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
(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)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2007
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ITEM 1. REPORTS TO STOCKHOLDERS.
M F S(R)
INVESTMENT MANAGEMENT
MFS(R) SPECIAL VALUE TRUST
[graphic omitted]
Annual report
10/31/07
MFV-ANN
MFS(R) Special Value Trust
LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 2
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MANAGEMENT REVIEW 3
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PERFORMANCE SUMMARY 6
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INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES
AND RISKS OF THE FUND 8
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PORTFOLIO MANAGERS' PROFILES 10
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 11
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PORTFOLIO OF INVESTMENTS 12
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STATEMENT OF ASSETS AND LIABILITIES 25
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STATEMENT OF OPERATIONS 26
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STATEMENTS OF CHANGES IN NET ASSETS 27
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FINANCIAL HIGHLIGHTS 28
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NOTES TO FINANCIAL STATEMENTS 29
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 38
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RESULTS OF SHAREHOLDER MEETING 39
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TRUSTEES AND OFFICERS 40
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 46
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PROXY VOTING POLICIES AND INFORMATION 51
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QUARTERLY PORTFOLIO DISCLOSURE 51
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FEDERAL TAX INFORMATION 51
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MFS(R) PRIVACY NOTICE 52
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CONTACT INFORMATION BACK COVER
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New York Stock Exchange Symbol: MFV
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NOT FDIC INSURED o MAY LOSE VALUE o
NO BANK OR CREDIT UNION GUARANTEE o NOT A DEPOSIT o
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR
NCUA/NCUSIF
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LETTER FROM THE CEO
[Photo of Robert J. Manning]
Dear Shareholders:
The past year has been a great example of why investors should keep their eyes
on the long term.
In 2006 the Dow Jones Industrial Average returned 19% and was fairly stable.
This year we have seen a greater level of volatility than has been experienced
in recent years. The Dow hit several new highs but also experienced swift
drops as a global credit crisis swept through markets, spurred by defaults on
U.S. subprime loans and a liquidity crunch. Still, even with this volatility,
the Dow ended the first three quarters of 2007 with a return near 13%.
U.S. Treasury bonds gained ground, especially in the third quarter as
investors sought less risky asset classes. The spreads of many lower quality
debt investments widened.
In 2007 the U.S. dollar fell against the euro, oil prices have hit their
highest levels yet, and gold has spiked to its steepest price in 28 years.
Around the globe, stocks sold off as risk aversion mounted. As we have said
before, markets can be volatile, and investors should make sure they have an
investment plan that can carry them through the peaks and troughs.
If you are focused on a long-term investment strategy, the short-term ups and
downs of the markets should not necessarily dictate portfolio action on your
part. In our view, investors who remain committed to a long-term plan are more
likely to achieve their financial goals.
In any market environment, we believe individual investors are best served by
following a three-pronged investment strategy of allocating their holdings
across the major asset classes, diversifying within each class, and regularly
rebalancing their portfolios to maintain their desired allocations. Of course,
these strategies cannot guarantee a profit or protect against a loss.
Investing and planning for the long term require diligence and patience, two
traits that in our experience are essential to capitalizing on the many
opportunities the financial markets can offer -- through both up and down
economic cycles.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
December 14, 2007
The opinions expressed in this letter are subject to change, may not be relied
upon for investment advice, and no forecasts can be guaranteed.
PORTFOLIO COMPOSITION
PORTFOLIO STRUCTURE (i)
Bonds 68.2%
Common Stocks 22.5%
Floating Rate Loans 4.3%
Preferred Stocks 1.3%
Cash & Other Net Assets 3.7%
TOP TEN HOLDINGS (i)
Amgen, Inc. 2.4%
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Conseco, Inc. 2.3%
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Pall Corp. 2.2%
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Boston Scientific Corp. 2.2%
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Nortel Networks Corp. 1.9%
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D.R. Horton, Inc. 1.8%
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Countrywide Financial Corp. 1.6%
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Tenet Healthcare Corp. 1.5%
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E*TRADE Financial Corp. 1.4%
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Masco Corp. 1.4%
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CREDIT QUALITY OF BONDS (r)
AAA 0.2%
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AA 0.4%
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A 0.2%
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BBB 2.3%
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BB 17.6%
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B 49.7%
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CCC 25.4%
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Not Rated 4.2%
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PORTFOLIO FACTS
Average Duration (d)(i) 4.2
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Average Life (i)(m) 7.4 yrs.
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Average Maturity (i)(m) 8.0 yrs.
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Average Credit Quality of Rated
Securities (long-term) (a) B
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Average Credit Quality of Rated
Securities (short-term) (a) A-1
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(a) The average credit quality of rated securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
(d) Duration is a measure of how much a bond's price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a bond with a
5-year duration is likely to lose about 5.00% of its value.
(i) For purposes of this presentation, the bond component includes both accrued
interest amounts and the equivalent exposure from any derivative holdings,
if applicable.
(m) The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which have
been pre-refunded or pre-paid to an earlier date or which have a mandatory
put date prior to the stated maturity. The average life shown takes into
account these earlier dates.
(r) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based on
the rating assigned by Fitch, Inc. For those portfolios that hold a security
which is not rated by any of the three agencies, the security is considered
Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed
securities, if any, are included in the "AAA"-rating category. Percentages
are based on the total market value of investments as of 10/31/07.
Percentages are based on net assets as of 10/31/07, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
MANAGEMENT REVIEW
SUMMARY OF RESULTS
MFS Special Value Trust (the fund or trust) is a closed-end fund and maintains
a portfolio that includes investments in fixed income and equity securities.
For the twelve months ended October 31, 2007, the MFS Special Value Trust
provided a total return of 5.11%, at net asset value. This compares with
returns of 8.07%, 6.75%, and 10.83% for the trust's benchmarks, the JPMorgan
Emerging Markets Bond Index Global (EMBI Global Index), the Lehman Brothers
U.S. High-Yield Corporate Bond Index (Lehman Index), and the Russell 1000 Value
Index (Russell Index), respectively. The EMBI Global Index was added as a
benchmark for the trust, effective August 1, 2007, because it is believed that
the addition of this index more closely corresponds to the investment objective
and policies of the trust.
MARKET ENVIRONMENT
The U.S. economy continues to decouple from the rest of the world. Despite
seemingly robust growth rates during the second and third quarters of 2007,
underlying economic activity in the U.S. remains muted relative to other major
economies. Overall, global economies have seen moderate to strong growth over
the last twelve months as domestic demand improves and world trade accelerates.
With the strong global growth, however, has come increased concern about rising
global inflation, especially as capacity becomes more constrained, wages rise,
and energy and food prices advance. During the reporting period, global central
banks tightened monetary conditions, which in turn pushed global bond yields to
their highest levels during this economic expansion.
However, beginning in late July, heightened uncertainty and distress concerning
the subprime mortgage market caused several global credit markets to seize up,
forcing central banks to inject liquidity and to reassess their tightening
biases as sovereign bond yields declined and credit spreads widened. While
credit conditions improved somewhat by late October as the Federal Reserve
Board cut interest rates, the level of market turbulence remains significant.
Increased market volatility has also been exacerbated by U.S. home
foreclosures, falling housing prices, and a weakening trend in the labor
market. Despite increased volatility across all asset classes and the widening
in credit spreads, global equity markets remained elevated, generally having
erased losses incurred earlier in the summer.
DETRACTORS FROM PERFORMANCE
Within the fixed income portion of the MFS Special Value Trust, exposures to
"B" rated(s) and "CCC" rated securities along with exposure to the financial
sector held back results relative to the Lehman Index. Overall security
selection was another negative factor; positions that detracted from
performance included the bonds of Realogy Corp., Anthracite, Propex Fabrics,
Tropicana Entertainment(g), Harrah's, Freescale Semiconductor, and General
Motors Acceptance Corp.
Within the equity portion of the portfolio, stock selection in the technology
sector hurt performance relative to the Russell Index. Global
telecommunications equipment company Nortel Networks(aa) and network security
software company Symantec(g) were among the top detractors. Symantec reported
that second half 2007 results might be lower than the consensus expectation,
due in part to an uncertain economic environment.
The combination of stock selection and an overweighted position in the autos
and housing sector also had a negative impact on results. Homebuilder D.R.
Horton and home improvement products maker Masco held back the sector's
performance as both companies suffered amid the slowing housing market.
Stock selection in the financial services sector also weighed on relative
returns. Poor-performing stocks within this sector included mortgage lending
firm Countrywide Financial, electronic brokerage firm E*TRADE Financial, and
insurance company Conseco.
Stocks in other sectors that hampered results included health services provider
Tenet Healthcare and medical device maker Boston Scientific. Not owning
strong-performing integrated oil and gas company Exxon Mobil also hurt.
CONTRIBUTORS TO PERFORMANCE
Within the fixed income portion of the portfolio, the portfolio's higher yield
in comparison to that of the benchmark was a positive factor contributing to
relative performance. Top performing securities in the portfolio were the debt
of FMG Finance, Republic of Argentina, and Hospital Corporation of America
(HCA).
Within the equity portion of the portfolio, stock selection in the basic
materials sector bolstered relative returns. Package manufacturer Owens-
Illinois(g) was the strongest contributor in the sector. Owens-Illinois
reported first quarter 2007 earnings that exceeded consensus expectations. The
company cited better glass factory operating performance as one of the factors
in improved profitability.
Elsewhere, specialty pharmaceutical company Warner Chilcott(aa)(g), filtration
and separation systems manufacturer Pall Corp., and drilling rig operators
GlobalSantaFe(aa)(g) helped results.
Respectfully,
John Addeo David Cole Kenneth Enright
Portfolio Manager Portfolio Manager Portfolio Manager
(aa) Security is not a benchmark constituent.
(g) Security was not held in the portfolio at period end.
(s) Bonds rated "BBB", "Baa", or higher are considered investment grade;
bonds rated "BB", "Ba", or below are considered non-investment grade. The
primary source for bond quality ratings is Moody's Investors Service. If
not available, ratings by Standard & Poor's are used, else ratings by
Fitch, Inc. For securities which are not rated by any of the three
agencies, the security is considered Not Rated.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market or
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or an indication of
trading intent on behalf of any MFS portfolio. References to specific
securities are not recommendations of such securities, and may not be
representative of any MFS portfolio's current or future investments.
Note to Shareholders: Effective November 28, 2007, Kenneth Enright was no longer
a portfolio manager of the Trust.
PERFORMANCE SUMMARY THROUGH 10/31/07
The following chart represents the fund's historical performance in comparison
to its benchmarks. Investment return and principal value will fluctuate, and
shares, when sold, may be worth more or less than their original cost; current
performance may be lower or higher than quoted. The performance shown does not
reflect the deduction of taxes, if any, that a shareholder would pay on fund
distributions or the sale of fund shares.
PRICE SUMMARY
Year ended 10/31/07
Date Price
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Net Asset Value 10/31/07 $9.08
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10/31/06 $9.52
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New York Stock Exchange Price 10/31/07 $8.44
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2/06/07 (high)(t) $11.50
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8/16/07 (low) (t) $8.08
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10/31/06 $10.91
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TOTAL RETURNS VS BENCHMARKS
Year ended 10/31/07
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New York Stock Exchange Price (r) (14.74)%
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Net Asset Value (r) 5.11%
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JPMorgan Emerging Markets Bond Index Global (f) 8.07%
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Lehman Brothers U.S. High-Yield Corporate Bond Index(f) 6.75%
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Russell 1000 Value Index (f) 10.83%
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(f) Source: FactSet Research Systems Inc.
(r) Includes reinvestment of dividends and capital gain distributions.
(t) For the period November 1, 2006 through October 31, 2007.
INDEX DEFINITIONS
JPMorgan Emerging Markets Bond Index Global (EMBI Global) - measures the
performance of U.S.-dollar-denominated debt instruments issued by emerging
market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds.
Lehman Brothers U.S. High-Yield Corporate Bond Index - measures the universe of
non-investment grade, fixed rate debt. Eurobonds and debt issues from countries
designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are
excluded.
Russell 1000 Value Index - constructed to provide a comprehensive barometer for
the value securities in the large-cap segment of the U.S. equity universe.
Companies in this index generally have lower price-to-book ratios and lower
forecasted growth values.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The fund's shares may trade at a discount to net asset value. Shareholders do
not have the right to cause the fund to repurchase their shares at net asset
value. When fund shares trade at a premium, buyers pay more than the net asset
value underlying fund shares, and shares purchased at a premium would receive
less than the amount paid for them in the event of the fund's liquidation. As
a result, the total returns that are calculated based on the net asset value
and New York Stock Exchange prices can be different.
The fund'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. It may also result
in a recharacterization of what economically represents a return of capital to
ordinary income. In addition, distributions of current year long-term gains
may be recharacterized as ordinary income. Returns of shareholder capital have
the effect of reducing the fund's assets and may increase the fund's expense
ratio.
The fund's target annual distribution rate is calculated based on the fund's
average daily net asset value, not a fixed share price, and the fund's
dividend amount will fluctuate with changes in the fund's average daily net
assets.
From time to time the fund may receive proceeds from litigation settlements,
without which performance would be lower.
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.
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS
OF THE FUND
INVESTMENT OBJECTIVE
The fund's investment objective is to seek high current income, but may also
consider capital appreciation. The fund's objective may be changed without
shareholder approval.
PRINCIPAL INVESTMENT STRATEGIES
MFS normally invests the fund's assets primarily in debt instruments. MFS
normally invests the fund's assets in U.S. Government securities, foreign
government securities, mortgage backed and other asset-backed securities of
U.S. and foreign issuers, corporate bonds of U.S. and foreign issuers, debt
instruments of issuers located in emerging market countries, and equity
securities. MFS allocates the fund's assets across these categories with a view
toward broad diversification across and within these categories. MFS may invest
up to 100% of the fund's assets in lower quality debt instruments, including
those that are in default.
MFS may invest the fund's assets in foreign securities, including emerging
market securities.
The fund seeks to make a monthly distribution at an annual fixed rate of up to
10% of the fund's average monthly net asset value.
MFS may invest the fund's assets in mortgage dollar rolls.
MFS may use derivatives for different purposes, including to earn income and
enhance returns, to increase or decrease exposure to a particular market, to
manage or adjust the risk profile of the fund, or as alternatives to direct
investments.
MFS uses a bottom-up investment approach in buying and selling investments for
the fund. Investments are selected primarily based on fundamental analysis of
instruments and their issuers in light of current market, economic, political,
and regulatory conditions. Factors considered may include the instrument's
credit quality, collateral characteristics, and indenture provisions, and the
issuer's management ability, capital structure, leverage, and ability to meet
its current obligations. Quantitative analysis of the structure of the
instrument and its features may also be considered.
PRINCIPAL RISKS
Stock markets are volatile and can decline due to adverse issuer, market,
industry, political, regulatory or economic conditions. The value of the
portfolio's equity investments will fluctuate in response to many factors
including company specific factors as well as general market, economic,
political and regulatory conditions. Foreign investments can be more volatile
than U.S. investments. Changes in currency exchange rates can affect the U.S.
dollar rate of foreign currency investments and investments denominated in
foreign currency. The portfolio's yield and share prices change daily based on
the credit quality of its investments and changes in interest rates. In
general, the value of debt securities will decline when interest rates rise and
will increase when interest rates fall. Debt securities with longer maturity
dates will generally be subject to greater price fluctuations than those with
shorter maturities. Mortgage securities are subject to prepayment risk which
can offer less potential for gains in a declining interest rate environment and
greater potential for loss in a rising interest rate environment. Derivatives
can be highly volatile and involve risks in addition to those of the underlying
indicator's in whose value the derivative is based. Gains or losses from
derivatives can be substantially greater than the derivatives' original cost.
Lower quality debt securities involve substantially greater risk of default and
their value can decline significantly over time. When you sell your shares,
they may be worth more or less than the amount you paid for them. Please see
the prospectus for further information regarding these and other risk
considerations.
A copy of the fund's prospectus is available on the EDGAR database on the
Securities and Exchange Commission's Internet Web site at http://sec.gov.
PORTFOLIO MANAGERS' PROFILES
John Addeo -- Investment Officer of MFS; employed in the
investment management area of MFS since 1998.
Portfolio manager of the Trust since 2002.
David Cole -- Investment Officer of MFS; employed in the
investment management area of MFS since 2004.
High Yield Analyst at Franklin Templeton
Investments from 1999 to 2004. Portfolio manager
of the Trust since 2006.
Kenneth Enright -- Investment Officer of MFS; employed in the
investment management area of MFS since 1986.
Portfolio manager of the Trust since 2004.
Note to Shareholders: Effective November 28, 2007, Kenneth Enright was no longer
a portfolio manager of the Trust.
DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN
The fund offers a Dividend Reinvestment and Cash Purchase Plan that allows you
to reinvest either all of the distributions paid by the fund or only the long-
term capital gains. Purchases are made at the market price unless that price
exceeds the net asset value (the shares are trading at a premium). If the
shares are trading at a premium, purchases will be made at a discounted price
of either the net asset value or 95% of the market price, whichever is greater.
Twice each year you can also buy shares. Investments may be made in any amount
over $100 in January and July on the 15th of the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee, you
can ask the firm or nominee to participate in the plan on your behalf. If the
nominee does not offer the plan, you may wish to request that your shares be
re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the fund. However, when shares are bought
on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the transaction expenses, including
commissions. The automatic reinvestment of distributions does not relieve you
of any income tax that may be payable (or required to be withheld) on the
distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 9 a.m. to 5 p.m. Eastern time. Please have
available the name of the fund and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. Please call for additional details. When you
withdraw from the plan, you can receive the value of the reinvested shares in
one of two ways: a check for the value of the full and fractional shares, or a
certificate for the full shares and a check for the fractional shares.
Effective May 1, 2007, Computershare Trust Company, N.A. (the Transfer Agent
for the fund) became the agent for the plan.
PORTFOLIO OF INVESTMENTS
10/31/07
The Portfolio of Investments is a complete list of all securities owned by your trust. It is categorized by
broad-based asset classes.
Bonds - 66.7%
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ISSUER SHARES/PAR VALUE ($)
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Aerospace - 1.5%
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Bombardier, Inc., 8%, 2014 (n) $ 225,000 $ 234,000
Hawker Beechcraft Acquisition Co. LLC, 9.75%, 2017 (n) 375,000 381,563
Vought Aircraft Industries, Inc., 8%, 2011 340,000 337,875
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$ 953,438
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Airlines - 0.8%
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Continental Airlines, Inc., 6.795%, 2018 $ 280,692 $ 269,464
Continental Airlines, Inc., 8.307%, 2018 202,285 202,791
Continental Airlines, Inc., 7.566%, 2020 7,325 7,069
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$ 479,324
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Apparel Manufacturers - 1.0%
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Levi Strauss & Co., 9.75%, 2015 $ 345,000 $ 360,094
Propex Fabrics, Inc., 10%, 2012 395,000 252,800
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$ 612,894
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Asset Backed & Securitized - 2.9%
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Anthracite Ltd., CDO, 6%, 2037 (z) $ 450,000 $ 292,535
Asset Securitization Corp., FRN, 8.355%, 2029 (z) 700,000 723,625
Falcon Franchise Loan LLC, FRN, 3.689%, 2025 (i)(z) 523,856 67,546
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.062%, 2017 95,000 91,150
Merrill Lynch Mortgage Trust, FRN, 5.83%, 2017 95,000 89,877
Morgan Stanley Capital I, Inc., FRN, 1.434%, 2039 (i)(n) 697,506 32,832
Preferred Term Securities XII Ltd., 9.8%, 2033 (e)(z) 225,000 162,000
Preferred Term Securities XVI Ltd., 14%, 2035 (e)(z) 300,000 240,000
Preferred Term Securities XVII Ltd., 9.3%, 2035 (e)(z) 187,000 134,640
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$ 1,834,205
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Automotive - 4.2%
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Allison Transmission, Inc., 11%, 2015 (z) $ 410,000 $ 417,688
Ford Motor Credit Co., 8.625%, 2010 125,000 121,532
Ford Motor Credit Co. LLC, 9.75%, 2010 735,000 731,920
Ford Motor Credit Co. LLC, 7%, 2013 174,000 156,186
Ford Motor Credit Co. LLC, 8%, 2016 230,000 212,933
Ford Motor Credit Co. LLC., FRN, 7.992%, 2012 125,000 115,722
General Motors Corp., 8.375%, 2033 547,000 497,770
Goodyear Tire & Rubber Co., 9%, 2015 153,000 167,344
TRW Automotive, Inc., 7%, 2014 (n) 215,000 209,625
-----------
$ 2,630,720
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Broadcasting - 5.3%
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Allbritton Communications Co., 7.75%, 2012 $ 264,000 $ 267,960
Bonten Media Acquisition Co., 9%, 2015 (n)(p) 165,000 151,594
CanWest MediaWorks LP, 9.25%, 2015 (n) 130,000 131,950
Clear Channel Communications, Inc., 5.5%, 2014 235,000 187,158
Inmarsat Finance II PLC, 0% to 2008, 10.375% to 2012 360,000 347,400
Intelsat Bermuda Ltd., 11.25%, 2016 345,000 370,875
Intelsat Corp., 0% to 2010, 9.25% to 2015 180,000 148,050
Intelsat Ltd., FRN, 11.409%, 2013 80,000 83,400
Intelsat Subsidiary Holding Co. Ltd., 8.625%, 2015 135,000 137,025
LBI Media Holdings, Inc., 0% to 2008, 11% to 2013 875,000 801,719
LBI Media, Inc., 8.5%, 2017 (n) 130,000 131,300
Univision Communications, Inc., 9.75%, 2015 (n)(p) 595,000 583,100
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$ 3,341,531
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Brokerage & Asset Managers - 0.2%
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Nuveen Investments, Inc., 10.5%, 2015 (z) $ 130,000 $ 130,000
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Building - 1.7%
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Interface, Inc., 10.375%, 2010 $ 180,000 $ 190,800
Interface, Inc., 9.5%, 2014 170,000 179,350
Nortek Holdings, Inc., 0% to 2009, 10.75% to 2014 362,000 237,110
Nortek Holdings, Inc., 8.5%, 2014 175,000 154,875
Ply Gem Industries, Inc., 9%, 2012 375,000 305,625
-----------
$ 1,067,760
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Business Services - 1.0%
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Nortel Networks Corp., 10.75%, 2016 (n) $ 60,000 $ 62,550
SunGard Data Systems, Inc., 10.25%, 2015 555,000 578,588
-----------
$ 641,138
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Cable TV - 1.9%
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CCH I Holdings LLC, 11%, 2015 $ 368,000 $ 356,960
CCO Holdings LLC, 8.75%, 2013 95,000 95,000
CSC Holdings, Inc., 6.75%, 2012 215,000 208,013
Kabel Deutschland GmbH, 10.625%, 2014 230,000 249,550
NTL Cable PLC, 9.125%, 2016 173,000 182,515
Videotron Ltee, 6.875%, 2014 120,000 119,700
-----------
$ 1,211,738
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Chemicals - 3.0%
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Innophos, Inc., 8.875%, 2014 $ 230,000 $ 231,725
Koppers Holdings, Inc., 0% to 2009, 9.875% to 2014 547,000 469,053
Koppers, Inc., 9.875%, 2013 150,000 158,625
Momentive Performance Materials, Inc., 9.75%, 2014 (z) 200,000 195,000
Momentive Performance Materials, Inc., 11.5%, 2016 (n) 250,000 241,250
Mosaic Co., 7.625%, 2016 (n) 230,000 247,825
Nalco Co., 8.875%, 2013 320,000 336,800
-----------
$ 1,880,278
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Computer Software - 0.4%
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First Data Corp., 9.875%, 2015 (z) $ 240,000 $ 229,800
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Consumer Goods & Services - 3.4%
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ACCO Brands Corp., 7.625%, 2015 $ 250,000 $ 237,500
Affinion Group, Inc., 11.5%, 2015 195,000 203,288
Del Laboratories, Inc., 8%, 2012 225,000 216,000
GEO Group, Inc., 8.25%, 2013 210,000 212,625
Jarden Corp., 7.5%, 2017 180,000 171,000
Kar Holdings, Inc., 10%, 2015 (n) 320,000 305,600
Realogy Corp., 10.5%, 2014 (n) 200,000 166,250
Realogy Corp., 12.375%, 2015 (n) 310,000 226,300
Visant Holding Corp., 8.75%, 2013 245,000 251,125
Vitro S.A. De C.V., 8.625%, 2012 4,000 3,990
Vitro S.A.B. De C.V., 9.125%, 2017 121,000 119,488
-----------
$ 2,113,166
--------------------------------------------------------------------------------------------------------------
Containers - 0.7%
--------------------------------------------------------------------------------------------------------------
Crown Americas, 7.625%, 2013 $ 75,000 $ 76,313
Graham Packaging Co. LP, 9.875%, 2014 265,000 262,350
Owens-Brockway Glass Container, Inc., 8.25%, 2013 105,000 109,200
-----------
$ 447,863
--------------------------------------------------------------------------------------------------------------
Electronics - 1.5%
--------------------------------------------------------------------------------------------------------------
Avago Technologies Finance, 11.875%, 2015 $ 170,000 $ 190,400
Freescale Semiconductor, Inc., 10.125%, 2016 530,000 480,313
Spansion LLC, 11.25%, 2016 (n) 300,000 288,375
-----------
$ 959,088
--------------------------------------------------------------------------------------------------------------
Emerging Market Quasi-Sovereign - 0.1%
--------------------------------------------------------------------------------------------------------------
OAO Gazprom, 9.625%, 2013 $ 60,000 $ 69,150
--------------------------------------------------------------------------------------------------------------
Emerging Market Sovereign - 0.6%
--------------------------------------------------------------------------------------------------------------
Republic of Argentina, 7%, 2017 $ 234,000 $ 197,361
Republic of Ecuador, 10%, 2030 134,000 127,970
Republic of Panama, 6.7%, 2036 28,000 29,400
-----------
$ 354,731
--------------------------------------------------------------------------------------------------------------
Energy - Independent - 3.1%
--------------------------------------------------------------------------------------------------------------
Chaparral Energy, Inc., 8.875%, 2017 (n) $ 285,000 $ 266,475
Chesapeake Energy Corp., 6.375%, 2015 260,000 252,200
Chesapeake Energy Corp., 6.875%, 2016 80,000 79,600
Energy Partners Ltd., 9.75%, 2014 (n) 125,000 123,750
Forest Oil Corp., 7.25%, 2019 (n) 120,000 120,000
Hilcorp Energy I LP, 7.75%, 2015 (n) 145,000 142,644
Hilcorp Energy I LP, 9%, 2016 (n) 200,000 207,500
Mariner Energy, Inc., 8%, 2017 220,000 217,250
OPTI Canada, Inc., 8.25%, 2014 (n) 220,000 220,550
Plains Exploration & Production Co., 7%, 2017 350,000 332,500
-----------
$ 1,962,469
--------------------------------------------------------------------------------------------------------------
Entertainment - 0.9%
--------------------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 11%, 2016 $ 220,000 $ 238,150
Marquee Holdings, Inc., 0% to 2009, 12% to 2014 415,000 351,713
-----------
$ 589,863
--------------------------------------------------------------------------------------------------------------
Financial Institutions - 1.3%
--------------------------------------------------------------------------------------------------------------
General Motors Acceptance Corp., 6.875%, 2011 $ 469,000 $ 432,236
General Motors Acceptance Corp., 6.75%, 2014 266,000 235,701
Residential Capital LLC, 7.125%, 2008 110,000 92,675
Residential Capital LLC, 7.5%, 2012 24,000 17,520
-----------
$ 778,132
--------------------------------------------------------------------------------------------------------------
Food & Beverages - 1.2%
--------------------------------------------------------------------------------------------------------------
ARAMARK Corp., 8.5%, 2015 $ 470,000 $ 475,875
Dean Foods Co., 7%, 2016 300,000 280,500
-----------
$ 756,375
--------------------------------------------------------------------------------------------------------------
Forest & Paper Products - 1.1%
--------------------------------------------------------------------------------------------------------------
Abitibi-Consolidated, Inc., 7.4%, 2018 $ 130,000 $ 91,650
Canada Paper Corp., 8.625%, 2011 40,000 31,600
Jefferson Smurfit Corp., 8.25%, 2012 210,000 210,000
JSG Funding PLC, 7.75%, 2015 30,000 29,550
Millar Western Forest Products, Ltd., 7.75%, 2013 385,000 298,375
-----------
$ 661,175
--------------------------------------------------------------------------------------------------------------
Gaming & Lodging - 4.7%
--------------------------------------------------------------------------------------------------------------
Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (n) $ 230,000 $ 215,050
Harrah's Entertainment, Inc., 5.75%, 2017 815,000 601,063
Harrah's Operating Co., Inc., 5.375%, 2013 150,000 120,598
Isle of Capri Casinos, Inc., 7%, 2014 245,000 217,438
MGM Mirage, Inc., 7.5%, 2016 320,000 318,000
MTR Gaming Group, Inc., 9%, 2012 80,000 80,000
NCL Corp. Ltd., 10.625%, 2014 360,000 364,500
Pinnacle Entertainment, Inc., 8.25%, 2012 195,000 200,850
Station Casinos, Inc., 6.5%, 2014 360,000 300,600
Wimar Opco LLC, 9.625%, 2014 (n) 410,000 307,500
Wynn Las Vegas LLC, 6.625%, 2014 230,000 225,975
-----------
$ 2,951,574
--------------------------------------------------------------------------------------------------------------
Industrial - 1.1%
--------------------------------------------------------------------------------------------------------------
Blount, Inc., 8.875%, 2012 $ 190,000 $ 192,850
JohnsonDiversey Holdings, Inc., "B", 9.625%, 2012 465,000 482,438
Wesco Distribution, Inc., 7.5%, 2017 30,000 28,050
-----------
$ 703,338
--------------------------------------------------------------------------------------------------------------
Insurance - Property & Casualty - 0.4%
--------------------------------------------------------------------------------------------------------------
USI Holdings Corp., 9.75%, 2015 (n) $ 270,000 $ 238,275
--------------------------------------------------------------------------------------------------------------
Machinery & Tools - 0.2%
--------------------------------------------------------------------------------------------------------------
Case New Holland, Inc., 7.125%, 2014 $ 140,000 $ 144,900
--------------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 6.1%
--------------------------------------------------------------------------------------------------------------
Accellent, Inc., 10.5%, 2013 $ 340,000 $ 320,450
Advanced Medical Optics, Inc., 7.5%, 2017 95,000 89,538
Community Health Systems, Inc., 8.875%, 2015 (n) 335,000 339,188
DaVita, Inc., 6.625%, 2013 80,000 79,600
DaVita, Inc., 7.25%, 2015 150,000 151,688
HCA, Inc., 9%, 2014 320,000 313,283
HCA, Inc., 6.375%, 2015 170,000 145,138
HCA, Inc., 9.25%, 2016 620,000 652,550
HealthSouth Corp., 10.75%, 2016 345,000 363,975
LVB Acquisition Merger Sub, Inc., 10%, 2017 (z) 125,000 128,438
LVB Acquisition Merger Sub, Inc., 11.625%, 2017 (z) 135,000 137,531
Psychiatric Solutions, Inc., 7.75%, 2015 210,000 213,675
Surgical Care Affiliates, Inc., 10%, 2017 (n) 185,000 177,600
U.S. Oncology, Inc., 10.75%, 2014 350,000 364,000
Universal Hospital Services, Inc., 8.5%, 2015 (n)(p) 130,000 132,275
Universal Hospital Services, Inc., FRN, 8.759%, 2015 (n) 35,000 35,088
VWR Funding, Inc., 10.25%, 2015 (n)(p) 200,000 196,000
-----------
$ 3,840,017
--------------------------------------------------------------------------------------------------------------
Metals & Mining - 2.4%
--------------------------------------------------------------------------------------------------------------
FMG Finance Ltd., 10.625%, 2016 (n) $ 460,000 $ 545,100
Foundation PA Coal Co., 7.25%, 2014 65,000 63,863
Freeport-McMoRan Copper & Gold, Inc., 8.25%, 2015 175,000 189,000
Freeport-McMoRan Copper & Gold, Inc., 8.375%, 2017 295,000 323,025
PNA Group, Inc., 10.75%, 2016 275,000 281,188
Ryerson, Inc., 12%, 2015 (z) 120,000 123,300
-----------
$ 1,525,476
--------------------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 0.8%
--------------------------------------------------------------------------------------------------------------
Atlas Pipeline Partners LP, 8.125%, 2015 $ 210,000 $ 208,950
Deutsche Bank (El Paso Performance-Linked Trust, CLN), 7.75%, 2011 (n) 65,000 67,016
Williams Cos., Inc., 8.75%, 2032 175,000 203,875
-----------
$ 479,841
--------------------------------------------------------------------------------------------------------------
Network & Telecom - 1.1%
--------------------------------------------------------------------------------------------------------------
Cincinnati Bell, Inc., 8.375%, 2014 $ 235,000 $ 235,588
Nordic Telephone Co. Holdings, 8.875%, 2016 (n) 105,000 111,038
Qwest Corp., 8.875%, 2012 115,000 125,925
Time Warner Telecom Holdings, Inc., 9.25%, 2014 100,000 103,875
Windstream Corp., 8.625%, 2016 95,000 101,650
-----------
$ 678,076
--------------------------------------------------------------------------------------------------------------
Oil Services - 0.4%
--------------------------------------------------------------------------------------------------------------
Basic Energy Services, Inc., 7.125%, 2016 $ 165,000 $ 158,813
Compagnie Generale de Geophysique - Veritas, 7.75%, 2017 65,000 66,950
-----------
$ 225,763
--------------------------------------------------------------------------------------------------------------
Oils - 0.3%
--------------------------------------------------------------------------------------------------------------
Petroleos de Venezuela S.A., 5.25%, 2017 $ 250,000 $ 188,875
--------------------------------------------------------------------------------------------------------------
Other Banks & Diversified Financials - 0.7%
--------------------------------------------------------------------------------------------------------------
CenterCredit International B.V., 8.625%, 2014 $ 200,000 $ 174,000
Russian Standard Finance S.A., 8.625%, 2011 (n) 101,000 93,425
Russian Standard Finance S.A., 8.625%, 2011 150,000 138,750
-----------
$ 406,175
--------------------------------------------------------------------------------------------------------------
Pharmaceuticals - 0.4%
--------------------------------------------------------------------------------------------------------------
Warner Chilcott Corp., 8.75%, 2015 $ 222,000 $ 229,770
--------------------------------------------------------------------------------------------------------------
Printing & Publishing - 3.4%
--------------------------------------------------------------------------------------------------------------
American Media Operations, Inc., 10.25%, 2009 $ 289,000 $ 276,718
Dex Media, Inc., 0% to 2008, 9% to 2013 310,000 293,725
Dex Media, Inc., 0% to 2008, 9% to 2013 210,000 198,975
Idearc, Inc., 8%, 2016 475,000 476,188
Nielsen Finance LLC, 10%, 2014 125,000 131,563
Nielsen Finance LLC, 0% to 2011, 12.5% to 2016 485,000 350,413
R.H. Donnelley Corp., 8.875%, 2016 365,000 365,000
-----------
$ 2,092,582
--------------------------------------------------------------------------------------------------------------
Retailers - 1.4%
--------------------------------------------------------------------------------------------------------------
Buhrmann U.S., Inc., 7.875%, 2015 $ 125,000 $ 120,313
Couche-Tard, Inc., 7.5%, 2013 140,000 141,750
Eye Care Centers of America, Inc., 10.75%, 2015 145,000 153,338
Neiman Marcus Group, Inc., 9%, 2015 (p) 165,000 174,075
Rite Aid Corp., 7.5%, 2017 65,000 60,450
Rite Aid Corp., 9.5%, 2017 (n) 220,000 203,500
-----------
$ 853,426
--------------------------------------------------------------------------------------------------------------
Specialty Stores - 1.0%
--------------------------------------------------------------------------------------------------------------
Claire's Stores, Inc., 9.25%, 2015 (n) $ 360,000 $ 306,900
Claire's Stores, Inc., 10.5%, 2017 (n) 45,000 34,200
Michaels Stores, Inc., 10%, 2014 130,000 130,975
Payless ShoeSource, Inc., 8.25%, 2013 170,000 168,088
-----------
$ 640,163
--------------------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 0.9%
--------------------------------------------------------------------------------------------------------------
Centennial Communications Corp., 10.125%, 2013 $ 140,000 $ 148,750
MetroPCS Wireless, Inc., 9.25%, 2014 (n) 90,000 89,325
MetroPCS Wireless, Inc., 9.25%, 2014 (n) 45,000 44,663
Wind Acquisition Finance S.A., 10.75%, 2015 (n) 225,000 250,313
-----------
$ 533,051
--------------------------------------------------------------------------------------------------------------
Transportation - 0.5%
--------------------------------------------------------------------------------------------------------------
Autopistas del Sol S.A., 11.5%, 2017 (n) $ 166,000 $ 151,060
PT Arpeni Pratama Ocean Line Tbk., 8.75%, 2013 (n) 132,000 130,350
-----------
$ 281,410
--------------------------------------------------------------------------------------------------------------
Utilities - Electric Power - 3.1%
--------------------------------------------------------------------------------------------------------------
Intergen N.V., 9%, 2017 (n) $ 110,000 $ 116,325
Mirant Americas Generation, Inc., 8.5%, 2021 750,000 736,853
NGC Corp. Capital Trust, 8.316%, 2027 275,000 254,375
NRG Energy, Inc., 7.375%, 2016 490,000 488,775
Reliant Energy, Inc., 6.75%, 2014 65,000 66,138
Reliant Energy, Inc., 7.875%, 2017 300,000 302,625
-----------
$ 1,965,091
--------------------------------------------------------------------------------------------------------------
TOTAL BONDS (IDENTIFIED COST, $42,197,354) $41,682,641
--------------------------------------------------------------------------------------------------------------
Common Stocks - 22.5%
--------------------------------------------------------------------------------------------------------------
Biotechnology - 2.4%
--------------------------------------------------------------------------------------------------------------
Amgen, Inc. (a) 25,600 $ 1,487,616
--------------------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 1.4%
--------------------------------------------------------------------------------------------------------------
E*TRADE Financial Corp. (a)(l) 81,100 $ 903,454
--------------------------------------------------------------------------------------------------------------
Cable TV - 0.4%
--------------------------------------------------------------------------------------------------------------
Comcast Corp., "A" (a) 9,400 $ 197,870
Time Warner Cable, Inc. (a)(l) 2,300 65,757
-----------
$ 263,627
--------------------------------------------------------------------------------------------------------------
Construction - 3.4%
--------------------------------------------------------------------------------------------------------------
D.R. Horton, Inc. (l) 86,800 $ 1,101,492
Goodman Global, Inc. (a)(l) 5,200 128,180
Lennox International, Inc. (l) 1,400 49,980
Masco Corp. (l) 36,400 876,512
-----------
$ 2,156,164
--------------------------------------------------------------------------------------------------------------
Consumer Goods & Services - 0.0%
--------------------------------------------------------------------------------------------------------------
Central Garden & Pet Co. (a) 1,900 $ 15,751
--------------------------------------------------------------------------------------------------------------
Electronics - 0.1%
--------------------------------------------------------------------------------------------------------------
Intel Corp. (l) 1,900 $ 51,110
--------------------------------------------------------------------------------------------------------------
Energy - Independent - 0.2%
--------------------------------------------------------------------------------------------------------------
Foundation Coal Holdings, Inc. (l) 2,660 $ 113,635
--------------------------------------------------------------------------------------------------------------
Energy - Integrated - 0.2%
--------------------------------------------------------------------------------------------------------------
Chevron Corp. (l) 1,200 $ 109,812
--------------------------------------------------------------------------------------------------------------
Food & Drug Stores - 1.1%
--------------------------------------------------------------------------------------------------------------
Sally Beauty Holdings, Inc. (a)(l) 75,600 $ 699,300
--------------------------------------------------------------------------------------------------------------
Forest & Paper Products - 0.1%
--------------------------------------------------------------------------------------------------------------
Louisiana-Pacific Corp. (l) 2,000 $ 32,920
--------------------------------------------------------------------------------------------------------------
Insurance - 2.3%
--------------------------------------------------------------------------------------------------------------
Conseco, Inc. (a)(l) 90,700 $ 1,432,153
--------------------------------------------------------------------------------------------------------------
Major Banks - 0.1%
--------------------------------------------------------------------------------------------------------------
Bank of America Corp. 500 $ 24,140
JPMorgan Chase & Co. (l) 500 23,500
-----------
$ 47,640
--------------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 1.4%
--------------------------------------------------------------------------------------------------------------
Tenet Healthcare Corp. (a)(l) 260,700 $ 915,057
--------------------------------------------------------------------------------------------------------------
Medical Equipment - 4.4%
--------------------------------------------------------------------------------------------------------------
Boston Scientific Corp. (a)(l) 98,700 $ 1,368,969
Pall Corp. 34,300 1,374,401
-----------
$ 2,743,370
--------------------------------------------------------------------------------------------------------------
Network & Telecom - 1.9%
--------------------------------------------------------------------------------------------------------------
Nortel Networks Corp. (a)(l) 73,529 $ 1,186,023
--------------------------------------------------------------------------------------------------------------
Other Banks & Diversified Financials - 1.6%
--------------------------------------------------------------------------------------------------------------
Countrywide Financial Corp. (l) 64,000 $ 993,280
--------------------------------------------------------------------------------------------------------------
Pharmaceuticals - 0.1%
--------------------------------------------------------------------------------------------------------------
Johnson & Johnson 800 $ 52,136
--------------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.0%
--------------------------------------------------------------------------------------------------------------
Golden Books Family Entertainment, Inc. (a) 53,266 $ 0
--------------------------------------------------------------------------------------------------------------
Real Estate - 0.1%
--------------------------------------------------------------------------------------------------------------
Host Hotels & Resorts, Inc., REIT (l) 4,000 $ 88,640
--------------------------------------------------------------------------------------------------------------
Telephone Services - 0.4%
--------------------------------------------------------------------------------------------------------------
Adelphia Business Solutions, Inc. (a)(l) 40,000 $ 0
Windstream Corp. (l) 17,200 231,340
-----------
$ 231,340
--------------------------------------------------------------------------------------------------------------
Utilities - Electric Power - 0.9%
--------------------------------------------------------------------------------------------------------------
NRG Energy, Inc. (a) 12,454 $ 568,650
--------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $18,082,907) $14,091,678
--------------------------------------------------------------------------------------------------------------
Floating Rate Loans - 4.3% (g)(r)
--------------------------------------------------------------------------------------------------------------
Aerospace - 0.2%
--------------------------------------------------------------------------------------------------------------
Hawker Beechcraft Acquisition Co., Letter of Credit, 7.2%, 2014 $ 5,209 $ 5,082
Hawker Beechcraft Acquisition Co., Term Loan, 7.17%, 2014 126,994 123,898
-----------
$ 128,980
--------------------------------------------------------------------------------------------------------------
Automotive - 0.9%
--------------------------------------------------------------------------------------------------------------
Allison Transmission, Inc., Term Loan B, 8.17%, 2014 $ 72,103 $ 70,278
Ford Motor Co., Term Loan B, 8.7%, 2013 276,830 266,142
Goodyear Tire & Rubber Co., Term Loan, 6.43%, 2014 134,971 130,965
Mark IV Industries, Inc., Second Lien Term Loan, 10.98%, 2011 129,863 124,777
-----------
$ 592,162
--------------------------------------------------------------------------------------------------------------
Broadcasting - 0.2%
--------------------------------------------------------------------------------------------------------------
Univision Communications, Inc., Term Loan B, 7.2%, 2014 (o) $ 125,365 $ 118,643
--------------------------------------------------------------------------------------------------------------
Building - 0.6%
--------------------------------------------------------------------------------------------------------------
Building Materials Holding Corp., Second Lien Term Loan,
10.81%, 2014 (o) $ 240,217 $ 198,980
Roofing Supply Group, Inc. Term Loan, 9.2%, 2013 159,142 146,411
-----------
$ 345,391
--------------------------------------------------------------------------------------------------------------
Cable TV - 0.2%
--------------------------------------------------------------------------------------------------------------
Charter Communications Operating LLC, Term Loan, 6.99%, 2014 $ 158,085 $ 151,716
--------------------------------------------------------------------------------------------------------------
Computer Software - 0.1%
--------------------------------------------------------------------------------------------------------------
First Data Corp., Term Loan B1, 7.96%, 2014 $ 96,658 $ 92,993
--------------------------------------------------------------------------------------------------------------
Containers - 0.6%
--------------------------------------------------------------------------------------------------------------
Altivity Packaging LLC, Initial Second Lien Term Loan, 9.75%, 2013 $ 284,091 $ 284,624
Altivity Packaging LLC, Second Lien term Loan, 9.75%, 2013 90,909 91,080
-----------
$ 375,704
--------------------------------------------------------------------------------------------------------------
Energy - Independent - 0.7%
--------------------------------------------------------------------------------------------------------------
Crimson Exploration, Second Lien Term Loan, 10.37%, 2012 $ 111,133 $ 108,355
Sandridge Energy, Inc., Term Loan, 8.63%, 2015 327,000 320,460
-----------
$ 428,815
--------------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.1%
--------------------------------------------------------------------------------------------------------------
Advanced Medical Optics, Inc., Term Loan, 7.03%, 2014 (o) $ 59,163 $ 56,796
HCA, Inc., Term Loan B, 7.45%, 2012 22,408 21,864
-----------
$ 78,660
--------------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.4%
--------------------------------------------------------------------------------------------------------------
Idearc, Inc., Term Loan B, 7.2%, 2014 $ 234,462 $ 230,857
--------------------------------------------------------------------------------------------------------------
Specialty Stores - 0.3%
--------------------------------------------------------------------------------------------------------------
Michaels Stores, Inc., Term Loan B, 7.62%, 2013 $ 166,974 $ 159,321
--------------------------------------------------------------------------------------------------------------
TOTAL FLOATING RATE LOANS (IDENTIFIED COST, $2,770,481) $ 2,703,242
--------------------------------------------------------------------------------------------------------------
Preferred Stocks - 1.3%
--------------------------------------------------------------------------------------------------------------
Broadcasting - 1.3%
--------------------------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc., "B", 10.75% (p) 775 $ 817,625
--------------------------------------------------------------------------------------------------------------
Real Estate - 0.0%
--------------------------------------------------------------------------------------------------------------
HRPT Properties Trust, "B", REIT, 8.75% (l) 200 $ 5,000
--------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS (IDENTIFIED COST, $767,645) $ 822,625
--------------------------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 14.9%
--------------------------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio, at Cost and
Net Asset Value 9,290,476 $ 9,290,476
--------------------------------------------------------------------------------------------------------------
Repurchase Agreements - 4.3%
--------------------------------------------------------------------------------------------------------------
Merrill Lynch & Co., 4.94%, dated 10/31/07, due 11/01/07, total
to be received $2,662,365 (secured by various U.S. Treasury and
Federal Agency obligations and Mortgage Backed securities in a
jointly traded account), at Cost $ 2,662,000 $ 2,662,000
--------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST, $75,770,863) (k) $71,252,662
--------------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (14.0)% (8,695,095)
--------------------------------------------------------------------------------------------------------------
NET ASSETS - 100.0% $62,557,567
--------------------------------------------------------------------------------------------------------------
(a) Non-income producing security.
(e) The rate shown represents a current effective yield.
(g) The rate shown represents a weighted average coupon rate on settled positions at period end.
(i) Interest only security for which the trust receives interest on notional principal (Par amount). Par
amount shown is the notional principal and does not reflect the cost of the security.
(k) As of October 31, 2007 the trust held securities fair valued in accordance with the policies adopted by
the Board of Trustees, aggregating $40,847,087 and 57.33% of market value. An independent pricing service
provided an evaluated bid for 56.79% of the market value.
(l) All or a portion of this security is on loan.
(n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be
sold in the ordinary course of business in transactions exempt from registration, normally to qualified
institutional buyers. At period end, the aggregate value of these securities was $8,259,224 representing
13.2% of net assets.
(o) All or a portion of this position has not settled. Upon settlement date, interest rates will be
determined.
(p) Payment-in-kind security.
(r) Remaining maturities of floating rate loans may be less than stated maturities shown as a result of
contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty.
These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest
which are determined periodically by reference to a base lending rate plus a premium.
(z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal
restrictions on resale. These securities generally may be resold in transactions exempt from registration
or to the public if the securities are subsequently registered. Disposal of these securities may involve
time-consuming negotiations and prompt sale at an acceptable price may be difficult. The trust holds the
following restricted securities:
CURRENT
ACQUISITION ACQUISITION MARKET TOTAL % OF
RESTRICTED SECURITIES DATE COST VALUE NET ASSETS
--------------------------------------------------------------------------------------------------------------
Allison Transmission, Inc., 11%, 2015 10/11/07 - 10/19/07 $410,200 $417,688
Anthracite Ltd., CDO, 6%, 2037 5/14/02 303,729 292,535
Asset Securitization Corp., FRN,
8.355%, 2029 1/25/05 604,160 723,625
Falcon Franchise Loan LLC, FRN, 3.689%, 2025 1/29/03 99,513 67,546
First Data Corp., 9.875%, 2015 10/16/07 - 10/18/07 227,612 229,800
LVB Acquisition Merger Sub, Inc.,
10%, 2017 9/24/07 - 9/25/07 124,963 128,438
LVB Acquisition Merger Sub, Inc.,
11.625%, 2017 10/18/07 - 10/30/07 137,344 137,531
Momentive Performance Materials, Inc.,
9.75%, 2014 9/10/07 - 10/18/07 195,338 195,000
Nuveen Investments, Inc., 10.5%, 2015 10/31/07 130,000 130,000
Preferred Term Securities XII Ltd.,
9.8%, 2033 1/07/05 236,250 162,000
Preferred Term Securities XVI Ltd.,
14%, 2035 12/08/04 300,000 240,000
Preferred Term Securities XVII Ltd.,
9.3%, 2035 3/09/05 187,000 134,640
Ryerson, Inc., 12%, 2015 10/03/07 - 10/30/07 123,338 123,300
--------------------------------------------------------------------------------------------------------------
Total Restricted Securities $2,982,103 4.8%
========================
UNFUNDED LOAN COMMITMENTS
As of October 31, 2007, the portfolio had the following unfunded loan commitments of $4,353, which could be
extended at the option of the borrower:
UNFUNDED UNREALIZED
LOAN APPRECIATION
BORROWER COMMITMENT (DEPRECIATION)
--------------------------------------------------------------------------------------------------------------
Univision Communications, Delayed Draw Term Loan, 2014 $4,353 $73
SWAP AGREEMENTS AT 10/31/07
NOTIONAL CASH FLOWS CASH FLOWS
EXPIRATION AMOUNT COUNTERPARTY TO RECEIVE TO PAY VALUE
--------------------------------------------------------------------------------------------------------------
CREDIT DEFAULT SWAPS
6/20/09 USD 200,000 JPMorgan Chase Bank 4.10% (1) $(8,599)
(fixed rate)
6/20/12 USD 200,000 Morgan Stanley Capital 3.76% (2) (28,331)
Services, Inc. (fixed rate)
6/20/12 USD 100,000 Morgan Stanley Capital 4.15% (2) (12,870)
Services, Inc. (fixed rate)
6/20/12 USD 600,000 JPMorgan Chase Bank (a) (3) 4.2065% 12,568
(fixed rate)
9/20/12 USD 200,000 Goldman Sachs International 3.75% (4) 5,019
(fixed rate)
3/20/17 USD 35,000 JPMorgan Chase Bank (5) 0.78% (714)
(fixed rate)
3/20/17 USD 35,000 JPMorgan Chase Bank (5) 0.80% (766)
(fixed rate)
3/20/17 USD 30,000 Merrill Lynch International (5) 0.81% (679)
(fixed rate)
--------
$(34,372)
========
(1) Trust to pay notional amount upon a defined credit event by Abitibi Consolidated, Inc., 8.375%, 4/01/15.
(2) Trust to pay notional amount upon a defined credit event by Bowater, Inc., 6.5%, 6/ 15/13.
(3) Trust to receive notional amount upon a defined credit event multiplied by the rate of return of the CDX
HY Index.
(4) Trust to pay notional amount upon a defined credit event by Allied Waste, 7.375%, 4/ 15/14.
(5) Trust to receive notional amount upon a defined credit event by Waste Management, Inc., 7.375%, 8/01/10.
(a) Premiums paid by the trust amounted to $32,250.
At October 31, 2007, the trust had sufficient cash and/or other liquid securities to cover any commitments
under these derivative contracts.
The following abbreviations are used in this report and are defined:
CDO Collateralized Debt Obligation
CLN Credit-Linked Note
FRN Floating Rate Note. Interest rate resets periodically and may not be the rate reported
at period end.
REIT Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 10/31/07
This statement represents your trust's balance sheet, which details the assets and liabilities
comprising the total value of the trust.
ASSETS
------------------------------------------------------------------------------------------------------
Investments, at value, including $9,233,304 of securities on loan
(identified cost, $75,770,863) $71,252,662
Cash 5,545
Receivable for investments sold 866,345
Interest and dividends receivable 980,539
Swaps, at value (premiums paid, $32,250) 17,587
Unrealized appreciation on unfunded loan commitments 73
Other assets 14,909
------------------------------------------------------------------------------------------------------
Total assets $73,137,660
------------------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------------------
Distributions payable $46,523
Payable for investments purchased 966,971
Swaps, at value 51,959
Collateral for securities loaned, at value (c) 9,290,476
Payable to affiliates
Management fee 2,929
Transfer agent and dividend disbursing costs 2,924
Administrative services fee 107
Payable for independent trustees' compensation 131,103
Accrued expenses and other liabilities 87,101
------------------------------------------------------------------------------------------------------
Total liabilities $10,580,093
------------------------------------------------------------------------------------------------------
Net assets $62,557,567
------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
------------------------------------------------------------------------------------------------------
Paid-in capital $67,982,382
Unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies (4,584,772)
Accumulated net realized gain (loss) on investments and foreign
currency transactions (738,706)
Accumulated distributions in excess of net investment income (101,337)
------------------------------------------------------------------------------------------------------
Net assets $62,557,567
------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding (7,145,040 issued, less
256,600 treasury shares) 6,888,440
------------------------------------------------------------------------------------------------------
Net asset value per share (net assets of $62,557,567 / 6,888,440
shares of beneficial interest outstanding) $9.08
------------------------------------------------------------------------------------------------------
(c) Non-cash collateral not included.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF OPERATIONS
Year ended 10/31/07
This statement describes how much your trust earned in investment income and accrued in expenses.
It also describes any gains and/or losses generated by trust operations.
NET INVESTMENT INCOME
-------------------------------------------------------------------------------------------------------
Income
Interest $4,387,478
Dividends 219,773
-------------------------------------------------------------------------------------------------------
Total investment income $4,607,251
-------------------------------------------------------------------------------------------------------
Expenses
Management fee $610,765
Transfer agent and dividend disbursing costs 17,267
Administrative services fee 20,263
Independent trustees' compensation 18,252
Custodian fee 28,304
Shareholder communications 65,857
Auditing fees 42,811
Legal fees 540
Miscellaneous 35,871
-------------------------------------------------------------------------------------------------------
Total expenses $839,930
-------------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (326)
-------------------------------------------------------------------------------------------------------
Net expenses $839,604
-------------------------------------------------------------------------------------------------------
Net investment income $3,767,647
-------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
-------------------------------------------------------------------------------------------------------
Realized gain (loss) (identified cost basis)
Investment transactions $5,745,238
Swap transactions 32,253
Foreign currency transactions (22,172)
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $5,755,319
-------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments $(5,902,228)
Swap transactions (66,622)
Translation of assets and liabilities in foreign currencies 7,013
Unfunded loan commitments 73
-------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(5,961,764)
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $(206,445)
-------------------------------------------------------------------------------------------------------
Change in net assets from operations $3,561,202
-------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations, any
distributions, and any shareholder transactions.
YEARS ENDED 10/31
----------------------------------
2007 2006
CHANGE IN NET ASSETS
FROM OPERATIONS
------------------------------------------------------------------------------------------------------
Net investment income $3,767,647 $3,800,930
Net realized gain (loss) on investments and foreign
currency transactions 5,755,319 (895,884)
Net unrealized gain (loss) on investments and foreign
currency translation (5,961,764) 2,662,409
------------------------------------------------------------------------------------------------------
Change in net assets from operations $3,561,202 $5,567,455
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
------------------------------------------------------------------------------------------------------
From net investment income $(6,089,196) $(4,028,876)
From net realized gain on investments (546,024) --
From paid-in capital -- (2,511,845)
------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(6,635,220) $(6,540,721)
------------------------------------------------------------------------------------------------------
Change in net assets from trust share transactions $587,170 $540,115
------------------------------------------------------------------------------------------------------
Total change in net assets $(2,486,848) $(433,151)
------------------------------------------------------------------------------------------------------
NET ASSETS
------------------------------------------------------------------------------------------------------
At beginning of period 65,044,415 65,477,566
At end of period (including accumulated distributions in
excess of net investment income of $101,337 and $162,777,
respectively) $62,557,567 $65,044,415
------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the trust's financial performance for the past 5 years.
Certain information reflects financial results for a single trust share. The total returns in the table represent the rate
by which an investor would have earned (or lost) on an investment in the trust share class (assuming reinvestment of all
distributions) held for the entire period.
YEARS ENDED 10/31
-----------------------------------------------------------------------
2007 2006 2005 2004 2003
Net asset value, beginning of period $9.52 $9.66 $10.12 $9.80 $7.50
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.55 $0.56 $0.60 $0.59 $0.59
Net realized and unrealized gain (loss) on
investments and foreign currency (0.02) 0.26 (0.04) 0.74 2.56
-----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.53 $0.82 $0.56 $1.33 $3.15
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
-----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.89) $(0.59) $(0.72) $(0.58) $(0.57)
From net realized gain on investments (0.08) -- -- -- (0.28)
From paid-in capital -- (0.37) (0.30) (0.43) --
-----------------------------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(0.97) $(0.96) $(1.02) $(1.01) $(0.85)
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.08 $9.52 $9.66 $10.12 $9.80
-----------------------------------------------------------------------------------------------------------------------------
Per share market value, end of period $8.44 $10.91 $10.85 $11.60 $10.40
-----------------------------------------------------------------------------------------------------------------------------
Total return at market value (%) (14.74) 10.88 2.77 22.56(b) 58.07
-----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.27 1.37 1.37 1.28 1.34
Expenses after expense reductions (f) 1.27 1.37 1.37 1.28 N/A
Net investment income 5.70 5.82 5.95 5.82 6.75
Portfolio turnover 76 72 47 72 94
Net assets at end of period (000 Omitted) $62,558 $65,044 $65,478 $67,939 $65,195
-----------------------------------------------------------------------------------------------------------------------------
(b) The trust's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales. The
non-recurring accrual did not have a material impact on the net asset value per share based on the shares outstanding
on the day the proceeds were recorded.
(d) Per share data are based on average shares outstanding.
(f) 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 fund or trust) is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a closed-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The trust
can invest in 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, including
securities of emerging market issuers. 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. The markets of emerging markets
countries are generally more volatile than the markets of developed countries
with more mature economies. All of the risks of investing in foreign securities
previously described are heightened when investing in emerging markets
countries.
INVESTMENT VALUATIONS - Equity securities, including restricted equity
securities, are generally valued at the last sale or official closing price as
reported by an independent pricing service on the market or exchange on which
they are primarily traded. For securities for which there were no sales
reported that day, equity securities are generally valued at the last quoted
daily bid quotation as reported by an independent pricing service on the market
or exchange on which they are primarily traded. For securities held short for
which there were no sales reported for the day, the position is generally
valued at the last quoted daily ask quotation as reported by an independent
pricing service on the market or exchange on which such securities are
primarily traded. Debt instruments (other than short-term instruments),
including restricted debt instruments, are generally valued at an evaluated or
composite bid as reported by an independent pricing service. Short-term
instruments with a maturity at issuance of 60 days or less may be valued at
amortized cost, which approximates market value. Forward foreign currency
contracts are generally valued at the mean of bid and asked prices for the time
period interpolated from rates reported by an independent pricing service for
proximate time periods. Swaps are generally valued at an evaluated bid as
reported by an independent pricing service. Open-end investment companies are
generally valued at their net asset value per share. Securities and other
assets generally valued on the basis of information from an independent pricing
service may also be valued at a broker-dealer bid quotation. Values obtained
from pricing services can utilize both dealer-supplied valuations and
electronic data processing techniques, which take into account 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. The values of foreign securities and other assets and liabilities
expressed in foreign currencies are converted to U.S. dollars using the mean of
bid and asked prices for rates reported by an independent pricing service.
The Board of Trustees has delegated primary responsibility for determining or
causing to be determined the value of the trust's investments (including any
fair valuation) to the adviser pursuant to valuation policies and procedures
approved by the Board. If the adviser determines that reliable market
quotations are not readily available, investments are valued at fair value as
determined in good faith by the adviser in accordance with such procedures
under the oversight of the Board of Trustees. Under the trust's valuation
policies and procedures, market quotations are not considered to be readily
available for many types of debt instruments and certain types of derivatives.
These investments are generally valued at fair value based on information from
independent pricing services. In addition, investments may be valued at fair
value if the adviser determines that an investment's value has been materially
affected by events occurring after the close of the exchange or market on which
the investment is principally traded (such as foreign exchange or market) and
prior to the determination of the trust's net asset value, or after the halting
of trading of a specific security where trading does not resume prior to the
close of the exchange or market on which the security is principally traded.
Events that occur on a frequent basis after foreign markets close (such as
developments in foreign markets and significant movements in the U.S. markets)
and prior to the determination of the trust's net asset value may be deemed to
have a material affect on the value of securities traded in foreign markets.
Accordingly, the trust's foreign equity securities may often be valued at fair
value. The adviser may rely on independent pricing services or other
information (such as the correlation with price movements of similar securities
in the same or other markets; the type, cost and investment characteristics of
the security; the business and financial condition of the issuer; and trading
and other market data) to assist in determining whether to fair value and at
what value to fair value an investment. The value of an investment for purposes
of calculating the trust's net asset value can differ depending on the source
and method used to determine value. When fair valuation is used, the value of
investments used to determine the trust's net asset value may differ from
quoted or published prices for the same investments.
In September 2006, FASB Statement No. 157, Fair Value Measurements (the
"Statement") was issued, and is effective for fiscal years beginning after
November 15, 2007 and for all interim periods within those fiscal years. This
Statement provides a single definition of fair value, a hierarchy for measuring
fair value and expanded disclosures about fair value measurements. Management
is evaluating the application of the Statement to the trust's, and believes the
impact will be limited to expanded disclosures resulting from the adoption of
this Statement in the trust's financial statements.
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 and other funds managed by
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
FOREIGN CURRENCY TRANSLATION - Purchases and sales of foreign investments,
income, and expenses are converted into U.S. dollars based upon currency
exchange rates prevailing on the respective dates of such transactions. Gains
and losses attributable to foreign currency exchange rates on sales of
securities are recorded for financial statement purposes as net realized gains
and losses on investments. Gains and losses attributable to foreign exchange
rate movements on income and expenses are recorded for financial statement
purposes as foreign currency transaction gains and losses. That portion of both
realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
DERIVATIVE RISK - The trust may invest in derivatives for hedging or non-
hedging purposes. While hedging can reduce or eliminate losses, it can also
reduce or eliminate gains. When the trust uses derivatives as an investment to
gain market exposure, or for hedging purposes, gains and losses from derivative
instruments may be substantially greater than the derivative's original cost.
Derivative instruments include swap agreements.
SWAP AGREEMENTS - The trust may enter into swap agreements. A swap is an
exchange of cash payments between the trust and another party. Net cash
payments are exchanged at specified intervals and are recorded as a realized
gain or loss in the Statement of Operations. The value of the swap is adjusted
daily and the change in value, including accruals of periodic amounts of
interest to be paid or received, is recorded as unrealized appreciation or
depreciation in the Statement of Operations. Upfront payments received or made
at the inception of the swap are reflected as premiums paid or received on the
Statement of Assets and Liabilities and are amortized using the effective
interest method over the term of the agreement. A liquidation payment received
or made upon early termination is recorded as a realized gain or loss in the
Statement of Operations. Collateral, in the form of cash or securities, may be
required to be held in segregated accounts with the trust's custodian in
connection with these agreements. Risk of loss may exceed amounts recognized on
the Statement of Assets and Liabilities. These risks include the possible lack
of a liquid market, failure of the counterparty to perform under the terms of
the agreements, and unfavorable market movement of the underlying instrument.
All swap agreements entered into by the trust with the same counterparty are
generally governed by a single master agreement, which provides for the netting
of all amounts owed by the parties under the agreement upon the occurrence of
an event of default, thereby reducing the credit risk to which such party is
exposed.
The trust holds credit default swaps in which one party makes a stream of
payments based on a fixed percentage applied to the notional amount to another
party in exchange for the right to receive a specified return in the event of a
default by a third party, such as a corporate issuer or foreign issuer, on its
obligation. The trust may enter into credit default swaps to limit or to reduce
its risk exposure to defaults of corporate and sovereign issuers or to create
direct or synthetic short or long exposure to corporate debt securities or
certain sovereign debt securities to which it is not otherwise exposed.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the trust with indemnification against Borrower default. The
trust bears the risk of loss with respect to the investment of cash collateral.
On loans collateralized by cash, the cash collateral is invested in a money
market fund or short-term securities. A portion of the income generated upon
investment of the collateral is remitted to the Borrowers, and the remainder is
allocated between the trust and the lending agent. On loans collateralized by
U.S. Treasury securities, a fee is received from the Borrower, and is allocated
between the trust and the lending agent. Net income from securities lending is
included in interest income on the Statement of Operations. The dividend and
interest income earned on the securities loaned is accounted for in the same
manner as other dividend and interest income.
At October 31, 2007, the value of securities loaned was $9,233,304. These loans
were collateralized by cash of $9,290,476 and U.S. Treasury obligations of
$234,915.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS - The trust may invest in loans and
loan participations or other receivables. These investments may include standby
financing commitments, including revolving credit facilities, which obligate
the trust to supply additional cash to the borrower on demand. At October 31,
2007, the portfolio had unfunded loan commitments of $4,353, which could be
extended at the option of the borrower and which are covered by sufficient cash
and/or liquid securities held by the trust. Loan participations involve a risk
of insolvency of the lending bank or other financial intermediary.
INDEMNIFICATIONS - Under the trust's organizational documents, its officers and
trustees may be indemnified against certain liabilities and expenses arising
out of the performance of their duties to the trust. Additionally, in the
normal course of business, the trust enters into agreements with service
providers that may contain indemnification clauses. The trust's maximum
exposure under these agreements is unknown as this would involve future claims
that may be made against the trust that have not yet occurred.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. The trust earns certain fees in connection with its floating rate
loan purchasing activities. These fees are in addition to interest payments
earned and may include amendment fees, commitment fees, facility fees, consent
fees, and prepayment fees. These fees are recorded on an accrual basis as
income in the accompanying financial statements. Dividends received in cash are
recorded on the ex-dividend date. Certain dividends from foreign securities
will be recorded when the trust is informed of the dividend if such information
is obtained subsequent to the ex-dividend date. Dividend and interest payments
received in additional securities are recorded on the ex-dividend or
ex-interest date in an amount equal to the value of the security on such date.
The trust may receive proceeds from litigation settlements. Any proceeds
received from litigation involving portfolio holdings are reflected in the
Statement of Operations in realized gain/loss if the security has been disposed
of by the trust or in unrealized gain/loss if the security is still held by the
trust. Any other proceeds from litigation not related to portfolio holdings are
reflected as other income in the Statement of Operations.
FEES PAID INDIRECTLY - The trust's custody fee may be reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
trust. For the year ended October 31, 2007, custody fees were not reduced.
TAX MATTERS AND DISTRIBUTIONS - The trust intends to qualify as a regulated
investment company, as defined under Subchapter M of the Internal Revenue Code,
and to distribute all of its taxable income, including realized capital gains.
Accordingly, no provision for federal income tax is required in the financial
statements. Foreign taxes, if any, have been accrued by the trust in the
accompanying financial statements.
Distributions to shareholders are recorded on the ex-dividend date. The trust
pays monthly distributions based on an annual rate of 10% of the trust's
average daily net asset value. As a result, distributions may exceed actual
earnings which may result in a tax return of capital or, to the extent the
trust has long-term gains, may be recharacterized as ordinary income. Income
and capital gain distributions are determined in accordance with income tax
regulations, which may differ from U.S. generally accepted accounting
principles. Certain capital accounts in the financial statements are
periodically adjusted for permanent differences in order to reflect their tax
character. These adjustments have no impact on net assets or net asset value
per share. Temporary differences which arise from recognizing certain items of
income, expense, gain or loss in different periods for financial statement and
tax purposes will reverse at some time in the future. Distributions in excess
of net investment income or net realized gains are temporary overdistributions
for financial statement purposes resulting from differences in the recognition
or classification of income or distributions for financial statement and tax
purposes.
Book/tax differences primarily relate to amortization and accretion of debt
securities, defaulted bonds, derivative transactions and deferred trustee
compensation.
The tax character of distributions declared to shareholders is as follows:
10/31/07 10/31/06
Ordinary income (including any
short-term capital gains) (a) $6,089,196 $4,028,876
Long-term capital gain 546,024 --
----------------------------------------------------------
$6,635,220 $4,028,876
Tax return of capital (b) -- 2,511,845
----------------------------------------------------------
Total distributions $6,635,220 $6,540,721
(a) Included in the trust's distributions from ordinary income for the year
ended October 31, 2007 is $2,144,189 in excess of investment company
taxable income.
(b) Distributions in excess of tax basis earnings and profits are reported in
the financial statements as a tax return of capital.
The federal tax cost and the tax basis components of distributable earnings
were as follows:
AS OF 10/31/07
Cost of investments $76,512,610
----------------------------------------------------------
Gross appreciation $1,061,889
Gross depreciation (6,321,837)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $(5,259,948)
Other temporary differences (164,867)
In June 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (the "Interpretation") was issued, and is effective for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax years as
of the effective date. On December 22, 2006, the SEC delayed the implementation
of the Interpretation for regulated investment companies for an additional six
months. This Interpretation prescribes a minimum threshold for financial
statement recognition of the benefit of a tax position taken or expected to be
taken in a tax return, and requires certain expanded disclosures. Management
has evaluated the application of the Interpretation to the trust, and has
determined that there is no impact resulting from the adoption of this
Interpretation on the trust's financial statements.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The trust has an investment advisory agreement with MFS to
provide overall investment management and related administrative services and
facilities to the trust. 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
gross income. Gross income is calculated based on tax elections that generally
include the accretion of discount and exclude the amortization of premium,
which may differ from investment income reported in the Statement of
Operations. The management fee, from net assets and gross income, incurred for
the year ended October 31, 2007 was equivalent to an annual effective rate of
0.92% of the trust's average daily net assets.
TRANSFER AGENT - Prior to December 18, 2006, MFS Service Center, Inc. (MFSC), a
wholly-owned subsidiary of MFS, received a fee from the trust for its services
as registrar and dividend-disbursing agent. Pursuant to a written agreement,
the trust paid MFSC an account maintenance fee of no more than $9.00 and a
dividend services fee of $0.75 per reinvestment. Effective December 18, 2006,
the trust has engaged Computershare Trust Company, N.A. ("Computershare") as
the sole transfer agent for the trust. MFSC will continue to monitor and
supervise the activities of Computershare for an agreed upon fee approved by
the Board of Trustees. For the year ended October 31, 2007, these fees paid to
MFSC amounted to $4,994. MFSC may also receive payment from the trust for
out-of-pocket expenses paid by MFSC on behalf of the trust. For the year ended
October 31, 2007, no out-of-pocket costs were incurred by the trust.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to the trust.
Under an administrative services agreement, the trust partially reimburses MFS
the costs incurred to provide these services. The trust is charged a fixed
amount plus a fee based on average daily net assets. The trust's annual fixed
amount is $17,500.
The administrative services fee incurred for the year ended October 31, 2007
was equivalent to an annual effective rate of 0.0306% of the trust's average
daily net assets.
TRUSTEES' AND OFFICERS' COMPENSATION - The trust pays compensation to
independent trustees in the form of a retainer, attendance fees, and additional
compensation to Board and Committee chairpersons. The trust does not pay
compensation directly to trustees or to officers of the trust who are also
officers of the investment adviser, 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 MFSC. The trust has an unfunded, defined
benefit plan for certain retired independent trustees which resulted in a
pension expense of $4,080. The trust also has an unfunded retirement benefit
deferral plan for certain independent trustees which resulted in an expense of
$3,948. Both amounts are included in independent trustees' compensation for the
year ended October 31, 2007. The liability for deferred retirement benefits
payable to certain independent trustees under both plans amounted to $118,854
at October 31, 2007, and is included in payable for independent trustees'
compensation.
DEFERRED TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan)
independent trustees previously were allowed to elect to defer receipt of all
or a portion of their annual compensation. Trustees are no longer allowed to
defer compensation under the Plan. Amounts previously deferred are treated as
though equivalent dollar amounts had been invested in shares of certain 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 payable for independent trustees' compensation is $10,910
of deferred trustees' compensation.
OTHER - This trust and certain other MFS funds (the funds) have entered into a
services agreement (the Agreement) which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. The funds can
terminate the Agreement with Tarantino LLC at any time under the terms of the
Agreement. For the year ended October 31, 2007, the fee paid to Tarantino LLC
was $419. MFS has agreed to reimburse the trust for a portion of the payments
made by the funds to Tarantino LLC in the amount of $326, which is shown as a
reduction of total expenses in the Statement of Operations. Additionally, MFS
has agreed to bear all expenses associated with office space, other
administrative support, and supplies provided to the ICCO.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$47,987,225 and $51,554,438, respectively.
(5) SHARES OF BENEFICIAL INTEREST
The trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. The Trustees have
authorized the repurchase by the trust of up to 10% annually of its own shares
of beneficial interest. During the year ended October 31, 2007, the trust did
not repurchase any shares. Transactions in trust shares were as follows:
YEAR ENDED YEAR ENDED
10/31/07 10/31/06
SHARES AMOUNT SHARES AMOUNT
Shares issued to shareholders
in reinvestment of distributions 58,252 $587,170 55,000 $540,115
--------------------------------------------------------------------------------
(6) LINE OF CREDIT
The trust and other funds managed by MFS participate in a $1 billion unsecured
committed line of credit provided by a syndication of banks under a credit
agreement. In addition, the trust and other funds managed by MFS have
established uncommitted borrowing arrangements with certain banks. Borrowings
may be made for temporary financing needs. Interest is charged to each fund,
based on its borrowings, generally at a rate equal to the Federal Reserve funds
rate plus 0.30%. In addition, a commitment fee, based on the average daily,
unused portion of the committed line of credit, is allocated among the
participating funds at the end of each calendar quarter. For the year ended
October 31, 2007, the trust's commitment fee and interest expense were $343 and
$330, respectively, and are included in miscellaneous expense on the Statement
of Operations.
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
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, 2007, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our procedures included
confirmation of securities owned as of October 31, 2007, by correspondence with
the Fund's custodian and brokers or by other appropriate auditing procedures
where replies from brokers were not received. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Special Value Trust at October 31, 2007, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and its financial highlights for each of the five years in
the period then ended, in conformity with U.S. generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
December 14, 2007
RESULTS OF SHAREHOLDER MEETING
10/31/07 (unaudited)
At the annual meeting of shareholders of MFS Special Value Trust, which was
held on October 4, 2007, the following action was taken:
ITEM 1. To elect a Board of Trustees:
NUMBER OF SHARES
----------------
NOMINEE AFFIRMATIVE WITHHOLD AUTHORITY
------- ----------- ------------------
Robert J. Manning 5,970,228 186,164
Lawrence Cohn, M.D. 5,954,648 201,744
Lawrence Perera 5,951,562 204,830
Laurie Thomsen 5,967,052 189,340
TRUSTEES AND OFFICERS --
IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of December 1, 2007, are listed below, together with their
principal occupations during the past five years. (Their titles may have varied during that period.) The
address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS DURING
POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS &
NAME, DATE OF BIRTH WITH FUND SINCE(h) OTHER DIRECTORSHIPS(j)
------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(k) Trustee February 2004 Massachusetts Financial Services
(born 10/20/63) Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
Robert C. Pozen(k) Trustee February 2004 Massachusetts Financial Services
(born 8/08/46) Company, Chairman (since February
2004); MIT Sloan School
(education), Senior Lecturer
(since 2006); Secretary of
Economic Affairs, The Commonwealth
of Massachusetts (January 2002 to
December 2002); Fidelity
Investments, Vice Chairman (June
2000 to December 2001); Fidelity
Management & Research Company
(investment adviser), President
(March 1997 to July 2001); Bell
Canada Enterprises
(telecommunications), Director;
Medtronic, Inc. (medical
technology), Director; Telesat
(satellite communications),
Director
INDEPENDENT TRUSTEES
J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern
(born 5/01/36) of Trustees Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
Robert E. Butler(n) Trustee January 2006 Consultant - regulatory and
(born 11/29/41) compliance matters (since July
2002); PricewaterhouseCoopers LLP
(professional services firm),
Partner (until 2002)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 3/11/37) Chief of Cardiac Surgery (2005);
Harvard Medical School, Professor
of Cardiac Surgery; Physician
Director of Medical Device
Technology for Partners HealthCare
David H. Gunning Trustee January 2004 Retired; Cleveland-Cliffs Inc.
(born 5/30/42) (mining products and service
provider), Vice Chairman/Director
(until May 2007); Portman Limited
(mining), Director (since 2005);
Encinitos Ventures (private
investment company), Principal
(1997 to April 2001); Lincoln
Electric Holdings, Inc. (welding
equipment manufacturer), Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 9/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman;
Atlantic Coast Tan (tanning
salons), Vice Chairman (since
2002)
Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial
(born 12/21/44) services and insurance), Vice
Chairman and Chief Operating
Officer (until May 2001); The
Equitable Life Assurance Society
(insurance), President and Chief
Operating Officer (until May 2001)
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 6/23/35) Partner
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 9/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Laurie J. Thomsen Trustee March 2005 New Profit, Inc. (venture
(born 8/05/57) philanthropy), Partner (since
2006); Private investor; Prism
Venture Partners (venture
capital), Co-founder and General
Partner (until June 2004); The
Travelers Companies (commercial
property liability insurance),
Director
Robert W. Uek Trustee January 2006 Retired (since 1999);
(born 5/18/41) PricewaterhouseCoopers LLP
(professional services firm),
Partner (until 1999); Consultant
to investment company industry
(since 2000); TT International
Funds (mutual fund complex),
Trustee (2000 until 2005);
Hillview Investment Trust II Funds
(mutual fund complex), Trustee
(2000 until 2005)
OFFICERS
Maria F. Dwyer(k) President November 2005 Massachusetts Financial Services
(born 12/01/58) Company, Executive Vice President
and Chief Regulatory Officer
(since March 2004) Chief
Compliance Officer (since December
2006); Fidelity Management &
Research Company, Vice President
(prior to March 2004); Fidelity
Group of Funds, President and
Treasurer (prior to March 2004)
Tracy Atkinson(k) Treasurer September 2005 Massachusetts Financial Services
(born 12/30/64) Company, Senior Vice President
(since September 2004);
PricewaterhouseCoopers LLP,
Partner (prior to September 2004)
Christopher R. Bohane(k) Assistant Secretary July 2005 Massachusetts Financial Services
(born 1/18/74) and Assistant Clerk Company, Vice President and Senior
Counsel (since April 2003);
Kirkpatrick & Lockhart LLP (law
firm), Associate (prior to April
2003)
Ethan D. Corey(k) Assistant Secretary July 2005 Massachusetts Financial Services
(born 11/21/63) and Assistant Clerk Company, Special Counsel (since
December 2004); Dechert LLP (law
firm), Counsel (prior to December
2004)
David L. DiLorenzo(k) Assistant Treasurer July 2005 Massachusetts Financial Services
(born 8/10/68) Company, Vice President (since
June 2005); JP Morgan Investor
Services, Vice President (prior to
June 2005)
Timothy M. Fagan(k) Assistant Secretary September 2005 Massachusetts Financial Services
(born 7/10/68) and Assistant Clerk Company, Vice President and Senior
Counsel (since September 2005);
John Hancock Advisers, LLC, Vice
President and Chief Compliance
Officer (September 2004 to August
2005), Senior Attorney (prior to
September 2004); John Hancock
Group of Funds, Vice President and
Chief Compliance Officer
(September 2004 to December 2004)
Mark D. Fischer(k) Assistant Treasurer July 2005 Massachusetts Financial Services
(born 10/27/70) Company, Vice President (since May
2005); JP Morgan Investment
Management Company, Vice President
(prior to May 2005)
Brian E. Langenfeld(k) Assistant Secretary June 2006 Massachusetts Financial Services
(born 3/07/73) and Assistant Clerk Company, Assistant Vice President
and Counsel (since May 2006); John
Hancock Advisers, LLC, Assistant
Vice President and Counsel (May
2005 to April 2006); John Hancock
Advisers, LLC, Attorney and
Assistant Secretary (prior to May
2005)
Ellen Moynihan(k) Assistant Treasurer April 1997 Massachusetts Financial Services
(born 11/13/57) Company, Senior Vice President
Susan S. Newton(k) Assistant Secretary May 2005 Massachusetts Financial Services
(born 3/07/50) and Assistant Clerk Company, Senior Vice President and
Associate General Counsel (since
April 2005); John Hancock
Advisers, LLC, Senior Vice
President, Secretary and Chief
Legal Officer (prior to April
2005); John Hancock Group of
Funds, Senior Vice President,
Secretary and Chief Legal Officer
(prior to April 2005)
Susan A. Pereira(k) Assistant Secretary July 2005 Massachusetts Financial Services
(born 11/05/70) and Assistant Clerk Company, Vice President and Senior
Counsel (since June 2004); Bingham
McCutchen LLP (law firm),
Associate (prior to June 2004)
Mark N. Polebaum(k) Secretary and Clerk January 2006 Massachusetts Financial Services
(born 5/01/52) Company, Executive Vice President,
General Counsel and Secretary
(since January 2006); Wilmer
Cutler Pickering Hale and Dorr LLP
(law firm), Partner (prior to
January 2006)
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 3/07/44) Compliance Officer compliance services), Principal
(since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice
President (April 2003 to June
2004); David L. Babson & Co.
(investment adviser), Managing
Director, Chief Administrative
Officer and Director (prior to
March 2003)
James O. Yost(k) Assistant Treasurer September 1990 Massachusetts Financial Services
(born 6/12/60) Company, Senior Vice President
------------
(h) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(j) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(k) "Interested person" of the Trust within the meaning of the Investment Company Act of 1940 (referred to as
the 1940 Act), which is the principal federal law governing investment companies like the fund, as a
result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
(n) In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant
retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The
terms of that settlement required that compensation and expenses related to the independent compliance
consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to
the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29.
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 and officer will serve until
next elected or his or her earlier death, resignation, retirement or removal.
Messrs. Butler, Gutow, Sherratt and Uek and Ms. Thomsen are members of the Trust's Audit Committee.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain
affiliates of MFS. As of January 1, 2007, the Trustees served as board members of 97 funds within the MFS
Family of Funds.
The Statement of Additional Information for the Trust and further information about the Trustees are available
without charge upon request by calling 1-800-225-2606.
On October 22, 2007, Maria F. Dwyer, as Chief Executive Officer of the Trust, certified to the New York Stock
Exchange that as of the date of her certification she was not aware of any violation by the Trust of the
corporate governance listing standards of the New York Stock Exchange.
The Trust filed with the Securities and Exchange Commission the certifications of its principal executive
officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2003 as an exhibit to
the Trust's Form N-CSR for the period covered by this report.
--------------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
INDEPENDENT REGISTERED PUBLIC
PORTFOLIO MANAGERS ACCOUNTING FIRM
John F. Addeo Ernst & Young LLP
David P. Cole 200 Clarendon Street, Boston, MA 02116
Kenneth J. Enright
BOARD REVIEW OF INVESTMENT
ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of
Trustees and a majority of the non-interested ("independent") Trustees, voting
separately, annually approve the continuation of the Fund's investment advisory
agreement with MFS. The Trustees consider matters bearing on the Fund and its
advisory arrangements at their meetings throughout the year, including a review
of performance data at each regular meeting. In addition, the independent
Trustees met several times over the course of three months beginning in May and
ending in July, 2007 ("contract review meetings") for the specific purpose of
considering whether to approve the continuation of the investment advisory
agreement for the Fund and the other investment companies that the Board
oversees (the "MFS Funds"). The independent Trustees were assisted in their
evaluation of the Fund's investment advisory agreement by independent legal
counsel, from whom they received separate legal advice and with whom they met
separately from MFS during various contract review meetings. The independent
Trustees were also assisted in this process by the MFS Funds' Independent Chief
Compliance Officer, a full-time senior officer appointed by and reporting to
the independent Trustees.
In connection with their deliberations regarding the continuation of the
investment advisory agreement, the Trustees, including the independent
Trustees, considered such information and factors as they believed, in light of
the legal advice furnished to them and their own business judgment, to be
relevant. The investment advisory agreement for the Fund was considered
separately, although the Trustees also took into account the common interests
of all MFS Funds in their review. As described below, the Trustees considered
the nature, quality, and extent of the various investment advisory,
administrative, and shareholder services performed by MFS under the existing
investment advisory agreement and other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and
relied upon materials that included, among other items: (i) information
provided by Lipper Inc. on the investment performance (based on net asset
value) of the Fund for various time periods ended December 31, 2006 and the
investment performance (based on net asset value) of a group of funds with
substantially similar investment classifications/objectives (the "Lipper
performance universe"), as well as the investment performance (based on net
asset value) of a group of funds identified by objective criteria suggested by
MFS ("MFS peer funds"), (ii) information provided by Lipper Inc. on the Fund's
advisory fees and other expenses and the advisory fees and other expenses of
comparable funds identified by Lipper (the "Lipper expense group"), as well as
the advisory fees and other expenses of MFS peer funds, (iii) information
provided by MFS on the advisory fees of comparable portfolios of other clients
of MFS, including institutional separate accounts and other clients, (iv)
information as to whether and to what extent applicable expense waivers,
reimbursements or fee "breakpoints" are observed for the Fund, (v) information
regarding MFS' financial results and financial condition, including MFS' and
certain of its affiliates' estimated profitability from services performed for
the Fund and the MFS Funds as a whole, (vi) MFS' views regarding the outlook
for the mutual fund industry and the strategic business plans of MFS, (vii)
descriptions of various functions performed by MFS for the Funds, such as
compliance monitoring and portfolio trading practices, and (viii) information
regarding the overall organization of MFS, including information about MFS'
senior management and other personnel providing investment advisory,
administrative and other services to the Fund and the other MFS Funds. The
comparative performance, fee and expense information prepared and provided by
Lipper Inc. was not independently verified and the independent Trustees did not
independently verify any information provided to them by MFS.
The Trustees' conclusion as to the continuation of the investment advisory
agreement was based on a comprehensive consideration of all information
provided to the Trustees and not the result of any single factor. Some of the
factors that figured particularly in the Trustees' deliberations are described
below, although individual Trustees may have evaluated the information
presented differently from one another, giving different weights to various
factors. It is also important to recognize that the fee arrangements for the
Fund and other MFS Funds are the result of years of review and discussion
between the independent Trustees and MFS, that certain aspects of such
arrangements may receive greater scrutiny in some years than in others, and
that the Trustees' conclusions may be based, in part, on their consideration of
these same arrangements during the course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the
Fund's total return investment performance as well as the performance of peer
groups of funds over various time periods. The Trustees placed particular
emphasis on the total return performance of the Fund's common shares in
comparison to the performance of funds in its Lipper performance universe over
the three-year period ended December 31, 2006, which the Trustees believed was
a long enough period to reflect differing market conditions. The total return
performance of the Fund's common shares ranked 2nd out of a total of 2 funds in
the Lipper performance universe for this three-year period (a ranking of first
place out of the total number of funds in the performance universe indicating
the best performer and a ranking of last place out of the total number of funds
in the performance universe indicating the worst performer). The total return
performance of the Fund's common shares ranked 3rd out of a total of 3 funds
for the one-year period ended December 31, 2006. The Fund was the only fund in
its Lipper performance universe for the five-year period ended December 31,
2006. Given the size of the Lipper performance universe and information
previously provided by MFS regarding differences between the Fund and other
funds in its Lipper performance universe, the Trustees also reviewed the Fund's
performance in comparison to a custom benchmark developed by MFS. The Fund
under-performed its custom benchmark for each of the one- and three-year
periods ended December 31, 2006 (one-year: 10.08% total return for the Fund
versus 15.28% total return for the benchmark; three-year: 8.04% total return
for the Fund versus 10.99% total return for the benchmark) and out-performed
its custom benchmark for the five-year period ended December 31, 2006 (11.88%
total return for the Fund versus 10.86% total return for the benchmark).
Because of the passage of time, these performance results are likely to differ
from the performance results for more recent periods, including those shown
elsewhere in this report.
In the course of their deliberations, the Trustees took into account
information provided by MFS in connection with the contract review meetings, as
well as during investment review meetings conducted with portfolio management
personnel during the course of the year regarding the Fund's performance. After
reviewing these and related factors, the Trustees concluded, within the context
of their overall conclusions regarding the investment advisory agreement, that
they were satisfied with MFS' responses and efforts relating to investment
performance.
In assessing the reasonableness of the Fund's advisory fee, the Trustees
considered, among other information, the Fund's advisory fee and the total
expense ratio of the Fund's common shares as a percentage of average daily net
assets and the advisory fee and total expense ratios of peer groups of funds
based on information provided by Lipper Inc. and MFS. The Trustees considered
that, according to the Lipper data, the Fund's effective advisory fee rate was
approximately at the Lipper expense group median, and the Fund's total expense
ratio was lower than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional
accounts. In comparing these fees, the Trustees considered information provided
by MFS as to the generally broader scope of services provided by MFS to the
Fund in comparison to institutional accounts and the impact on MFS and expenses
associated with the more extensive regulatory regime to which the Fund is
subject in comparison to institutional accounts.
The Trustees considered that, as a closed-end fund, the Fund is unlikely to
experience meaningful asset growth. As a result, the Trustees did not view the
potential for realization of economies of scale as the Fund's assets grow to be
a material factor in their deliberations. The Trustees noted that they would
consider economies of scale in the future in the event the Fund experiences
significant asset growth, such as through an offering of preferred shares
(which is not currently contemplated) or a material increase in the market
value of the Fund's portfolio securities.
The Trustees also considered information prepared by MFS relating to MFS' costs
and profits with respect to the Fund, the MFS Funds considered as a group, and
other investment companies and accounts advised by MFS, as well as MFS'
methodologies used to determine and allocate its costs to the MFS Funds, the
Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees
concluded, within the context of their overall conclusions regarding the
investment advisory agreement, that the advisory fees charged to the Fund
represent reasonable compensation in light of the services being provided by
MFS to the Fund.
In addition, the Trustees considered MFS' resources and related efforts to
continue to retain, attract and motivate capable personnel to serve the Fund.
The Trustees also considered current and developing conditions in the financial
services industry, including the entry into the industry of large and
well-capitalized companies which are spending, and appear to be prepared to
continue to spend, substantial sums to engage personnel and to provide services
to competing investment companies. In this regard, the Trustees also considered
the financial resources of MFS and its ultimate parent, Sun Life Financial Inc.
The Trustees also considered the advantages and possible disadvantages to the
Fund of having an adviser that also serves other investment companies as well
as other accounts.
The Trustees also considered the nature, quality, cost, and extent of
administrative services provided to the Fund by MFS under agreements other than
the investment advisory agreement. The Trustees also considered the nature,
extent and quality of certain other services MFS performs or arranges for on
the Fund's behalf, which may include securities lending programs, directed
expense payment programs, class action recovery programs, and MFS' interaction
with third-party service providers, principally custodians and sub-custodians.
The Trustees concluded that the various non-advisory services provided by MFS
and its affiliates on behalf of the Funds were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund's
portfolio brokerage commissions, if applicable, to pay for investment research
(excluding third-party research, for which MFS pays directly) and various other
factors. Additionally, the Trustees considered so-called "fall-out benefits" to
MFS such as reputational value derived from serving as investment manager to
the Fund.
Based on their evaluation of factors that they deemed to be material, including
those factors described above, the Board of Trustees, including a majority of
the independent Trustees, concluded that the Fund's investment advisory
agreement with MFS should be continued for an additional one-year period,
commencing August 1, 2007.
A discussion regarding the Board's most recent review and renewal of the Fund's
investment advisory agreement is available by clicking on the fund's name under
"Select a fund" on the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the Proxy Voting section of mfs.com or by visiting the SEC's Web site at
http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is
available without charge by visiting the Proxy Voting section of mfs.com or by
visiting the SEC's Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet Web site at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
FEDERAL TAX INFORMATION (unaudited)
The trust will notify shareholders of amounts for use in preparing 2007 income
tax forms in January 2008. The following information is provided pursuant to
provisions of the Internal Revenue Code.
The trust designates the maximum amount allowable as qualified dividend income
eligible for the 15% tax rate.
The trust designates $546,024 as capital gain dividends paid during the fiscal
year.
MFS(R) PRIVACY NOTICE
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 the investment products and services 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 nonpublic
personal information with third parties or certain of our affiliates in
connection with servicing your account or processing your transactions. We may
share information with companies or financial institutions that perform
marketing services on our behalf or with other financial institutions with
which we have joint marketing arrangements, subject to any legal requirements.
Authorization to access your nonpublic personal information is limited to
appropriate personnel who provide products, services, or information to you. We
maintain physical, electronic, and procedural safeguards to help protect the
personal information we collect about you.
If you have any questions about the 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.
CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS
INVESTOR INFORMATION
Transfer Agent, Registrar and Dividend Disbursing Agent
Call 1-800-637-2304 any business day from 9 a.m. to 5 p.m. Eastern time
Write to: Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Effective December 18, 2006, Computershare Trust Company, N.A. became the
Transfer Agent and Registrar and Computershare Shareholder Services, Inc.
became the Dividend Disbursing Agent, succeeding MFS Service Center, Inc.
NUMBER OF SHAREHOLDERS
As of October 31, 2007, our records indicate that there are 488 registered
shareholders and approximately 4,655 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:
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
1-800-637-2304
M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street, Boston, MA 02116
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the
Registrant's principal executive officer and principal financial and accounting
officer. The Registrant has not amended any provision in its Code of Ethics
(the "Code") that relates to an element of the Code's definitions enumerated in
paragraph (b) of Item 2 of this Form N-CSR.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Messrs. Robert E. Butler and Robert W. Uek and Ms. Laurie J. Thomsen, members
of the Audit Committee, have been determined by the Board of Trustees in their
reasonable business judgment to meet the definition of "audit committee
financial expert" as such term is defined in Form N-CSR. In addition, Messrs.
Butler, and Uek and Ms. Thomsen are "independent" members of the Audit
Committee (as such term has been defined by the Securities and Exchange
Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of
2002). The Securities and Exchange Commission has stated that the designation
of a person as an audit committee financial expert pursuant to this Item 3 on
the Form N-CSR does not impose on such a person any duties, obligations or
liability that are greater than the duties, obligations or liability imposed on
such person as a member of the Audit Committee and the Board of Trustees in the
absence of such designation or identification.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(a) THROUGH 4(d) AND 4(g):
The Board of Trustees has appointed Ernst & Young LLP ("E&Y") to serve as
independent accountants to the Registrant (hereinafter the "Registrant" or the
"Fund"). The tables below set forth the audit fees billed to the Fund as well
as fees for non-audit services provided to the Fund and/or to the Fund's
investment adviser, Massachusetts Financial Services Company ("MFS"), and to
various entities either controlling, controlled by, or under common control
with MFS that provide ongoing services to the Fund ("MFS Related Entities").
For the fiscal years ended October 31, 2007 and 2006, audit fees billed to the
Fund by E&Y were as follows:
Audit Fees
FEES BILLED BY E&Y: 2007 2006
---- ----
MFS Special Value Trust 40,580 37,375
For the fiscal years ended October 31, 2007 and 2006, fees billed by E&Y for
audit-related, tax and other services provided to the Fund and for
audit-related, tax and other services provided to MFS and MFS Related Entities
were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY E&Y: 2007 2006 2007 2006 2007 2006
---- ---- ---- ---- ---- ----
To MFS Special Value 10,000 15,000 8,744 8,807 0 144
Trust
To MFS and MFS Related 0 0 0 15,500 0 0
Entities of MFS
Special Value
Trust*
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2007 2006
---- ----
To MFS Special Value Trust, 219,760 113,820
MFS and MFS Related
Entities#
* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to
the operations and financial reporting of the Fund (portions of which services also related to the operations and
financial reporting of other funds within the MFS Funds complex).
# This amount reflects the aggregate fees billed by E&Y for non-audit services rendered to the Fund and for
non-audit services rendered to MFS and the MFS Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are
reasonably related to the performance of the audit or review of financial statements, but not reported under
"Audit Fees," including accounting consultations, agreed-upon procedure reports, attestation reports, comfort
letters and internal control reviews.
(2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including
services relating to the filing or amendment of federal, state or local income tax returns, regulated investment
company qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services provided by E&Y other than those
reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees," including fees for the subscription to tax
treatise and for services related to analysis of fund administrative expenses, compliance program and records
management projects.
ITEM 4(e)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Fund and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the
Audit Committee and it is not practical to wait to seek pre-approval at the
next regular meeting of the Audit Committee, pre-approval of such services may
be referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 between such regular meetings of the Audit Committee. Any engagement
pre-approved by the Chair between regular meetings of the Audit Committee shall
be presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(e)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Fund and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after
the start of the engagement with respect to services other than audit, review
or attest services, if certain conditions are satisfied).
ITEM 4(f): Not applicable.
ITEM 4(h): The Registrant's Audit Committee has considered whether the
provision by a Registrant's independent registered public accounting firm of
non-audit services to MFS and MFS Related Entities that were not pre-approved
by the Committee (because such services were provided prior to the
effectiveness of SEC rules requiring pre-approval or because such services did
not relate directly to the operations and financial reporting of the
Registrant) was compatible with maintaining the independence of the independent
registered public accounting firm as the Registrant's principal auditors
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The Registrant has an Audit Committee established in accordance with Section
3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit
Committee are Messrs. Robert E. Butler, William R. Gutow, J. Dale Sherratt and
Robert W. Uek and Ms. Laurie J. Thomsen.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments of the Registrant is included as part of the report
to shareholders of the Registrant under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Board of Trustees and the Board of Managers of the investment
companies (the "MFS Funds") advised by Massachusetts Financial Services Company
("MFS") have delegated to MFS the right and obligation to vote proxies for
shares that are owned by the MFS Funds, in accordance with MFS' proxy voting
policies and procedures (the "MFS Proxy Policies"). The MFS Proxy Policies are
set forth below:
MASSACHUSETTS FINANCIAL SERVICES COMPANY
PROXY VOTING POLICIES AND PROCEDURES
MARCH 1, 2007
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 ("MFS Proxy
Voting Policies and Procedures"), with respect to securities owned by the
clients for which MFS serves as investment adviser and has the power to vote
proxies, including the registered investment companies sponsored by MFS, other
than the MFS Union Standard Equity Fund (the "MFS Funds"). References to
"clients" in these policies and procedures include the MFS Funds and other
clients of MFS, such as funds organized offshore, sub-advised funds and
separate account clients, to the extent these clients have delegated to MFS the
responsibility to vote proxies on their behalf under the MFS Proxy Voting
Policies and Procedures.
The MFS Proxy Voting 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 periodically reviews matters that are presented for shareholder
vote by either management or shareholders of public companies. Based on the
overall principle that all votes cast 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, set forth below, that govern
how MFS generally will vote on specific matters presented for shareholder vote.
In all cases, MFS will exercise its discretion in voting on these matters in
accordance with this overall principle. In other words, the underlying
guidelines are simply that - guidelines. Proxy items of significance are often
considered on a case-by-case basis, in light of all relevant facts and
circumstances, and in certain cases MFS may vote proxies in a manner different
from these guidelines.
As a general matter, MFS maintains a consistent voting position on
similar proxy proposals with respect to 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 different proxy statements. There also
may be situations involving matters presented for shareholder vote that are not
governed by the guidelines. 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 overall principle of voting
proxies in the best long-term economic interests of MFS' clients.
From time to time, MFS receives comments on these guidelines as well
as regarding particular voting issues from its clients. These comments are
carefully considered by MFS when it reviews these guidelines each year and
revises them 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 are
likely to arise in connection with the voting of proxies on behalf of MFS'
clients. If such potential material conflicts of interest do arise, MFS will
analyze, document and report on such potential material conflicts of interest
(see Sections B.2 and E below), and shall ultimately vote the relevant proxies
in what MFS believes to be the best long-term economic interests of its
clients. The MFS Proxy Voting Committee is responsible for monitoring and
reporting with respect to such potential material conflicts of interest.
2. MFS' POLICY ON SPECIFIC ISSUES
ELECTION OF DIRECTORS
MFS believes that good governance should be based on a board with at
least a simple majority of directors who are "independent" of management, and
whose key committees (e.g., compensation, nominating, and audit committees) are
comprised entirely of "independent" directors. While MFS generally supports the
board's nominees in uncontested elections, we will withhold our vote for, or
vote against, as applicable, a nominee to a board of a U.S. issuer if, as a
result of such nominee being elected to the board, the board would be comprised
of a majority of members who are not "independent" or, alternatively, the
compensation, nominating or audit committees would include members who are not
"independent."
MFS will also withhold its vote for, or vote against, as applicable, a
nominee to a board if we can determine that he or she failed to attend at least
75% of the board and/or relevant committee meetings in the previous year
without a valid reason stated in the proxy materials. In addition, MFS will
withhold its vote for, or vote against, as applicable, all nominees standing
for re-election to a board if we can determine: (1) since the last annual
meeting of shareholders and without shareholder approval, the board or its
compensation committee has re-priced underwater stock options; or (2) since the
last annual meeting, the board has either implemented a poison pill without
shareholder approval or has not taken responsive action to a majority
shareholder approved resolution recommending that the "poison pill" be
rescinded. Responsive action would include the rescission of the "poison
pill"(without a broad reservation to reinstate the "poison pill" in the event
of a hostile tender offer), or assurance in the proxy materials that the terms
of the "poison pill" would be put to a binding shareholder vote within the next
five to seven years.
MFS will also withhold its vote for, or vote against, as applicable, a
nominee (other than a nominee who serves as the issuer's Chief Executive
Officer) standing for re-election if such nominee participated (as a director
or committee member) in the approval of a senior executive compensation package
MFS deems to be "excessive." In the event that MFS determines that an issuer
has adopted an "excessive" executive compensation package, MFS will withhold
its vote for, or vote against, as applicable, the re-election of the issuer's
Chief Executive Officer as director regardless of whether the Chief Executive
Officer participated in the approval of the package. MFS will determine whether
a senior executive compensation package is excessive on a case by case basis.
Examples of "excessive" executive compensation packages include packages that
contain egregious employment contract terms or pension payouts, backdated stock
options, overly generous hiring bonuses for chief executive officers or
packages which include excessive perks.
MFS evaluates a contested election of directors on a case-by-case
basis considering the long-term financial performance of the company relative
to its industry, management's track record, the qualifications of the nominees
for both slates and an evaluation of what each side is offering shareholders.
MFS votes for reasonably crafted proposals calling for directors to be
elected with an affirmative majority of votes cast and/or the elimination of
the plurality standard for electing directors (including binding resolutions
requesting that the board amend the company's bylaws), provided the proposal
includes a carve-out for a plurality voting standard when there are more
director nominees than board seats (e.g., contested elections) ("Majority Vote
Proposals").
MFS considers voting against Majority Vote Proposals if the company
has adopted, or has proposed to adopt in the proxy statement, formal corporate
governance principles that present a meaningful alternative to the majority
voting standard and provide an adequate response to both new nominees as well
as incumbent nominees who fail to receive a majority of votes cast.
MFS believes that a company's election policy should address the specific
circumstances at that company. MFS considers whether a company's election
policy articulates the following elements to address each director nominee who
fails to receive an affirmative majority of votes cast in an election:
o Establish guidelines for the process by which the company determines the
status of nominees who fail to receive an affirmative majority of votes cast
and disclose the guidelines in the annual proxy statement;
o Guidelines should include a reasonable timetable for resolution of the
nominee's status and a requirement that the resolution be disclosed together
with the reasons for the resolution;
o Vest management of the process in the company's independent directors, other
than the nominee in question; and
o Outline the range of remedies that the independent directors may consider
concerning the nominee.
CLASSIFIED BOARDS
MFS opposes proposals to classify a board (e.g., a board in which only
one-third of board members are elected each year). MFS supports
proposals to declassify a board.
NON-SALARY COMPENSATION PROGRAMS
MFS votes against stock 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 stock options
with an exercise price below fair market value on the date the options are
granted.
MFS also opposes stock option programs that allow the board or the
compensation committee, without shareholder approval, to reprice underwater
options or to automatically replenish shares (i.e., evergreen plans). MFS will
consider on a case-by-case basis proposals to exchange existing options for
newly issued options (taking into account such factors as whether there is a
reasonable value-for-value exchange).
MFS opposes stock option programs and restricted stock 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 restricted stock plans, stock option, non-employee
director, omnibus stock plans and any other stock plan if all such plans for a
particular company involve potential dilution, in the aggregate, of more than
15%. However, MFS may accept a higher percentage (up to 20%) in the case of
startup or small companies which cannot afford to pay large salaries to
executives, or in the case where MFS, based upon the issuer's public
disclosures, believes that the issuer has been responsible with respect to its
recent compensation practices, including the mix of the issuance of restricted
stock and options.
EXPENSING OF STOCK OPTIONS
MFS supports shareholder proposals to expense stock options because we
believe that the expensing of options presents a more accurate picture of the
company's financial results to investors. We also believe that companies are
likely to be more disciplined when granting options if the value of stock
options were treated as an expense item on the company's income statements.
EXECUTIVE COMPENSATION
MFS believes that competitive compensation packages are necessary to
attract, motivate and retain executives. Therefore, except as provided in
paragraph 2 above with respect to "excessive compensation" and the election of
directors, MFS opposes shareholder proposals that seek to set restrictions on
executive compensation. MFS also opposes shareholder requests for disclosure on
executive compensation beyond regulatory requirements because we believe that
current regulatory requirements for disclosure of executive compensation are
appropriate and that additional disclosure is often unwarranted and costly.
Although we support linking executive stock option grants to a company's
performance, MFS opposes shareholder proposals that mandate a link of
performance-based options to a specific industry or peer group stock index. MFS
believes that compensation committees should retain the flexibility to propose
the appropriate index or other criteria by which performance-based options
should be measured.
MFS supports reasonably crafted shareholder proposals that (i) require
the issuer to adopt a policy to recover the portion of performance-based
bonuses and awards paid to senior executives that were not earned based upon a
significant negative restatement of earnings unless the company already has
adopted a clearly satisfactory policy on the matter, or (ii) expressly prohibit
any future backdating of stock options.
EMPLOYEE STOCK PURCHASE PLANS
MFS supports the use of a broad-based employee stock purchase plans to
increase company stock ownership by employees, provided that shares purchased
under the plan are acquired for no less than 85% of their market value and do
not result in excessive dilution.
"GOLDEN PARACHUTES"
From time to time, shareholders of companies have submitted proxy
proposals that would require shareholder approval of 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 multiple of such officer's annual compensation that is not determined
in MFS' judgment to be excessive.
ANTI-TAKEOVER MEASURES
In general, MFS votes against any measure that inhibits capital
appreciation in a stock, including proposals that protect management from
action by shareholders. These types of proposals take many forms, ranging from
"poison pills" and "shark repellents" to super-majority requirements.
MFS will vote for proposals to rescind existing "poison pills" and
proposals that would require shareholder approval to adopt prospective "poison
pills." Nevertheless, MFS will consider supporting the adoption of a
prospective "poison pill" or the continuation of an existing "poison pill" if
we can determine that the following two conditions are met: (1) the "poison
pill" allows MFS clients to hold an aggregate position of up to 15% of a
company's total voting securities (and of any class of voting securities); and
(2) either (a) the "poison pill" has a term of not longer than five years,
provided that MFS will consider voting in favor of the "poison pill" if the
term does not exceed seven years and the "poison pill" is linked to a business
strategy or purpose that MFS believes is likely to result in greater value for
shareholders; or (b) the terms of the "poison pill" allow MFS clients the
opportunity to accept a fairly structured and attractively priced tender offer
(e.g., a "chewable poison pill" that automatically dissolves in the event of an
all cash, all shares tender offer at a premium price).
MFS will consider on a case-by-case basis proposals designed to
prevent tenders which are disadvantageous to shareholders such as tenders at
below market prices and tenders for substantially less than all shares of an
issuer.
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.
ISSUANCE OF STOCK
There are many legitimate reasons for the issuance of stock.
Nevertheless, 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.
MFS may also vote against the authorization or issuance of common or preferred
stock if MFS determines that the requested authorization is not warranted.
REPURCHASE PROGRAMS
MFS supports proposals to institute share repurchase plans in which
all shareholders have the opportunity to participate on an equal basis. Such
plans may include a company acquiring its own shares on the open market, or a
company making a tender offer to its own shareholders.
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.
CUMULATIVE VOTING
MFS opposes proposals that seek to introduce cumulative voting and for
proposals that seek to eliminate cumulative voting. In either case, MFS will
consider whether cumulative voting is likely to enhance the interests of MFS'
clients as minority shareholders. In our view, shareholders should provide
names of qualified candidates to a company's nominating committee, which (for
U.S. listed companies) must be comprised solely of "independent" directors.
WRITTEN CONSENT AND SPECIAL MEETINGS
Because the shareholder right to act by written consent (without
calling a formal meeting of shareholders) can be a powerful tool for
shareholders, MFS generally opposes proposals that would prevent shareholders
from taking action without a formal meeting or would take away a shareholder's
right to call a special meeting of company shareholders.
INDEPENDENT AUDITORS
MFS believes that the appointment of auditors for U.S. issuers is best
left to the board of directors of the company and therefore supports the
ratification of the board's selection of an auditor for the company. Some
shareholder groups have submitted proposals to limit the non-audit activities
of a company's audit firm or prohibit any non-audit services by a company's
auditors to that company. MFS opposes proposals recommending the prohibition or
limitation of the performance of non-audit services by an auditor, and
proposals recommending the removal of a company's auditor due to the
performance of non-audit work for the company by its auditor. MFS believes that
the board, or its audit committee, should have the discretion to hire the
company's auditor for specific pieces of non-audit work in the limited
situations permitted under current law.
OTHER CORPORATE GOVERNANCE, CORPORATE RESPONSIBILITY AND SOCIAL ISSUES
There are many groups advocating social change or changes to corporate
governance or corporate responsibility standards, and many have chosen the
publicly-held corporation as a vehicle for advancing their agenda. Generally,
MFS votes with management on such proposals unless MFS can determine that the
benefit to shareholders will outweigh any costs or disruptions to the business
if the proposal were adopted. Common among the shareholder proposals that MFS
generally votes against are proposals requiring the company to use corporate
resources to further a particular social objective outside the business of the
company, to refrain from investing or conducting business in certain countries,
to adhere to some list of goals or principles (e.g., environmental standards),
to disclose political contributions made by the issuer, to separate the
Chairman and Chief Executive Officer positions, or to promulgate special
reports on various activities or proposals for which no discernible shareholder
economic advantage is evident.
The laws of various states may regulate how the interests of certain
clients subject to those laws (e.g., state pension plans) are voted with
respect to social issues. Thus, it may be necessary to cast ballots differently
for certain clients than MFS might normally do for other clients.
FOREIGN ISSUERS
Many of the items on foreign proxies involve repetitive,
non-controversial matters that are mandated by local law. Accordingly, the
items that are generally deemed routine and which do not require the exercise
of judgment under these guidelines (and therefore voted in favor) for foreign
issuers include 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) discharge of
management and supervisory boards; and (v) approval of share repurchase
programs.
MFS generally supports the election of a director nominee standing for
re-election in uncontested elections unless it can be determined that (1) he or
she failed to attend at least 75% of the board and/or relevant committee
meetings in the previous year without a valid reason given in the proxy
materials; (2) since the last annual meeting of shareholders and without
shareholder approval, the board or its compensation committee has re-priced
underwater stock options; or (3) since the last annual meeting, the board has
either implemented a poison pill without shareholder approval or has not taken
responsive action to a majority shareholder approved resolution recommending
that the "poison pill" be rescinded. MFS will also withhold its vote for, or
vote against, as applicable, a director nominee standing for re-election of an
issuer that has adopted an excessive compensation package for its senior
executives as described above in the section entitled "Voting Guidelines-MFS'
Policy on Specific Issues-Election of Directors."
MFS generally supports the election of auditors, but may determine to
vote against the election of a statutory auditor in certain markets if MFS
reasonably believes that the statutory auditor is not truly independent. MFS
will evaluate all other items on proxies for foreign companies in the context
of the guidelines described above, but will generally vote against an item if
there is not sufficient information disclosed in order to make an informed
voting decision.
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 share blocking 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 will
not vote those proxies in the absence of an unusual, significant vote.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY VOTING COMMITTEE
The administration of these MFS Proxy Voting Policies and Procedures
is overseen by the MFS Proxy Voting Committee, which includes senior personnel
from the MFS Legal and Global Investment Support Departments. The MFS Proxy
Voting Committee:
a. Reviews these MFS Proxy Voting Policies and Procedures at least
annually and recommends any amendments considered to be necessary
or advisable;
b. Determines whether any potential material conflicts of interest
exist with respect to instances in which (i) MFS seeks to override
these MFS Proxy Voting Policies and Procedures and (ii) votes on
ballot items not clearly governed by these MFS Proxy Voting
Policies and Procedures; and
c. Considers special proxy issues as they may arise from time to time.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Voting Committee 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
significant attempt to influence MFS' voting on a particular proxy matter
should be reported to the MFS Proxy Voting Committee.
In cases where proxies are voted in accordance with these MFS Proxy
Voting Policies and Procedures, no material conflict of interest will be deemed
to exist. In cases where (i) MFS is considering overriding these MFS Proxy
Voting Policies and Procedures, or (ii) matters presented for vote are not
governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy
Voting Committee, or delegees, 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 or its affiliate
MFS Retirement Services, Inc. ("RSI"), 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 Voting Committee;
c. If the name of the issuer appears on the MFS Significant Client
List, then the MFS Proxy Voting Committee will be apprised of that
fact and each member of the MFS Proxy Voting Committee will
carefully evaluate the proposed vote 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 Voting Committee will document: the
name of the issuer, the issuer's relationship to MFS, the analysis
of the matters submitted for proxy vote, the votes as to be cast
and the reasons why the MFS Proxy Voting Committee determined that
the votes were cast in the best long-term economic interests of
MFS' clients, and not in MFS' corporate interests. A copy of the
foregoing documentation will be provided to MFS' Conflicts Officer.
The members of the MFS Proxy Voting Committee are responsible for
creating and maintaining the MFS Significant Client List, in consultation with
MFS' distribution, institutional business units and RSI. The MFS Significant
Client List will be reviewed and updated periodically, as appropriate.
3. GATHERING PROXIES
Most proxies received by MFS and its clients originate at Automatic
Data Processing Corp. ("ADP") although a few proxies are transmitted to
investors by corporate issuers through their custodians or depositories. 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. This material will include
proxy cards, reflecting the shareholdings of Funds and of clients on the record
dates for such shareholder meetings, as well as proxy statements with 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 related administrative services, such
as vote processing and recordkeeping functions for MFS' Funds and institutional
client accounts. The Proxy Administrator receives proxy statements and proxy
cards directly or indirectly 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 all upcoming shareholders' meetings are
available on-line to certain MFS employees and the MFS Proxy Voting Committee.
4. ANALYZING PROXIES
Proxies are voted in accordance with these MFS Proxy Voting Policies
and Procedures. The Proxy Administrator at the prior direction of MFS
automatically votes all proxy matters that do not require the particular
exercise of discretion or judgment with respect to these MFS Proxy Voting
Policies and Procedures as determined by the MFS Proxy Voting Committee. With
respect to proxy matters that require the particular exercise of discretion or
judgment, MFS considers and votes on those proxy matters. MFS receives research
from ISS which it may take into account in deciding how to vote. In addition,
MFS expects to rely on ISS to identify circumstances in which a board may have
approved excessive executive compensation. Representatives of the MFS Proxy
Voting Committee review, as appropriate, votes cast to ensure conformity with
these MFS Proxy Voting Policies and Procedures.
As a general matter, portfolio managers and investment analysts have
little or no involvement in specific votes 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 the potential
that proxy solicitors, issuers, or third parties might attempt to exert
inappropriate influence on the vote. In limited types of votes (e.g., corporate
actions, such as mergers and acquisitions), a representative of MFS Proxy
Voting Committee may consult with or seek recommendations from portfolio
managers or analysts.(1) However, the MFS Proxy Voting Committee would
ultimately determine the manner in which all proxies are voted.
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(1) 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 prior to the cut-off date of the
shareholder meeting, certain members of the MFS Proxy Voting Committee may
determine to abstain from voting.
As noted above, MFS reserves the right to override the guidelines when
such an override is, in MFS' best judgment, consistent with the overall
principle of voting proxies in the best long-term economic interests of MFS'
clients. Any such override of the guidelines shall be analyzed, documented and
reported in accordance with the procedures set forth in these policies.
5. VOTING PROXIES
In accordance with its contract with MFS, the Proxy Administrator also
generates a variety of reports for the MFS Proxy Voting Committee, and makes
available on-line various other types of information so that the MFS Proxy
Voting Committee may review and 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
Voting Committee to monitor the proxy voting process. When proxy materials for
clients are received, they are forwarded to the Proxy Administrator and are
input into the Proxy Administrator's system. 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 voting
cut-off 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 forwarded 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 MFS Proxy Voting Policies and
Procedures in effect from time to time and will retain all proxy voting reports
submitted to the Board of Trustees, Board of Directors and Board of Managers of
the MFS Funds for the period required by applicable law. Proxy solicitation
materials, including electronic versions of the proxy cards completed by
representatives of the MFS Proxy Voting Committee, 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 Voting
Committee. All proxy voting materials and supporting documentation, including
records generated by the Proxy Administrator's system as to proxies processed,
including the dates when proxy ballots were received and submitted, and the
votes on each company's proxy issues, are retained as required by applicable
law.
E. REPORTS
MFS FUNDS
MFS will report the results of its voting to the Board of Trustees,
Board of Directors and Board of Managers of the MFS Funds. These reports will
include: (i) a summary of how votes were cast; (ii) a review of situations
where MFS did not vote in accordance with the guidelines and the rationale
therefore; (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, Directors and Managers of the MFS Funds will consider
possible modifications to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has
requested that MFS furnish a record of votes cast. The report specifies the
proxy issues which have been voted for the client during the year and the
position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party
other than the client or its representatives (unless required by applicable
law) because we consider that information to be confidential and proprietary to
the client.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
GENERAL. Information regarding the portfolio manager(s) of the MFS Special
Value Trust (the "Fund") is set forth below.
PORTFOLIO MANAGER PRIMARY ROLE SINCE TITLE AND FIVE YEAR HISTORY
----------------- ------------ ----- ---------------------------
John Addeo Debt Securities 2002 Senior Vice President of
Portfolio Manager MFS; employed in the
investment management
area of MFS since 1998.
Kenneth J. Enright Equity Securities 2004 Senior Vice President of
Portfolio Manager MFS; employed in the
investment management
area of MFS since 1986
David P. Cole Debt Securities October 2006 Vice President of MFS;
Portfolio Manager employed in the
investment management
area of MFS since 2004.
High Yield Analyst at
Franklin Templeton
Investments from 1999 to
2004.
COMPENSATION. Portfolio manager total cash compensation is a combination of
base salary and performance bonus:
o Base Salary - Base salary represents a smaller percentage of portfolio
manager total cash compensation (generally below 33%) than incentive
compensation.
o Performance Bonus - Generally, incentive compensation represents a
majority of portfolio manager total cash compensation. The performance
bonus is based on a combination of quantitative and qualitative factors,
with more weight given to the former (generally over 60 %) and less
weight given to the latter.
>> The quantitative portion is based on pre-tax performance of all of
the accounts managed by the portfolio manager (which includes the
Fund and any other accounts managed by the portfolio manager) over a
one-, three- and five-year period relative to the appropriate Lipper
peer group universe and/or one or more benchmark indices with
respect to each account. Primary weight is given to portfolio
performance over a three-year time period with lesser consideration
given to portfolio performance over one- and five-year periods
(adjusted as appropriate if the portfolio manager has served for
shorter periods).
>> The qualitative portion is based on the results of an annual
internal peer review process (conducted by other portfolio managers,
analysts and traders) and management's assessment of overall
portfolio manager contributions to investor relations and the
investment process (distinct from fund and other account
performance).
Portfolio managers also typically benefit from the opportunity to participate
in the MFS Equity Plan. Equity interests and/or options to acquire equity
interests in MFS or its parent company are awarded by management, on a
discretionary basis, taking into account tenure at MFS, contribution to the
investment process, and other factors.
Finally, portfolio managers are provided with a benefits package including a
defined contribution plan, health coverage and other insurance, which are
available to other employees of MFS on substantially similar terms. The
percentage such benefits represent of any portfolio manager's compensation
depends upon the length of the individual's tenure at MFS and salary level, as
well as other factors.
OWNERSHIP OF FUND SHARES. The following table shows the dollar range of equity
securities of the Fund beneficially owned by the Fund's portfolio manager as of
the Fund's fiscal year ended October 31, 2007. The following dollar ranges
apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
NAME OF PORTFOLIO MANAGER DOLLAR RANGE OF EQUITY SECURITIES IN FUND
------------------------- -----------------------------------------
John Addeo N
Kenneth J. Enright N
David P. Cole N
OTHER ACCOUNTS. In addition to the Fund, the Fund's portfolio manager is
responsible (either individually or jointly) for the day-to-day management of
certain other accounts, the number and total assets of which as of the Fund's
fiscal year ended October 31, 2007 were as follows:
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
--------------------- ----------------------- --------------
NUMBER OF NUMBER OF NUMBER OF
NAME ACCOUNTS* TOTAL ASSETS* ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
John Addeo 14 $4.9 billion 3 $518.8 million 2 $535.8
million
Kenneth J. Enright 10 $23.0 billion 0 N/A 1 $718.2
million
David P. Cole 11 $4.5 billion 2 $238.2 million 0 N/A
--------------
* Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified
in the table above.
POTENTIAL CONFLICTS OF INTEREST. MFS seeks to identify potential conflicts of
interest resulting from a portfolio manager's management of both the Fund and
other accounts, and has adopted policies and procedures designed to address
such potential conflicts.
The management of multiple funds and accounts (including proprietary accounts)
may give rise to potential conflicts of interest if the funds and accounts have
different objectives and strategies, benchmarks, time horizons and fees as a
portfolio manager must allocate his or her time and investment ideas across
multiple funds and accounts. In certain instances there may be securities which
are suitable for the Fund's portfolio as well as for accounts of MFS or its
subsidiaries with similar investment objectives. A Fund's trade allocation
policies may give rise to conflicts of interest if the Fund's orders do not get
fully executed or are delayed in getting executed due to being aggregated with
those of other accounts of MFS or its subsidiaries. A portfolio manager may
execute transactions for another fund or account that may adversely impact the
value of the Fund's investments. Investments selected for funds or accounts
other than the Fund may outperform investments selected for the Fund.
When two or more clients are simultaneously engaged in the purchase or sale of
the same security, the securities are allocated among clients in a manner
believed by MFS to be fair and equitable to each. It is recognized that in some
cases this system could have a detrimental effect on the price or volume of the
security as far as the Fund is concerned. In most cases, however, MFS believes
that the Fund's ability to participate in volume transactions will produce
better executions for the Fund.
MFS does not receive a performance fee for its management of the Fund. As a
result, MFS and/or a portfolio manager may have a financial incentive to
allocate favorable or limited opportunity investments or structure the timing
of investments to favor accounts other than the Fund - for instance, those that
pay a higher advisory fee and/or have a performance fee.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
============================================================================================================
MFS SPECIAL VALUE TRUST
------------------------------------------------------------------------------------------------------------
(D)
(C) MAXIMUM NUMBER
TOTAL NUMBER OF (OR APPROXIMATE
(B) SHARES PURCHASED AS DOLLAR VALUE) OF
(A) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET
TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR BE PURCHASED UNDER
PERIOD SHARES PURCHASED PER SHARE PROGRAMS THE PLANS OR PROGRAMS
============================================================================================================
11/1/06-11/30/06 0 N/A 0 679,033
------------------------------------------------------------------------------------------------------------
12/1/06-12/31/06 0 N/A 0 679,033
------------------------------------------------------------------------------------------------------------
1/1/07-1/31/07 0 N/A 0 679,033
------------------------------------------------------------------------------------------------------------
2/1/07-2/28/07 0 N/A 0 679,033
------------------------------------------------------------------------------------------------------------
3/1/07-3/31/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
4/1/07-4/30/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
5/1/07-5/31/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
6/1/07-6/30/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
7/1/07-7/31/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
8/1/07-8/31/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
9/1/07-9/30/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
10/1/07-10/31/07 0 N/A 0 685,222
------------------------------------------------------------------------------------------------------------
TOTAL 0 N/A 0
============================================================================================================
Note: The Board of Trustees approves procedures to repurchase shares annually.
The notification to shareholders of the program is part of the semi-annual and
annual reports sent to shareholders. These annual programs begin on March 1st
of each year. The programs conform to the conditions of Rule 10b-18 of the
securities Exchange Act of 1934 and limit the aggregate number of shares that
may be purchased in each annual period (March 1 through the following February
28) to 10% of the Registrant's outstanding shares as of the first day of the
plan year (March 1). The aggregate number of shares available for purchase for
the March 1, 2007 plan year is 685,222.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940 (the "Act")) as conducted within 90 days of the filing date of this
Form N-CSR, the registrant's principal financial officer and principal
executive officer have concluded that those disclosure controls and
procedures provide reasonable assurance that the material information
required to be disclosed by the registrant on this report is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: Code of Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto. (3)Any written
solicitation to purchase securities under Rule 23c-1 under the Act sent
or given during the period covered by the report by or on behalf of the
Registrant to 10 or more persons. Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
NOTICE
A copy of the Amended and Restated Declaration of Trust of the Registrant is on
file with the Secretary of State of the Commonwealth of Massachusetts and
notice is hereby given that this instrument is executed on behalf of the
Registrant by an officer of the Registrant as an officer and not individually
and the obligations of or arising out of this instrument are not binding upon
any of the Trustees or shareholders individually, but are binding only upon the
assets and property of the respective constituent series of the Registrant.
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)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President
Date: December 17, 2007
-----------------
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)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President (Principal Executive
Officer)
Date: December 17, 2007
-----------------
By (Signature and Title)* TRACY ATKINSON
-----------------------------------------------------
Tracy Atkinson, Treasurer (Principal Financial Officer
and Accounting Officer)
Date: December 17, 2007
-----------------
* Print name and title of each signing officer under his or her signature.