-------------------------------------------------------------------------------------------------------
Anacomp, Inc.* 30 $302
-------------------------------------------------------------------------------------------------------
Chemicals - 0.0%
-------------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 1,212 $20,604
-------------------------------------------------------------------------------------------------------
Containers - 1.8%
-------------------------------------------------------------------------------------------------------
Owens Illinois, Inc.* 97,000 $1,193,100
-------------------------------------------------------------------------------------------------------
Electrical Equipment - 1.7%
-------------------------------------------------------------------------------------------------------
Tyco International Ltd. 51,500 $1,075,320
-------------------------------------------------------------------------------------------------------
Gaming & Lodging - 0.3%
-------------------------------------------------------------------------------------------------------
Pinnacle Entertainment, Inc.* 23,675 $207,156
-------------------------------------------------------------------------------------------------------
General Merchandise - 2.5%
-------------------------------------------------------------------------------------------------------
Sears, Roebuck & Co. 31,240 $1,644,161
-------------------------------------------------------------------------------------------------------
Metals & Mining - 1.7%
-------------------------------------------------------------------------------------------------------
Alcoa, Inc. 27,140 $856,810
-------------------------------------------------------------------------------------------------------
Commonwealth Industries, Inc. 39,700 271,945
-------------------------------------------------------------------------------------------------------
$1,128,755
-------------------------------------------------------------------------------------------------------
Oil Services - 5.1%
-------------------------------------------------------------------------------------------------------
BJ Services Co.* 21,300 $698,853
-------------------------------------------------------------------------------------------------------
Cooper Cameron Corp.* 15,930 682,123
-------------------------------------------------------------------------------------------------------
GlobalSantaFe Corp. 54,430 1,225,219
-------------------------------------------------------------------------------------------------------
Noble Corp.* 20,890 717,154
-------------------------------------------------------------------------------------------------------
$3,323,349
-------------------------------------------------------------------------------------------------------
Specialty Chemicals - 0.5%
-------------------------------------------------------------------------------------------------------
Atlantis Plastics, Inc.* 35,250 $314,077
-------------------------------------------------------------------------------------------------------
Telephone Services - 2.2%
-------------------------------------------------------------------------------------------------------
Adelphia Business Solutions* 40,000 $540
-------------------------------------------------------------------------------------------------------
NTL, Inc.* 6,317 389,948
-------------------------------------------------------------------------------------------------------
Verizon Communications, Inc. 31,400 1,055,040
-------------------------------------------------------------------------------------------------------
$1,445,528
-------------------------------------------------------------------------------------------------------
Utilities - Electric Power - 1.8%
-------------------------------------------------------------------------------------------------------
Calpine Corp.* 255,060 $1,175,827
-------------------------------------------------------------------------------------------------------
El Paso Electric Co.* 800 9,712
-------------------------------------------------------------------------------------------------------
$1,185,539
-------------------------------------------------------------------------------------------------------
Wireless Communications - 2.2%
-------------------------------------------------------------------------------------------------------
AT&T Wireless Services, Inc.* 195,470 $1,417,157
-------------------------------------------------------------------------------------------------------
Total U.S. Stocks $18,492,257
-------------------------------------------------------------------------------------------------------
Foreign Stocks - 1.6%
-------------------------------------------------------------------------------------------------------
Bermuda - 0.1%
-------------------------------------------------------------------------------------------------------
Global Crossings Holdings Ltd., 10.5s, Preferred
(Telecommunications - Wireline)** 10,525 $84,200
-------------------------------------------------------------------------------------------------------
Canada - 0.1%
-------------------------------------------------------------------------------------------------------
International Utility Structures, Inc. (Metals & Mining)* 254,700 $57,930
-------------------------------------------------------------------------------------------------------
Netherlands - 0.5%
-------------------------------------------------------------------------------------------------------
Completel Europe N.V. (Telephone Services)* 11,741 $313,534
-------------------------------------------------------------------------------------------------------
Sweden - 0.7%
-------------------------------------------------------------------------------------------------------
Song Networks Holding AB (Telephone Services) 66,675 $435,661
-------------------------------------------------------------------------------------------------------
United Kingdom - 0.2%
-------------------------------------------------------------------------------------------------------
Jazztel PLC (Telecommunications - Wireline)** 337,125 $152,654
-------------------------------------------------------------------------------------------------------
Total Foreign Stocks $1,043,979
-------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $25,895,392) $19,536,236
-------------------------------------------------------------------------------------------------------
Preferred Stocks - 3.5%
-------------------------------------------------------------------------------------------------------
Advertising & Broadcasting - 1.0%
-------------------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc., 10.75s##* 650 $653,250
-------------------------------------------------------------------------------------------------------
Automotive - 0.0%
-------------------------------------------------------------------------------------------------------
Hayes Lemmerz International, Inc., 8s* 114 $8,550
-------------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 2.5%
-------------------------------------------------------------------------------------------------------
Paxon Communications Corp., 14.25s 175 $1,645,000
-------------------------------------------------------------------------------------------------------
Telephone Services - 0.0%
-------------------------------------------------------------------------------------------------------
NTL, Inc., 10.5s 10 $47
-------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $1,996,579) $2,306,847
-------------------------------------------------------------------------------------------------------
Convertible Bonds - 1.9%
-------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
-------------------------------------------------------------------------------------------------------
United Kingdom - 1.9%
-------------------------------------------------------------------------------------------------------
Business Services - 1.8%
-------------------------------------------------------------------------------------------------------
Colt Telecom Group, 2s, 2006 EUR 1,000 $1,184,272
-------------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 0.1%
-------------------------------------------------------------------------------------------------------
Jazztel PLC, 12s, 2012** EUR 98 $66,044
-------------------------------------------------------------------------------------------------------
$1,250,316
-------------------------------------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $877,076) $1,250,316
-------------------------------------------------------------------------------------------------------
Convertible Preferred Stocks - 0.5%
-------------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
-------------------------------------------------------------------------------------------------------
Netherlands - 0.5%
-------------------------------------------------------------------------------------------------------
Completel Europe N.V. (Telecommunications - Wireline)* 117 $301,571
-------------------------------------------------------------------------------------------------------
Sweden - 0.0%
-------------------------------------------------------------------------------------------------------
Song Networks Holding AB (Telephone Services) 7,200 $29,519
-------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stocks (Identified Cost, $36,126) $331,090
-------------------------------------------------------------------------------------------------------
Warrants - 0.0%
-------------------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
-------------------------------------------------------------------------------------------------------
Anacomp, Inc. (Business Services)* 5,841 $409
-------------------------------------------------------------------------------------------------------
Doe Run Resources Corp. (Metals & Mining)* 2 0
-------------------------------------------------------------------------------------------------------
Ono Finance PLC (Broadcast & Cable TV)* 1,000 10
-------------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc. (Chemicals)* 2,003 20
-------------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Basic Industry)* 5,505 4,954
-------------------------------------------------------------------------------------------------------
Thermadyne Holdings Corp. (Basic Industry)* 3,330 3,330
-------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $123,377) $8,723
-------------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 21.0%
-------------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio,
at Identified Cost 13,644,323 $13,644,323
-------------------------------------------------------------------------------------------------------
Repurchase Agreement - 6.1%
-------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
-------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 10/31/03, due 11/03/03, total to be
received $3,945,345 (secured by various U.S. Treasury
and Federal Agency obligations in a jointly traded account),
at Cost $3,945 $3,945,000
-------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $85,362,913) $79,294,291
-------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (21.7)% (14,098,798)
-------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $65,195,493
-------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security - in default.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown in currencies other than the
U.S. dollar. A list of abbreviations is shown below.
EUR = Euro
See notes to financial statements.
---------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
---------------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 10/31/03
ASSETS
Investments, at value including $13,240,065 of
securities on loan (identified cost, $85,362,913) $79,294,291
-----------------------------------------------------------------------------------------------------
Cash 13,704
-----------------------------------------------------------------------------------------------------
Receivable for forward currency exchange contracts 20,507
-----------------------------------------------------------------------------------------------------
Receivable for investments sold 225,074
-----------------------------------------------------------------------------------------------------
Interest and dividends receivable 822,612
-----------------------------------------------------------------------------------------------------
Other assets 11,655
-----------------------------------------------------------------------------------------------------
Total assets $80,387,843
-----------------------------------------------------------------------------------------------------
LIABILITIES
Payable to dividend disbursing agent $50,071
-----------------------------------------------------------------------------------------------------
Payable for forward foreign currency exchange contracts 15,897
-----------------------------------------------------------------------------------------------------
Payable for investments purchased 1,150,076
-----------------------------------------------------------------------------------------------------
Collateral for securities loaned, at value 13,644,323
-----------------------------------------------------------------------------------------------------
Payable to affiliates
-----------------------------------------------------------------------------------------------------
Management fee 1,254
-----------------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fee 1,303
-----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 329,426
-----------------------------------------------------------------------------------------------------
Total liabilities $15,192,350
-----------------------------------------------------------------------------------------------------
Net assets $65,195,493
-----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $75,125,520
-----------------------------------------------------------------------------------------------------
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (6,063,576)
-----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and foreign
currency transactions (3,160,331)
-----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (706,120)
-----------------------------------------------------------------------------------------------------
Total $65,195,493
-----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding (6,912,014
less 256,600 treasury shares) 6,655,414
-----------------------------------------------------------------------------------------------------
Net asset value per share (net assets/shares of
beneficial interest outstanding) $9.80
-----------------------------------------------------------------------------------------------------
See notes to financial statements.
-----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
-----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It also
describes any gains and/or losses generated by fund operations.
FOR YEAR ENDED 10/31/03
INCOME
Interest $4,186,794
-----------------------------------------------------------------------------------------------------
Dividends 438,638
-----------------------------------------------------------------------------------------------------
Total investment income $4,625,432
-----------------------------------------------------------------------------------------------------
Expenses
-----------------------------------------------------------------------------------------------------
Management fee $534,688
-----------------------------------------------------------------------------------------------------
Trustees' compensation 57,047
-----------------------------------------------------------------------------------------------------
Administrative fee 5,523
-----------------------------------------------------------------------------------------------------
Investor communication expense 42,492
-----------------------------------------------------------------------------------------------------
Transfer and dividend disbursing agent fee 15,501
-----------------------------------------------------------------------------------------------------
Custodian fee 26,429
-----------------------------------------------------------------------------------------------------
Printing 18,706
-----------------------------------------------------------------------------------------------------
Postage 3,251
-----------------------------------------------------------------------------------------------------
Auditing fees 42,581
-----------------------------------------------------------------------------------------------------
Legal fees 752
-----------------------------------------------------------------------------------------------------
Miscellaneous 20,283
-----------------------------------------------------------------------------------------------------
Total expenses $767,253
-----------------------------------------------------------------------------------------------------
Fees paid indirectly (16,923)
-----------------------------------------------------------------------------------------------------
Net expenses $750,330
-----------------------------------------------------------------------------------------------------
Net investment income $3,875,102
-----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
-----------------------------------------------------------------------------------------------------
Investment transactions $631,307
-----------------------------------------------------------------------------------------------------
Foreign currency transactions (301,920)
-----------------------------------------------------------------------------------------------------
Net realized gain on investments and foreign currency
transactions $329,387
-----------------------------------------------------------------------------------------------------
Change in unrealized appreciation
-----------------------------------------------------------------------------------------------------
Investments $16,635,382
-----------------------------------------------------------------------------------------------------
Translation of assets and liabilities in foreign
currencies 23,924
-----------------------------------------------------------------------------------------------------
Net unrealized gain on investments and foreign currency
translation $16,659,306
-----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments and foreign
currency $16,988,693
-----------------------------------------------------------------------------------------------------
Increase in net assets from operations $20,863,795
-----------------------------------------------------------------------------------------------------
See notes to financial statements.
-----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF CHANGES IN NET ASSETS
-----------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting from operations, any
distributions, and any shareholder transactions.
FOR YEARS ENDED 10/31 2003 2002
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $3,875,102 $4,649,442
-----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions 329,387 (97,694)
-----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation 16,659,306 (5,698,466)
-------------------------------------------------------------- ----------- -----------
Increase (decrease) in net assets from operations $20,863,795 $(1,146,718)
-------------------------------------------------------------- ----------- -----------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(3,749,309) $(4,852,712)
-----------------------------------------------------------------------------------------------------
From net realized gain on investments and foreign
currency transactions (1,860,373) --
-----------------------------------------------------------------------------------------------------
In excess of net investment income -- (1,609,046)
-------------------------------------------------------------- ----------- -----------
Total distributions declared to shareholders $(5,609,682) $(6,461,758)
-------------------------------------------------------------- ----------- -----------
Net increase in net assets from trust share transactions $319,029 $632,359
-------------------------------------------------------------- ----------- -----------
Total increase (decrease) in net assets $15,573,142 $(6,976,117)
-------------------------------------------------------------- ----------- -----------
NET ASSETS
At beginning of period $49,622,351 $56,598,468
-----------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions in
excess of net investment income of $706,120 and
$817,777, respectively) $65,195,493 $49,622,351
-----------------------------------------------------------------------------------------------------
See notes to financial statements.
------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the past 5 years (or, if
shorter, the period of the fund's operation). Certain information reflects financial results for a single fund share. The total
returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund (assuming
reinvestment of all distributions). This information has been audited by the fund's independent auditors, whose report, together
with the fund's financial statements, are included in this report.
FOR YEARS ENDED 10/31
2003 2002 2001 2000 1999
Net asset value, beginning of period $7.50 $8.63 $11.67 $14.34 $13.76
------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)
Net investment income $0.59 $0.71 $0.77 $1.01 $0.57
------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency 2.56 (0.86) (2.16) (1.53) 1.66
------------------------------------------------- --------- ----------- ----------- ---------- ----------
Total from investment operations $3.15 $(0.15) $(1.39) $(0.52) $2.23
------------------------------------------------- --------- ----------- ----------- ---------- ----------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.57) $(0.74) $(0.77) $(1.01) $(0.57)
------------------------------------------------------------------------------------------------------------------------------
From net realized gain on investments and
foreign currency transactions (0.28) -- -- (0.95) (1.00)
------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- (0.24) (0.06) (0.01) (0.08)
------------------------------------------------------------------------------------------------------------------------------
From paid-in capital -- -- (0.82) (0.18) --
------------------------------------------------- --------- ----------- ----------- ---------- ----------
Total distributions declared to shareholders $(0.85) $(0.98) $(1.65) $(2.15) $(1.65)
------------------------------------------------- --------- ----------- ----------- ---------- ----------
Net asset value, end of period $9.80 $7.50 $8.63 $11.67 $14.34
------------------------------------------------- --------- ----------- ----------- ---------- ----------
Per share market value -- end of period $10.40 $7.25 $14.30 $13.75 $16.75
------------------------------------------------- --------- ----------- ----------- ---------- ----------
Total return (%) 58.07 (43.54) 16.99 (4.33) 11.08
------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND SUPPLEMENTAL DATA:
Expenses## 1.34 1.56 1.53 1.35 1.23
------------------------------------------------------------------------------------------------------------------------------
Net investment income(S) 6.75 8.39 7.49 7.46 3.79
------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 94 137 49 32 137
------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $65,195 $49,622 $56,598 $75,545 $91,603
------------------------------------------------------------------------------------------------------------------------------
(S) As required, effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change for
the year ended October 31, 2002 was to increase net investment income per share by $0.02, decrease net realized and unrealized
gains and losses per share by $0.02, and increase the ratio of net investment income to average net assets by 0.49%. Per
share, ratios, and supplemental data for periods prior to November 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 reductions from fees paid indirectly.
See notes to financial statements.
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Special Value Trust (the trust) is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
a non-diversified closed-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The trust can invest in high-yield securities rated below investment grade.
Investments in high-yield securities involve greater degrees of credit and
market risk than investments in higher-rated securities and tend to be more
sensitive to economic conditions. The 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 on the basis of quotes from brokers and dealers or on the basis of
valuations furnished by a pricing service. 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 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. If no sales are reported, as is the case for most
securities traded over the counter, securities are valued on the basis of
quotations obtained from brokers and dealers or on the basis of valuations
furnished by a pricing service. Forward contracts will be valued using a pricing
model taking into consideration market data from an external pricing source. Use
of the pricing services has been approved by the Board of Trustees. Short-term
obligations in the trust's portfolio are valued at amortized cost, which
constitutes fair value as determined by the Board of Trustees. Short-term
obligations with a remaining maturity in excess of 60 days will be valued upon
dealer-supplied valuations. Portfolio investments for which market quotations
are not readily available, or whose values have been materially affected by
events occurring after the close of their primary markets, are valued at fair
value as determined in good faith by or at 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 - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
DEFERRED TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan)
independent Trustees may elect to defer receipt of all or a portion of their
annual compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the trust or other MFS 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 $10,545 of Deferred Trustees'
Compensation.
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 in an amount at least equal to the market
value of the securities loaned. State Street provides the trust with
indemnification against Borrower default. The trust bears the risk of loss with
respect to the investment of cash collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the Borrower,
and is allocated between the trust and the lending agent. Income from securities
lending is included in interest income on the Statement of Operations. The
dividend and interest income earned on the securities loaned is accounted for in
the same manner as other dividend and interest income.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The trust may enter into
forward foreign currency exchange contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the trust may enter into contracts
to deliver or receive foreign currency it will receive from or require for its
normal investment activities. The trust may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. For non-hedging purposes, the
trust may enter into contracts with the intent of changing the relative exposure
of the trust's portfolio of securities to different currencies to take advantage
of anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement purposes in accordance
with accounting principles generally accepted in the United States of America.
All discount is accreted for tax reporting purposes as required by federal
income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date. Legal fees and other related
expenses incurred to preserve and protect the value of a security owned are
added to the cost of the security; other legal fees are expensed. Capital
infusions made directly to the security issuer, which are generally non-
recurring, incurred to protect or enhance the value of high-yield debt
securities, are reported as additions to the cost basis of the security. Costs
that are incurred to negotiate the terms or conditions of capital infusions or
that are expected to result in a plan of reorganization are reported as realized
losses. Ongoing costs incurred to protect or enhance an investment, or costs
incurred to pursue other claims or legal actions, are expensed.
For the year ended October 31, 2002, $203,396 was reclassified from interest
income to unrealized gain/loss due to accretion of discount on a debt security.
As a result, previously reported amounts have been reclassified. Net investment
income per share changed from $0.74 to $0.71 and the ratio of net investment
income to average daily net assets changed from 8.76% to 8.39%. The
reclassification had no effect on the trust's net assets, net asset value per
share, market value per share, total return nor fixed rate distributions paid to
shareholders.
FEES PAID INDIRECTLY - The trust's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
trust. This amount is shown as a reduction of total expenses on the Statement of
Operations.
TAX MATTERS AND DISTRIBUTIONS - The trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The trust
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the financial
statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, derivatives, defaulted bonds, and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended October 31, 2003
and October 31, 2002 was as follows:
10/31/03 10/31/02
Distributions declared from:
--------------------------------------------------------------------------------
Ordinary income $5,543,609 $6,461,758
--------------------------------------------------------------------------------
Long-term capital gain 66,073 --
--------------------------------------------------------------------------------
Total distributions declared $5,609,682 $6,461,758
--------------------------------------------------------------------------------
During the year ended October 31, 2003, accumulated distributions in excess of
net investment income increased by $14,136, accumulated net realized loss on
investments and foreign currency transactions increased by $108,068, and paid-
in capital increased by $122,204 due to differences between book and tax
accounting for 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 October 31, 2003, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $17,372
------------------------------------------------------------------
Unrealized depreciation (9,228,515)
------------------------------------------------------------------
Other temporary differences (718,884)
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(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities.
The management fee is computed daily and paid monthly at an annual rate of 0.68%
of the trust's average daily net assets and 3.40% of investment income.
Management fees incurred for the year ended October 31, 2003 were 0.93% of
average daily net assets on an annualized basis.
The trust pays compensation to the Independent Trustees ("Trustees") in the form
of both a retainer and attendance fees, and pays no compensation directly to its
Trustees who are officers of the investment adviser, or to officers of the
trust, all of whom receive remuneration for their services to the trust from
MFS. Certain officers and Trustees of the trust are officers or directors of MFS
and MFS Service Center, Inc. (MFSC). The trust has an unfunded, defined benefit
plan for inactive Trustees and an unfunded retirement benefit deferral plan for
active Trustees. Included in Trustees' compensation is a net increase of $40,206
as a result of the change in the trust's pension liability for active Trustees
and a pension expense of $7,799 for inactive trustees for the year ended October
31, 2003.
ADMINISTRATOR - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder communications,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the trust pays MFS an administrative fee
not to exceed the following annual percentage rates of the trust's average daily
net assets:
First $2 billion 0.0175%
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Next $2.5 billion 0.0130%
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Next $2.5 billion 0.0005%
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In excess of $7 billion 0.0000%
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TRANSFER AGENT - MFSC acts as registrar and dividend disbursing agent for the
Trust. The agreement provides that the Trust will pay MFSC an account
maintenance fee of no more than $9.00 and a dividend services fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of-pocket expenses.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$51,726,210 and $54,926,473, respectively.
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 $84,997,245
------------------------------------------------------------------
Gross unrealized depreciation $(12,972,261)
------------------------------------------------------------------
Gross unrealized appreciation 7,269,307
------------------------------------------------------------------
Net unrealized depreciation $(5,702,954)
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(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 6,655,413.944 full and fractional shares of beneficial interest.
Transactions in trust shares were as follows:
Year ended 10/31/03 Year ended 10/31/02
SHARES AMOUNT SHARES AMOUNT
Shares issued to shareholders in
reinvestment of distributions 35,268 $319,029 63,689 $632,359
------------------------------------------------------------------------------------------------------------
(6) LINE OF CREDIT
The trust and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. In addition, a commitment fee, based on the average daily unused
portion of the line of credit, is allocated among the participating funds at the
end of each quarter. The commitment fee allocated to the trust for the year
ended October 31, 2003, was $410. The trust had no borrowings during the year.
(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. 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)
-----------------------------------------------------------------------------------------------------------------
11/03/03 &
1/13/04 EUR 3,774,448 $4,398,019 $4,377,512 $20,507
---------- ---------- -------
$4,398,019 $4,377,512 $20,507
========== ========== =======
-----------------------------------------------------------------------------------------------------------------
-----------
PURCHASES
-----------
-----------------------------------------------------------------------------------------------------------------
11/03/03 EUR 1,887,224 $2,206,874 $2,190,977 $(15,897)
---------- ---------- -------
$2,206,874 $2,190,977 $(15,897)
========== ========== ========
-----------------------------------------------------------------------------------------------------------------
At October 31, 2003 the trust had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) RESTRICTED SECURITIES
The trust may invest not more than 20% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At October 31, 2003,
the trust owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 1.23% of net assets which may not be publicly sold
without registration under the Securities Act of 1933. The trust does not have
the right to demand that such securities be registered. The value of these
securities is determined by valuations furnished by dealers or by a pricing
service, or if not available, in good faith at the direction of the Trustees.
DATE OF PRINCIPAL
DESCRIPTION ACQUISITION AMOUNT COST VALUE
--------------------------------------------------------------------------------------------------------------------
DLJ Mortgage Acceptance Corp., 8s, 2003 4/6/01 803,000 $484,738 $803,000
(9) CHANGE IN ACCOUNTING PRINCIPLE
As Required, effective November 1, 2001 the trust adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies and began amortizing
premium and accreting discount on debt securities. The cumulative effect of this
accounting change had no impact on total net assets of the trust, but resulted
in a $99,487 increase in cost of securities and a corresponding $99,487 increase
in net unrealized depreciation, based on securities held by the trust on
November 1, 2001.
The effect of this change for the year ended October 31, 2002 was to increase
net investment income by $142,315, increase net unrealized depreciation by
$143,850, and decrease net realized losses by $1,535. The Statement of Changes
in Net Assets and Financial Highlights for prior periods has not been restated
to reflect this change in presentation.
(10) LEGAL PROCEEDINGS
Massachusetts Financial Services Company ("MFS"), the trust's investment
adviser, has been contacted by the Office of the New York State Attorney General
("NYAG") and the United States Securities and Exchange Commission ("SEC") in
connection with their investigations of practices in the mutual fund industry
identified as "market timing" mutual fund shares. MFS is cooperating with
respect to these investigations. MFS has been informed that the SEC is
considering whether to institute an enforcement action against MFS alleging
false and misleading disclosure in certain MFS fund prospectuses and breach of
fiduciary duty concerning market timing. The NYAG has also indicated that it is
considering whether to commence an enforcement proceeding against MFS relating
to these practices. MFS continues to discuss these matters with the SEC and the
NYAG. Certain other regulatory authorities are also conducting investigations
into these practices within the industry and have requested that MFS provide
information to them.
In December 2003, MFS and Sun Life Financial Inc., along with certain MFS funds
and Trustees who serve on the Board of Trustees of these MFS funds, were named
as defendants in class action lawsuits filed in the United States District
Court, District of Massachusetts seeking damages of unspecified amounts. The
lawsuits were purportedly filed on behalf of people who purchased, owned and/or
redeemed shares of certain MFS funds during specified periods. The suits allege
that certain defendants permitted market timing and late trading in the MFS
funds which allegedly caused financial injury to the funds' shareholders. The
defendants are reviewing the allegations and will respond appropriately.
Additional lawsuits based upon similar allegations may be filed in the future.
Any potential resolution of these matters may include, but not be limited to,
sanctions, penalties, damages or injunctions regarding MFS, restitution to
mutual fund shareholders and/or other financial penalties and structural changes
in the governance of MFS' mutual fund business.
These regulatory developments do not relate to closed-end investment companies
such as the trust, and the trust has not been named as a defendant in any of the
aforementioned lawsuits. Although MFS does not believe that these lawsuits will
have a material adverse effect on the trust, there can be no assurance that the
ongoing adverse publicity and/or other developments resulting from related
regulatory investigations or developments will not result in an increase in the
market discount of the trust's shares or other adverse consequences to the
trust.
-------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT
-------------------------------------------------------------------------------
To the Trustees and Shareholders of MFS Special Value Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Special Value Trust (the Fund), including the portfolio of investments, as of
October 31, 2003, and the related statement of operations for the year then
ended, the statement 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 auditing standards generally accepted
in the 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 as of October 31, 2003, 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 the
MFS Special Value Trust at October 31, 2003, 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 accounting principles generally
accepted in the United States.
ERNST & YOUNG LLP
Boston, Massachusetts
December 12, 2003
--------------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
--------------------------------------------------------------------------------------------------------------------
The following tables present certain information regarding the Trustees and officers of MFS Special Value Trust, including their
principal occupations, which, unless specific dates are shown, are of more than five years' duration, although the titles may not
have been the same throughout.
Name, age, position with the Trust, principal occupation, and other directorships(1)
INTERESTED TRUSTEES
JEFFREY L. SHAMES(2) (born 06/02/55) ABBY M. O'NEILL (born 04/27/28)
Chairman Trustee
Massachusetts Financial Services Company, Private investor; Rockefeller Financial Services, Inc.
Chairman (investment advisers), Chairman and
Chief Executive Officer
JOHN W. BALLEN(2) (born 09/12/59)
Trustee and President LAWRENCE T. PERERA (born 06/23/35)
Massachusetts Financial Services Company, Trustee
Chief Executive Officer and Director Hemenway & Barnes (attorneys), Partner
KEVIN R. PARKE(2) (born 12/14/59) WILLIAM J. POORVU (born 04/10/35)
Trustee Trustee
Massachusetts Financial Services Company, Private investor; Harvard University Graduate School
President, Chief Investment Officer and Director of Business Administration, Class of 1961 Adjunct
Professor in Entrepreneurship Emeritus;
INDEPENDENT TRUSTEES CBL & Associates Properties, Inc. (real estate
investment trust), Director
LAWRENCE H. COHN, M.D. (born 03/11/37)
Trustee J. DALE SHERRATT (born 09/23/38)
Brigham and Women's Hospital, Chief of Cardiac Trustee
Surgery; Harvard Medical School, Professor of Surgery Insight Resources, Inc. (acquisition planning
specialists), President; Wellfleet Investments
WILLIAM R. GUTOW (born 09/27/41) (investor in health care companies), Managing
Trustee General Partner (since 1993); Cambridge Nutraceuticals
Private investor and real estate consultant; (professional nutritional products), Chief Executive
Capitol Entertainment Management Company Officer (until May 2001)
(video franchise), Vice Chairman
ELAINE R. SMITH (born 04/25/46)
J. ATWOOD IVES (born 05/01/36) Trustee
Trustee Independent health care industry
Private investor; KeySpan Corporation (energy related consultant
services), Director; Eastern Enterprises (diversified
services company), Chairman, Trustee and Chief WARD SMITH (born 09/13/30)
Executive Officer (until November 2000) Trustee
Private investor
(1) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public
companies").
(2) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act) which is the
principal federal law governing investment companies like the Trust. The address of MFS is 500 Boylston Street, Boston,
Massachusetts 02116.
Trustees and Officers - continued
OFFICERS
JOHN W. BALLEN (born 09/12/59) ROBERT R. FLAHERTY (born 09/18/63)
Trustee and President Assistant Treasurer
Massachusetts Financial Services Company, Chief Massachusetts Financial Services Company, Vice
Executive Officer and Director President (since August 2000); UAM Fund Services,
Senior Vice President (prior to August 2000)
JAMES R. BORDEWICK, JR. (born 03/06/59)
Assistant Secretary and Assistant Clerk RICHARD M. HISEY (born 08/29/58)
Massachusetts Financial Services Company, Senior Treasurer
Vice President and Associate General Counsel Massachusetts Financial Services Company, Senior
Vice President (since July 2002); The Bank of New
STEPHEN E. CAVAN (born 11/06/53) York, Senior Vice President (September 2000 to July
Secretary and Clerk 2002); Lexington Global Asset Managers, Inc.,
Massachusetts Financial Services Company, Senior Executive Vice President and Chief Financial Officer
Vice President, General Counsel and Secretary (prior to September 2000); Lexington Funds,
Treasurer (prior to September 2000)
STEPHANIE A. DESISTO (born 10/01/53)
Assistant Treasurer ELLEN MOYNIHAN (born 11/13/57)
Massachusetts Financial Services Company, Vice Assistant Treasurer
President (since April 2003); Brown Brothers Massachusetts Financial Services Company,
Harriman & Co., Senior Vice President Vice President
(November 2002 to April 2003); ING Groep N.V./
Aeltus Investment Management, Senior Vice President JAMES O. YOST (born 06/12/60)
(prior to November 2002) Assistant Treasurer
Massachusetts Financial 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. Shames, Cohn, Sherratt and Smith, and Ms. O'Neill, have served in their capacity as Trustee of the Trust continuously
since originally elected or appointed. Messrs. Ballen, Gutow, Ives, Perera and Poorvu, and Ms. Smith, were elected by shareholders
and have served as Trustees of the Trust since January 1, 2002. Mr. Parke has served as a Trustee of the Trust since January 1,
2002.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the
investment adviser or distributor and, in the case of the officers, with certain affiliates of MFS. Each Trustee serves as a board
member of 110 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available without charge upon
request, by calling 1-800-225-2606.
----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA
02116-3741 02110
PORTFOLIO MANAGER JP Morgan Chase Manhattan Bank
John F. Addeo(1) One Chase Manhattan Plaza
New York, NY 10081
AUDITORS
Ernst & Young LLP
(1)MFS Investment Management
-------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2004, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2003.
The trust has designated $66,073 as a capital gain dividend for the year ended
October 31, 2003.
For the year ended October 31, 2003, the amount of distributions from income
eligible for the 70% dividends received deduction for corporations is 6.28%.
The trust hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. Complete information will be
reported in conjunction with your 2003 Form 1099-DIV.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS
-------------------------------------------------------------------------------
INVESTOR INFORMATION
Transfer Agent, Registrar and Dividend Disbursing Agent
Call 1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern
time
Write to: State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
A general description of the MFS Funds proxy voting policies is available
without charge, upon request, by calling 1-800-225-2606, by visiting the About
MFS section of mfs.com or by visiting the SEC's website at http://www.sec.gov.
NUMBER OF SHAREHOLDERS
As of October 31, 2003, our records indicate that there are 672 registered
shareholders and approximately 5,400 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the trust, please write or
call:
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
1-800-637-2304
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street
Boston, MA 02116-3741
(C) 2003 MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116
MFV-ANN-12/03 11M
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 the instructions to Form N-CSR that
applies to the Registrant's principal executive officer and principal financial
and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Messrs. J. Atwood Ives and Ward Smith, 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 the instructions to Form N-CSR. In addition, Messrs. Ives and Smith
are both "independent" members of the Audit Committee as defined in the
instructions to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time. [Applicable for annual reports filed for the first
fiscal year ending after December 15, 2003 (beginning with annual N-CSR filings
at the end of February, 2004 for December 31, 2003 reporting period.)]
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable at this time. [Applicable for closed-end fund annual reports
covering periods ending on or after the compliance date for the listing
standards applicable to the closed-end fund. Listed issuers must be in
compliance with the new listing rules by the earlier of the registrant's first
annual shareholders meeting after January 15, 2004 or October 31, 2004.]
ITEM 6. [RESERVED]
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
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 included within the MFS Family of Funds (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 the audit
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. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable at this time. [Required for closed-end funds for periods ending
on or after June 15, 2004 (beginning with N-CSR's filed at the end of August,
2004 for June 30, 2004 reporting period.)]
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not required at this time. [Required for reporting periods ending after January
1, 2004 (beginning with N-CSR's filed at the end of March 2004, for January 31,
2004 reporting period).]
ITEM 10. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this Form
N-CSR, the registrant's principal financial officer and principal
executive officer have concluded that those disclosure controls and
procedures provide reasonable assurance that the material information
required to be disclosed by the registrant on this report is recorded,
processed, summarized and reported within the time periods specified in
the Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant's internal
control over financial reporting.
ITEM 11. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) 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 23c-1 under the
Act (17 C.F.R. 270.23c-1) sent or given during the period covered by
the report by or on behalf of the registrant to 10 or more persons.
Not applicable at this time. [For closed-end funds for periods ending
on or after June 15, 2004 (beginning with N-CSR's filed at the end of
August 2004 for June 30, 2004 reporting period.)]
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of
Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C.
78r), or otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by reference into any
filing under the Securities Act of 1933 or the Exchange Act, except to the
extent that the registrant specifically incorporates it by reference:
Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) MFS SPECIAL VALUE TRUST
By (Signature and Title)* JOHN W. BALLEN
----------------------------------------------------
John W. Ballen, President
Date: January 5, 2004
---------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* JOHN W. BALLEN
----------------------------------------------------
John W. Ballen, President
(Principal Executive Officer)
Date: January 5, 2004
---------------------------
By (Signature and Title)* RICHARD M. HISEY
----------------------------------------------------
Richard M. Hisey, Treasurer
(Principal Financial Officer and Accounting Officer)
Date: January 5, 2004
---------------------------
* Print name and title of each signing officer under his or her signature.