UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5822
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MFS CHARTER INCOME TRUST
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
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: November 30
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Date of reporting period: November 30, 2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
M F S(R)
INVESTMENT MANAGEMENT
MFS(R) CHARTER INCOME TRUST
[graphic omitted]
ANNUAL REPORT
11/30/06
MCR-ANN
MFS(R) Charter Income Trust
LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 2
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MANAGEMENT REVIEW 4
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PORTFOLIO MANAGERS' PROFILES 6
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PERFORMANCE SUMMARY 8
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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 27
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STATEMENT OF OPERATIONS 28
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STATEMENTS OF CHANGES IN NET ASSETS 29
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FINANCIAL HIGHLIGHTS 30
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NOTES TO FINANCIAL STATEMENTS 31
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 40
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RESULTS OF SHAREHOLDER MEETING 41
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TRUSTEES AND OFFICERS 42
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 48
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PROXY VOTING POLICIES AND INFORMATION 52
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QUARTERLY PORTFOLIO DISCLOSURE 52
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FEDERAL TAX INFORMATION 52
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MFS(R) PRIVACY NOTICE 53
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CONTACT INFORMATION BACK COVER
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TRUST OBJECTIVE: The trust seeks to maximize current income.
New York Stock Exchange Symbol: MCR
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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:
What a difference a year can make. By the end of 2005, the Dow Jones
Industrial Average had lost value over the course of the year, as stocks were
beaten back by a myriad of investor worries, including a spike in oil prices,
a rise in interest rates, and political uncertainty in the Middle East.
Fast forward to 2006, and we have seen a dramatically different picture.
While there were some fluctuations in the global markets in the first half of
the year, the second half of 2006 has, so far, been good to many investors.
Oil prices retreated, boosting consumer confidence, and interest rates have
held steady. U.S. stock markets responded favorably to this news, as the Dow
reached a record high in October, passing the 12,000 mark.
What does all of this mean for you? If you're focused on a long-term
investment strategy, the high points in the road -- and the bumps -- should
not necessarily dictate portfolio action on your part. Markets are inherently
cyclical, and we firmly believe that investors who remain committed to a long-
term investment strategy are more likely to achieve their goals than those who
consistently chase short-term performance.
At MFS(R), our unique teamwork approach to managing money and our global
research platform support an unwavering focus on helping you realize your
long-term financial goals. We believe in a three-pronged investment strategy
of allocating your holdings across major asset classes, diversifying within
each class, and rebalancing regularly. 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 are essential to
capitalizing on the many opportunities the financial markets can offer.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
January 16, 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 97.7%
Cash & Other Net Assets 2.1%
Floating Rate Loans 0.2%
FIXED INCOME SECTORS (i)
Non-U.S. Government Bonds 21.7%
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High Grade Corporates 16.4%
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Mortgage-Backed Securities 14.9%
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High Yield Corporates 13.9%
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U.S. Treasury Securities 10.7%
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Emerging Market Bonds 8.4%
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Commercial Mortgage-Backed
Securities 6.1%
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U.S. Government Agencies 3.8%
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Asset-Backed Securities 1.7%
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Floating Rate Loans 0.2%
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Residential Mortgage-Backed
Securities 0.1%
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CREDIT QUALITY OF BONDS (r)
AAA 55.7%
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AA 2.6%
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A 3.5%
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BBB 18.9%
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BB 11.6%
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B 6.9%
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CCC 0.7%
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Not Rated 0.1%
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PORTFOLIO FACTS
Average Duration (d) 5.2
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Average Life (m) 8.0 yrs.
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Average Maturity (m) 13.6 yrs.
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Average Credit Quality of
Rated Securities (long-term) (a) A+
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Average Credit Quality of
Rated Securities (short-term) (a) A-1
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COUNTRY WEIGHTINGS (i)
United States 65.7%
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Germany 4.4%
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France 3.0%
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Canada 2.9%
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Ireland 2.8%
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Japan 2.7%
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United Kingdom 2.6%
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Russia 2.4%
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Spain 2.1%
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Other 11.4%
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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 graphical 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 11/30/06.
Percentages are based on net assets as of 11/30/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
MANAGEMENT REVIEW
SUMMARY OF RESULTS
The MFS Charter Income Trust is a closed-end fund and maintains a portfolio
that includes investments in investment-grade and high-yield corporate bonds,
U.S. government securities, and international investment-grade and emerging
markets debt.
In our review of the performance of this portfolio, we look to a number of
benchmarks, each reflecting the results of the various markets in which we
invest. The benchmarks are the Citigroup World Government Bond Non-Dollar
Hedged Index, JPMorgan Emerging Markets Bond Index Global (EMBI Global), Lehman
Brothers U.S. Credit Bond Index, Lehman Brothers U.S. Government/ Mortgage Bond
Index, and the Lehman Brothers U.S. High-Yield Corporate Bond Index (U.S.
High-Yield).
For the twelve months ended November 30, 2006, the MFS Charter Income Trust
provided a total return of 6.64%, at net asset value, surpassing three of the
five benchmarks. The trust trailed the U.S. High-Yield and EMBI Global indices.
DETRACTORS FROM PERFORMANCE
The trust's underweighted positions in "B" and "CCC" rated(s) corporate bonds
held back relative results as spreads narrowed over the period. Our holdings in
corporate bonds in the industrial sector were also an area of relative
underperformance.
CONTRIBUTORS TO PERFORMANCE
Yield was a positive factor in the trust's relative performance. Our shorter
duration(d) stance also contributed to results as interest rates generally rose
over the reporting period. Our overweighted position in "BB" rated(s) bonds
offset to some extent the effect of the trust's underweighted position in the
more speculative "B" and "CCC" rated bonds which detracted from performance. In
the finance sector, bonds of Ford Motor Credit and General Motors Acceptance
Corp. (GMAC) benefited performance. Individual sovereign bonds of Ireland,
Great Britain, Spain, and Germany were among the trust's top contributors.
Respectfully,
Richard O. Hawkins David P. Cole
Portfolio Manager Portfolio Manager
John F. Addeo Matthew W. Ryan
Portfolio Manager Portfolio Manager
Note to Shareholders: Effective October 9, 2006, David Cole became a co-
manager of the portfolio with John Addeo, Richard Hawkins and Matthew Ryan. He
replaced Scott Richards.
(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.
(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 and
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.
PORTFOLIO MANAGERS' PROFILES
Richard O. Hawkins, CFA, is Senior Vice President of MFS Investment
Management(R) an investment grade portfolio manager; and a portfolio manager of
several bond portfolios. Prior to joining the firm in 1988, he spent two years
as an International Bond Analyst for Fidelity Management & Research Company;
and five years as an International Lending Officer for Manufacturers Hanover
Trust Company. He was named portfolio manager at MFS in 2004. He has been a
portfolio manager of the fund since April 2006. Richard earned a bachelor's
degree from Brown University and a Master's of Business Administration from the
University of Pennsylvania. He is a member of the Association for Investment
Management and Research (AIMR) and the Boston Security Analysts Society, Inc.
He holds the Chartered Financial Analyst (CFA) designation.
John F. Addeo, CFA, is Vice President of MFS Investment Management(R) (MFS(R))
and portfolio manager of the high-yield bond portfolios of our mutual funds,
variable annuities, offshore accounts and closed-end funds. John joined MFS as
a research analyst in 1998. He became Vice President in 1999, associate
portfolio manager in 2000, and portfolio manager in 2001. He has been a
portfolio manager of the fund since February 2005. John was named Associate
Director of Fixed Income Research in 2004. Previously, he was a quantitative
analyst and a vice president in the high-yield groups of several major
investment companies. He received a Bachelor of Science degree from Siena
College in 1984. He holds the Chartered Financial Analyst (CFA) designation.
David P. Cole, CFA, is Vice President of MFS Investment Management(R) (MFS(R)).
He is also a co-portfolio manager on the firm's high-yield portfolios and the
high-yield segment of the MFS Diversified Income Fund. David joined MFS in 2004
after working for five years as a High Yield Analyst for Franklin Templeton
Investments. Prior to this, he served as a Financial Economist/Treasury Market
Analyst for Thomson Financial Services and three years as an Economist for
Standard and Poor's. David has a bachelor's degree from Cornell University and
an M.B.A from University of California, Berkeley. He holds the Chartered
Financial Analyst (CFA) designation.
Matthew W. Ryan, CFA, is Senior Vice President of MFS Investment Management(R)
(MFS(R)) and portfolio manager of strategic income and high yield portfolios,
as well as the firm's emerging market debt portfolios. Before joining the firm
in 1997, Matt worked for four years as an economist at the International
Monetary Fund and for five years as an international economist with the U.S.
Treasury Department. He was named a portfolio manager of MFS in 1998; Vice
President in 1999; and Senior Vice President in 2005. He has been a portfolio
manager of the fund since September 2001. Matt is a graduate of Williams
College and earned a master's degree in international economics and foreign
policy from Johns Hopkins University. Matt also holds the Chartered Financial
Analyst (CFA) designation.
Note to Shareholders: Effective October 9, 2006, David Cole became a co-
manager of the portfolio with John Addeo, Richard Hawkins and Matthew Ryan. He
replaced Scott Richards.
PERFORMANCE SUMMARY THROUGH 11/30/06
All results are historical. Investment return and principal value will
fluctuate, and shares, when sold, may be worth more or less than their
original cost. More recent returns may be more or less than those shown. Past
performance is no guarantee of future results.
PRICE SUMMARY
Year ended 11/30/06
Date Price
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Net Asset Value 11/30/06 $9.64
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11/30/05 $9.58
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New York Stock Exchange Price 11/30/06 $8.51
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1/24/06 (high) (t) $8.67
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6/27/06 (low) (t) $8.16
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11/30/05 $8.43
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TOTAL RETURNS VS BENCHMARKS
Year ended 11/30/06
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New York Stock Exchange Price (r) 6.98%
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Net Asset Value (r) 6.64%
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JPMorgan EMBI Global (f) 11.17%
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Lehman Brothers U.S. Credit Bond Index (f) 6.20%
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Lehman Brothers U.S. Government/Mortgage Bond Index (f) 5.85%
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Citigroup World Government Bond Non-Dollar Hedged Index (f) 4.49%
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Lehman Brothers U.S. High-Yield Corporate Bond Index (f) 11.60%
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(f) Source: FactSet Research Systems Inc.
(r) Includes reinvestment of dividends and capital gain distributions.
(t) For the period December 1, 2005 through November 30, 2006.
INDEX DEFINITIONS
Citigroup World Government Bond Non-Dollar Hedged Index - a market
capitalization-weighted index that tracks the currency-hedged performance of
the major government bond markets, excluding the United States. Country
eligibility is determined based upon market capitalization and investability
criteria.
JPMorgan Emerging Markets Bond Index Global (EMBI Global) - tracks total
returns for U.S.-dollar-denominated debt instruments issued by emerging market
sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds.
Lehman Brothers U.S. Credit Bond Index - measures publicly issued, SEC-
registered, U.S. corporate and specified foreign debentures and secured notes
that meet specified maturity, liquidity, and quality requirements.
Lehman Brothers U.S. Government/Mortgage Bond Index - measures debt issued by
the U.S. Government as well as mortgage-backed pass- through securities of
Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
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.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The trust's shares may trade at a discount to net asset value. Shareholders do
not have the right to cause the trust to repurchase their shares at net asset
value. When trust shares trade at a premium, buyers pay more than the net asset
value underlying trust shares, and shares purchased at a premium would receive
less than the amount paid for them in the event of the trust's liquidation. 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 trust's monthly distributions may include a return of capital to
shareholders. Distributions that are treated for federal income tax purposes as
a return of capital will reduce each shareholder's basis in his or her shares
and, to the extent the return of capital exceeds such basis, will be treated as
gain to the shareholder from a sale of shares. Returns of shareholder capital
have the effect of reducing the trust's assets and may increase the trust's
expense ratio.
Effective August 1, 2006, the trust will only send monthly notices reporting
the tax status of such distributions when required by SEC rules.
From time to time the trust may receive proceeds from litigation settlements,
without which performance would be lower.
KEY RISK CONSIDERATIONS
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 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 involve risks that may be
different from, and potentially greater than, those of the underlying
indicator's in whose value the derivative is based. The value of the derivative
can move in unexpected ways and result in unanticipated losses and increased
volatility if the value of the underlying indicator(s) does not move in the
direction or the extent anticipated. Interest payments on inflation adjusted
debt instruments can be unpredictable and vary based on the level of inflation.
The value of floating rate loans depends on the credit quality and adequacy of
the collateral securing the loan. Enforcing rights against the collateral may
be difficult or insufficient if the borrower of the floating rate loan
defaults. Lower quality debt securities involve substantially greater risk of
default and their value can decline significantly over time. Foreign
investments can be more volatile than U.S. investments. Changes in currency
exchange rates may affect the portfolio's net asset value, the value of
dividends and interest earned and gains and losses realized on the sale of
securities. Investing in emerging markets can involve risks in addition to
those generally associated with investing in more developed foreign markets.
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.
These risks may increase share price volatility.
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.
DIVIDEND REINVESTMENT AND
CASH PURCHASE PLAN
The trust offers a Dividend Reinvestment and Cash Purchase Plan that allows you
to reinvest either all of the distributions paid by the trust or only the
long-term capital gains. Purchases are made at the market price unless that
price exceeds the net asset value (the shares are trading at a premium). If the
shares are trading at a premium, purchases will be made at a discounted price
of either the net asset value or 95% of the market price, whichever is greater.
Twice each year you can also buy shares. Investments may be made in any amount
over $100 in January and July on the 15th of the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee, you
can ask the firm or nominee to participate in the plan on your behalf. If the
nominee does not offer the plan, you may wish to request that your shares be
re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. The automatic
reinvestment of distributions does not relieve you of any income tax that may
be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please have
available the name of the trust and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. Please call for additional details. When you
withdraw from the plan, you can receive the value of the reinvested shares in
one of two ways: a check for the value of the full and fractional shares, or a
certificate for the full shares and a check for the fractional shares.
The trust has amended the plan to appoint Computershare Trust Company, N.A.
(the Transfer Agent for the trust as of December 18, 2006) as agent for the
plan. The effective date for the amendment is May 1, 2007. Under the terms of
the plan, if you do not withdraw from the plan prior to May 1, 2007, you will
be deemed to accept the appointment of Computershare Trust Company, N.A. as
your agent under the plan.
PORTFOLIO OF INVESTMENTS
11/30/06
The Portfolio of Investments is a complete list of all securities owned by your trust.
It is categorized by broad-based asset classes.
Bonds - 95.8%
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ISSUER SHARES/PAR VALUE ($)
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Aerospace - 0.1%
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Bombardier, Inc., 8%, 2014 (z) $ 237,000 $ 238,185
DRS Technologies, Inc., 7.625%, 2018 440,000 453,200
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$ 691,385
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Agency - Other - 1.0%
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Financing Corp., 10.35%, 2018 $ 3,600,000 $ 5,331,899
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Airlines - 0.2%
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Continental Airlines, Inc., 7.566%, 2020 $ 1,011,390 $ 1,010,125
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Asset Backed & Securitized - 7.8%
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Amresco Commercial Mortgage Funding I, 7%, 2029 $ 3,000,000 $ 3,007,077
Asset Securitization Corp., FRN, 8.1473%, 2029 2,000,000 2,191,226
Bayview Financial Acquisition Trust, FRN, 5.483%, 2041 404,000 404,085
Bayview Financial Revolving Mortgage Loan Trust, FRN,
6.12%, 2040 (z) 1,160,000 1,161,596
Bear Stearns Commercial Mortgage Securities, Inc., FRN,
5.116%, 2041 1,120,248 1,120,909
Citigroup Commercial Mortgage Trust, 5.462%, 2049 1,588,110 1,623,036
Countrywide Asset-Backed Certificates, FRN, 5.147%, 2035 2,000,000 1,989,756
Credit Suisse Mortgage Securities Corp., 6.75%, 2030 (n) 2,000,000 2,178,578
Crest Ltd., 7%, 2040 (n) 2,000,000 1,907,800
DLJ Commercial Mortgage Corp., 6.04%, 2031 2,000,000 2,046,753
First Union-Lehman Brothers Bank of America, FRN,
0.6848%, 2035 (i) 63,720,038 1,040,325
First Union-Lehman Brothers Commercial Mortgage Trust,
7%, 2029 (n) 850,000 928,913
First Union-Lehman Brothers Commercial Mortgage Trust, FRN,
7.5%, 2029 3,000,000 3,415,838
JPMorgan Chase Commercial Mortgage Securities Corp., FRN,
5.038%, 2046 4,000,000 3,977,133
Morgan Stanley Capital I, Inc., 5.168%, 2042 1,532,020 1,535,785
Mortgage Capital Funding, Inc., FRN, 0.8702%, 2031 (i) 16,324,220 134,015
New Century Home Equity Loan Trust, FRN, 4.532%, 2035 2,500,000 2,471,572
Residential Asset Mortgage Products, Inc., 3.878%, 2035 753,525 748,902
Spirit Master Funding LLC, 5.05%, 2023 (z) 1,884,306 1,843,160
Structured Asset Securities Corp., FRN, 4.67%, 2035 2,484,152 2,458,867
TIAA Real Estate CDO Ltd., 7.17%, 2032 (n) 1,416,022 1,423,689
Wachovia Bank Commercial Mortgage Trust, FRN, 4.847%, 2041 2,000,000 1,964,385
Wachovia Bank Commercial Mortgage Trust, FRN, 5.083%, 2042 2,000,000 1,991,772
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$ 41,565,172
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Automotive - 1.6%
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DaimlerChrysler N.A. Holdings Corp., 8.5%, 2031 $ 400,000 $ 488,815
Ford Motor Credit Co., 5.8%, 2009 1,100,000 1,074,619
Ford Motor Credit Co., 9.75%, 2010 (n) 145,000 153,945
Ford Motor Credit Co., 7%, 2013 834,000 799,934
General Motors Acceptance Corp., 5.85%, 2009 1,842,000 1,838,438
General Motors Acceptance Corp., 6.875%, 2011 1,875,000 1,930,440
General Motors Acceptance Corp., 6.75%, 2014 1,397,000 1,432,516
General Motors Corp., 8.375%, 2033 419,000 381,814
GMAC LLC, 6.125%, 2008 234,000 233,905
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$ 8,334,426
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Broadcasting - 1.0%
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Allbritton Communications Co., 7.75%, 2012 $ 535,000 $ 541,688
CBS Corp., 6.625%, 2011 1,036,000 1,084,681
EchoStar DBS Corp., 6.375%, 2011 525,000 522,375
Intelsat Subsidiary Holding Co. Ltd., 8.625%, 2015 340,000 353,175
Lamar Media Corp., 7.25%, 2013 675,000 678,375
News America Holdings, 7.7%, 2025 1,140,000 1,322,547
News America, Inc., 6.2%, 2034 542,000 540,557
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$ 5,043,398
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Brokerage & Asset Managers - 1.0%
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Goldman Sachs Group, Inc., 5.7%, 2012 $ 2,680,000 $ 2,754,874
Morgan Stanley Dean Witter, Inc., 6.6%, 2012 2,537,000 2,705,119
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$ 5,459,993
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Business Services - 0.6%
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Iron Mountain, Inc., 7.75%, 2015 $ 175,000 $ 178,500
Xerox Corp., 7.625%, 2013 780,000 824,226
Xerox Corp., 6.4%, 2016 2,000,000 2,080,580
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$ 3,083,306
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Cable TV - 1.0%
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CCH II Holdings LLC, 10.25%, 2010 $ 670,000 $ 700,150
CSC Holdings, Inc., 8.125%, 2009 925,000 956,219
Grupo Televisa S.A., 8.5%, 2032 962,000 1,211,662
Mediacom LLC, 9.5%, 2013 280,000 287,700
Rogers Cable, Inc., 5.5%, 2014 1,025,000 969,906
TCI Communications, Inc., 9.8%, 2012 1,169,000 1,394,438
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$ 5,520,075
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Chemicals - 0.8%
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BCP Crystal Holdings Corp., 9.625%, 2014 $ 204,000 $ 223,890
Equistar Chemicals LP, 10.125%, 2008 375,000 398,438
Lyondell Chemical Co., 11.125%, 2012 615,000 665,738
Momentive Performance Materials, Inc., 11.5%, 2016 (z) 375,000 369,844
Mosaic Co., 7.625%, 2016 (z) 360,000 368,100
Nalco Co., 8.875%, 2013 50,000 52,875
Yara International A.S.A., 5.25%, 2014 (n) 2,000,000 1,942,626
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$ 4,021,511
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Conglomerates - 0.2%
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Kennametal, Inc., 7.2%, 2012 $ 1,140,000 $ 1,215,434
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Construction - 0.3%
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Beazer Homes USA, Inc., 6.875%, 2015 $ 1,835,000 $ 1,770,775
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Consumer Goods & Services - 0.4%
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Church & Dwight Co., Inc., 6%, 2012 $ 460,000 $ 443,900
Fortune Brands, Inc., 5.125%, 2011 1,150,000 1,135,915
Service Corp. International, 7%, 2017 470,000 467,650
Service Corp. International, 7.625%, 2018 120,000 125,400
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$ 2,172,865
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Containers - 0.4%
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Ball Corp., 6.625%, 2018 $ 475,000 $ 467,875
Crown Americas LLC, 7.75%, 2015 565,000 580,538
Owens-Brockway Glass Container, Inc., 8.875%, 2009 378,000 387,450
Owens-Brockway Glass Container, Inc., 8.25%, 2013 865,000 890,950
------------
$ 2,326,813
-----------------------------------------------------------------------------------------------------------
Defense Electronics - 0.9%
-----------------------------------------------------------------------------------------------------------
BAE Systems Holdings, Inc., 4.75%, 2010 (n) $ 790,000 $ 774,455
BAE Systems Holdings, Inc., 5.2%, 2015 (n) 2,000,000 1,937,334
L-3 Communications Corp., 5.875%, 2015 750,000 727,500
L-3 Communications Corp., 6.375%, 2015 1,500,000 1,488,750
------------
$ 4,928,039
-----------------------------------------------------------------------------------------------------------
Electronics - 0.1%
-----------------------------------------------------------------------------------------------------------
NXP B.V./NXP Funding LLC, 7.875%, 2014 (n) $ 300,000 $ 308,250
Sensata Technologies B.V., 8%, 2014 (n) 295,000 282,094
------------
$ 590,344
-----------------------------------------------------------------------------------------------------------
Emerging Market Quasi-Sovereign - 0.9%
-----------------------------------------------------------------------------------------------------------
Banco do Brasil S.A., 7.95%, 2049 (n) $ 161,000 $ 161,805
Gazprom OAO, 9.625%, 2013 (n) 1,510,000 1,801,430
Pemex Project Funding Master Trust, 8.625%, 2022 1,218,000 1,504,230
Petronas Capital Ltd., 7.875%, 2022 (n) 464,000 584,428
Petronas Capital Ltd., 7.875%, 2022 670,000 843,894
------------
$ 4,895,787
-----------------------------------------------------------------------------------------------------------
Emerging Market Sovereign - 1.9%
-----------------------------------------------------------------------------------------------------------
Arab Republic of Egypt, 8.75%, 2011 $ 221,000 $ 249,730
Republic of Argentina, FRN, 5.589%, 2012 1,242,000 1,157,974
Republic of Bulgaria, 8.25%, 2015 600,000 716,880
Republic of Colombia, FRN, 7.175%, 2015 777,000 802,253
Republic of El Salvador, 7.65%, 2035 36,000 40,320
Republic of Indonesia, 6.875%, 2017 (n) 171,000 178,695
Republic of Panama, 9.375%, 2029 1,121,000 1,493,733
Republic of Philippines, 9.375%, 2017 449,000 548,903
Republic of South Africa, 9.125%, 2009 469,000 509,146
Republic of Venezuela, 7%, 2018 822,000 829,398
Russian Federation, 3%, 2008 2,690,000 2,593,967
United Mexican States, 8.125%, 2019 976,000 1,195,112
------------
$ 10,316,111
-----------------------------------------------------------------------------------------------------------
Energy - Independent - 0.6%
-----------------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 6.875%, 2016 $ 1,425,000 $ 1,426,781
Forest Oil Corp., 7.75%, 2014 550,000 555,500
Newfield Exploration Co., 6.625%, 2014 770,000 770,000
Pan American Energy LLC, 7.75%, 2012 (n) 109,000 111,044
Quicksilver Resources, Inc., 7.125%, 2016 510,000 489,600
------------
$ 3,352,925
-----------------------------------------------------------------------------------------------------------
Energy - Integrated - 0.3%
-----------------------------------------------------------------------------------------------------------
TNK-BP Finance S.A., 7.5%, 2016 (n) $ 1,211,000 $ 1,279,631
-----------------------------------------------------------------------------------------------------------
Entertainment - 0.5%
-----------------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $ 309,000 $ 309,773
AMC Entertainment, Inc., 11%, 2016 200,000 220,750
Turner Broadcasting System, Inc., 8.375%, 2013 1,784,000 2,031,962
------------
$ 2,562,485
-----------------------------------------------------------------------------------------------------------
Financial Institutions - 0.6%
-----------------------------------------------------------------------------------------------------------
Countrywide Financial Corp., 6.25%, 2016 $ 1,250,000 $ 1,289,574
HSBC Finance Corp., 5.5%, 2016 1,481,000 1,505,665
International Lease Finance Corp., 5%, 2010 321,000 319,657
------------
$ 3,114,896
-----------------------------------------------------------------------------------------------------------
Food & Beverages - 0.1%
-----------------------------------------------------------------------------------------------------------
B&G Foods Holding Corp., 8%, 2011 $ 170,000 $ 171,700
Dole Foods Co., Inc., 8.875%, 2011 240,000 232,500
Michael Foods, Inc., 8%, 2013 315,000 326,025
------------
$ 730,225
-----------------------------------------------------------------------------------------------------------
Forest & Paper Products - 0.8%
-----------------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8.5%, 2013 $ 460,000 $ 476,100
MDP Acquisitions PLC, 9.625%, 2012 310,000 327,825
Norske Skog Canada Ltd., 7.375%, 2014 695,000 651,563
Stone Container Corp., 7.375%, 2014 1,000,000 910,000
Stora Enso Oyj, 6.404%, 2016 (n) 1,560,000 1,628,333
Verso Paper Holdings LLC, 9.125%, 2014 (n) 160,000 166,400
------------
$ 4,160,221
-----------------------------------------------------------------------------------------------------------
Gaming & Lodging - 1.4%
-----------------------------------------------------------------------------------------------------------
Caesars Entertainment, Inc., 8.125%, 2011 $ 730,000 $ 754,638
Harrah's Entertainment, Inc., 5.75%, 2017 860,000 720,958
Host Marriott LP, 6.75%, 2016 1,000,000 1,003,750
Mandalay Resort Group, 9.375%, 2010 450,000 478,125
MGM Mirage, Inc., 8.375%, 2011 1,155,000 1,201,200
MGM Mirage, Inc., 6.75%, 2013 230,000 226,550
MGM Mirage, Inc., 6.875%, 2016 195,000 188,906
Scientific Games Corp., 6.25%, 2012 380,000 367,650
Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 315,000 336,648
Station Casinos, Inc., 6.5%, 2014 1,230,000 1,151,588
Wyndham Worldwide Corp., 6%, 2016 (z) 270,000 268,781
Wynn Las Vegas LLC, 6.625%, 2014 485,000 477,725
------------
$ 7,176,519
-----------------------------------------------------------------------------------------------------------
Industrial - 0.2%
-----------------------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011 (z) $ 725,000 $ 772,125
JohnsonDiversey Holdings, Inc., "B", 9.625%, 2012 310,000 320,850
------------
$ 1,092,975
-----------------------------------------------------------------------------------------------------------
Insurance - 0.8%
-----------------------------------------------------------------------------------------------------------
American International Group, 4.25%, 2013 $ 4,250,000 $ 4,038,677
-----------------------------------------------------------------------------------------------------------
Insurance - Property & Casualty - 0.6%
-----------------------------------------------------------------------------------------------------------
AXIS Capital Holdings Ltd., 5.75%, 2014 $ 1,689,000 $ 1,705,125
Fund American Cos., Inc., 5.875%, 2013 1,351,000 1,360,974
------------
$ 3,066,099
-----------------------------------------------------------------------------------------------------------
International Market Quasi-Sovereign - 1.8%
-----------------------------------------------------------------------------------------------------------
Canada Housing Trust, 4.6%, 2011 CAD 2,714,000 $ 2,446,380
Development Bank of Japan, 1.05%, 2023 JPY 172,000,000 1,269,787
Japan Finance Corp. Ltd., 2%, 2016 JPY 650,000,000 5,786,058
------------
$ 9,502,225
-----------------------------------------------------------------------------------------------------------
International Market Sovereign - 19.5%
-----------------------------------------------------------------------------------------------------------
Commonwealth of Australia, 6%, 2017 AUD 919,000 $ 748,116
Federal Republic of Germany, 3.5%, 2008 EUR 4,130,000 5,457,955
Federal Republic of Germany, 5.25%, 2010 EUR 3,219,000 4,491,832
Federal Republic of Germany, 3.75%, 2015 EUR 4,585,000 6,114,593
Federal Republic of Germany, 6.25%, 2030 EUR 3,342,000 6,016,868
Government of Canada, 5.5%, 2009 CAD 2,554,000 2,325,200
Government of Canada, 4.5%, 2015 CAD 4,373,000 3,998,368
Government of Canada, 8%, 2023 CAD 949,000 1,227,374
Government of Canada, 5.75%, 2033 CAD 236,000 265,541
Kingdom of Denmark, 4%, 2015 DKK 28,258,000 5,146,761
Kingdom of Netherlands, 3.75%, 2009 EUR 6,605,000 8,773,312
Kingdom of Netherlands, 3.75%, 2014 EUR 727,000 969,061
Kingdom of Spain, 6%, 2008 EUR 2,322,000 3,155,149
Kingdom of Spain, 5.35%, 2011 EUR 4,875,000 6,941,238
Republic of Austria, 4.65%, 2018 EUR 6,035,000 8,649,664
Republic of France, 4.75%, 2012 EUR 1,219,000 1,707,904
Republic of France, 5%, 2016 EUR 3,631,000 5,314,100
Republic of France, 6%, 2025 EUR 874,000 1,491,424
Republic of France, 4.75%, 2035 EUR 3,752,000 5,709,706
Republic of Ireland, 3.25%, 2009 EUR 6,760,000 8,878,253
Republic of Ireland, 4.6%, 2016 EUR 3,665,000 5,200,518
United Kingdom Treasury, 5.75%, 2009 GBP 1,433,000 2,881,787
United Kingdom Treasury, 5%, 2012 GBP 969,000 1,928,102
United Kingdom Treasury, 8%, 2015 GBP 1,664,000 4,098,518
United Kingdom Treasury, 8%, 2021 GBP 369,000 999,477
United Kingdom Treasury, 4.25%, 2036 GBP 748,000 1,522,548
------------
$104,013,369
-----------------------------------------------------------------------------------------------------------
Machinery & Tools - 0.4%
-----------------------------------------------------------------------------------------------------------
Case New Holland, Inc., 6%, 2009 $ 1,415,000 $ 1,415,000
Case New Holland, Inc., 9.25%, 2011 160,000 169,800
Case New Holland, Inc., 7.125%, 2014 380,000 382,850
Manitowoc Co., Inc., 10.5%, 2012 331,000 356,239
------------
$ 2,323,889
-----------------------------------------------------------------------------------------------------------
Major Banks - 1.2%
-----------------------------------------------------------------------------------------------------------
BNP Paribas, 5.186% to 2015, FRN to 2049 (n) $ 1,667,000 $ 1,619,262
HBOS Capital Funding LP, 6.071% to 2014, FRN to 2049 (n) 1,330,000 1,368,985
JPMorgan Chase & Co., 5.125%, 2014 2,100,000 2,086,986
MUFG Capital Finance 1 Ltd., 6.346% to 2016, FRN to 2049 1,408,000 1,454,682
------------
$ 6,529,915
-----------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 1.1%
-----------------------------------------------------------------------------------------------------------
DaVita, Inc., 6.625%, 2013 $ 170,000 $ 168,725
DaVita, Inc., 7.25%, 2015 555,000 559,163
Fisher Scientific International, Inc., 6.125%, 2015 1,500,000 1,498,446
HCA, Inc., 8.75%, 2010 660,000 683,100
HCA, Inc., 6.375%, 2015 420,000 349,650
HCA, Inc., 9.25%, 2016 (z) 780,000 814,125
Omnicare, Inc., 6.875%, 2015 760,000 742,900
Owens & Minor, Inc., 6.35%, 2016 970,000 991,171
------------
$ 5,807,280
-----------------------------------------------------------------------------------------------------------
Metals & Mining - 1.3%
-----------------------------------------------------------------------------------------------------------
Arch Western Finance LLC, 6.75%, 2013 $ 630,000 $ 617,400
Chaparral Steel Co., 10%, 2013 515,000 572,938
FMG Finance Ltd., 10.625%, 2016 (n) 320,000 322,400
Foundation PA Coal Co., 7.25%, 2014 740,000 741,850
Griffin Coal Mining Co., 9.5%, 2016 (z) 190,000 191,425
International Steel Group, Inc., 6.5%, 2014 1,300,000 1,332,500
Ispat Inland ULC, 9.75%, 2014 1,200,000 1,341,000
Massey Energy Co., 6.875%, 2013 635,000 590,550
Peabody Energy Corp., 5.875%, 2016 425,000 405,875
Peabody Energy Corp., "B", 6.875%, 2013 355,000 359,438
U.S. Steel Corp., 9.75%, 2010 413,000 438,296
------------
$ 6,913,672
-----------------------------------------------------------------------------------------------------------
Mortgage Backed - 14.9%
-----------------------------------------------------------------------------------------------------------
Fannie Mae, 3.81%, 2013 $ 576,900 $ 543,132
Fannie Mae, 4.1%, 2013 931,292 889,931
Fannie Mae, 4.19%, 2013 790,338 757,944
Fannie Mae, 4.845%, 2013 249,836 246,923
Fannie Mae, 4.519%, 2014 898,698 876,752
Fannie Mae, 4.6%, 2014 754,423 737,719
Fannie Mae, 4.667%, 2014 1,315,223 1,293,984
Fannie Mae, 4.77%, 2014 588,597 578,427
Fannie Mae, 4.56%, 2015 316,233 307,743
Fannie Mae, 4.665%, 2015 256,134 250,879
Fannie Mae, 4.7%, 2015 244,397 239,884
Fannie Mae, 4.74%, 2015 600,000 587,845
Fannie Mae, 4.815%, 2015 600,000 590,415
Fannie Mae, 4.87%, 2015 516,115 511,864
Fannie Mae, 4.89%, 2015 172,206 171,015
Fannie Mae, 4.925%, 2015 1,921,946 1,918,484
Fannie Mae, 6%, 2016 - 2034 5,888,020 5,984,663
Fannie Mae, 5.5%, 2019 - 2035 49,084,257 49,029,684
Fannie Mae, 4.88%, 2020 558,917 555,693
Fannie Mae, 6.5%, 2032 - 2033 3,070,064 3,147,322
Freddie Mac, 5%, 2024 382,236 381,542
Freddie Mac, 5.5%, 2034 7,391,741 7,383,893
Freddie Mac, 6%, 2034 2,050,449 2,078,089
------------
$ 79,063,827
-----------------------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.1%
-----------------------------------------------------------------------------------------------------------
AmeriGas Partners LP, 7.25%, 2015 $ 470,000 $ 470,000
AmeriGas Partners LP, 7.125%, 2016 175,000 174,125
------------
$ 644,125
-----------------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 1.3%
-----------------------------------------------------------------------------------------------------------
Atlas Pipeline Partners, 8.125%, 2015 $ 375,000 $ 384,375
CenterPoint Energy Resources Corp., 7.875%, 2013 1,600,000 1,801,339
Colorado Interstate Gas Co., 5.95%, 2015 170,000 166,938
El Paso Performance-Linked Trust, 7.75%, 2011 (n) 1,060,000 1,097,100
Kinder Morgan Energy Partners, 7.125%, 2012 2,000,000 2,137,348
Magellan Midstream Partners LP, 5.65%, 2016 311,000 307,968
Williams Cos., Inc., 8.75%, 2032 800,000 898,000
------------
$ 6,793,068
-----------------------------------------------------------------------------------------------------------
Network & Telecom - 1.4%
-----------------------------------------------------------------------------------------------------------
Citizens Communications Co., 9.25%, 2011 $ 815,000 $ 901,594
Citizens Communications Co., 9%, 2031 405,000 441,450
Nordic Telephone Co. Holdings, 8.875%, 2016 (n) 305,000 322,538
Qwest Corp., 7.875%, 2011 860,000 918,050
Qwest Corp., 8.875%, 2012 450,000 501,188
Telefonica Europe B.V., 7.75%, 2010 1,000,000 1,083,441
Verizon New York, Inc., 6.875%, 2012 2,542,000 2,671,131
Windstream Corp., 8.625%, 2016 (n) 495,000 538,931
------------
$ 7,378,323
-----------------------------------------------------------------------------------------------------------
Oil Services - 0.1%
-----------------------------------------------------------------------------------------------------------
Basic Energy Services, Inc., 7.125%, 2016 $ 210,000 $ 202,650
GulfMark Offshore, Inc., 7.75%, 2014 435,000 444,788
------------
$ 647,438
-----------------------------------------------------------------------------------------------------------
Oils - 0.7%
-----------------------------------------------------------------------------------------------------------
Premcor Refining Group, Inc., 7.5%, 2015 $ 3,550,000 $ 3,724,383
-----------------------------------------------------------------------------------------------------------
Other Banks & Diversified Financials - 4.1%
-----------------------------------------------------------------------------------------------------------
Banco BMG S.A., 9.15%, 2016 (n) $ 982,000 $ 984,455
Banco de Credito del Peru, FRN, 6.95%, 2021 (n) 347,000 347,868
Banco do Estado de Sao Paulo S.A., 8.7%, 2049 (n) 1,400,000 1,480,500
Banco Mercantil del Norte S.A., 5.875% to 2009, FRN to 2014 (n) 808,000 811,232
Bosphorus Financial Services Ltd., FRN, 7.1738%, 2012 (z) 1,500,000 1,520,630
Chuo Mitsui Trust & Banking Co., 5.506% to 2015,
FRN to 2049 (n) 1,676,000 1,626,484
DFS Funding Corp., FRN, 7.39%, 2010 (z) 1,750,000 1,767,500
HSBK Europe B.V., 7.75%, 2013 (n) 637,000 668,850
ICICI Bank Ltd., FRN, 7.25%, 2049 (n) 200,000 209,660
Kazkommerts International B.V., 10.125%, 2007 (n) 367,000 372,505
Kazkommerts International B.V., 10.125%, 2007 128,000 129,920
Kazkommerts International B.V., 8%, 2015 583,000 604,863
Mizuho Capital Investment 1 Ltd., 6.686% to 2016, FRN to 2049(n) 3,800,000 3,901,255
Mizuho Financial Group, Inc., 5.79%, 2014 (n) 1,898,000 1,938,295
RBS Capital Trust II, 6.425% to 2034, FRN to 2049 458,000 485,082
Resona Bank Ltd., 5.85% to 2016, FRN to 2049 (n) 655,000 648,508
Russian Standard Finance S.A., 8.125%, 2008 (n) 682,000 682,000
Russian Standard Finance S.A., 7.5%, 2010 (n) 176,000 169,400
Russian Standard Finance S.A., 8.625%, 2011 (n) 498,000 494,265
UFJ Finance Aruba AEC, 6.75%, 2013 1,300,000 1,402,197
Woori Bank, 6.125% to 2011, FRN to 2016 (n) 1,490,000 1,540,913
------------
$ 21,786,382
-----------------------------------------------------------------------------------------------------------
Precious Metals & Minerals - 0.6%
-----------------------------------------------------------------------------------------------------------
Alrosa Finance S.A., 8.875%, 2014 $ 2,880,000 $ 3,319,776
-----------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.7%
-----------------------------------------------------------------------------------------------------------
Dex Media East LLC, 9.875%, 2009 $ 565,000 $ 593,250
Dex Media West LLC, 9.875%, 2013 1,527,000 1,664,430
Idearc, Inc., 8%, 2016 (z) 1,090,000 1,107,713
MediaNews Group, Inc., 6.875%, 2013 515,000 475,731
------------
$ 3,841,124
-----------------------------------------------------------------------------------------------------------
Railroad & Shipping - 0.6%
-----------------------------------------------------------------------------------------------------------
TFM S.A. de C.V., 9.375%, 2012 $ 2,809,000 $ 3,005,630
-----------------------------------------------------------------------------------------------------------
Real Estate - 0.9%
-----------------------------------------------------------------------------------------------------------
EOP Operating LP, 4.75%, 2014 $ 1,500,000 $ 1,486,412
HRPT Properties Trust, REIT, 6.25%, 2016 1,324,000 1,388,206
Kimco Realty Corp., REIT, 5.783%, 2016 710,000 731,820
Simon Property Group LP, REIT, 5.875%, 2017 1,260,000 1,309,237
------------
$ 4,915,675
-----------------------------------------------------------------------------------------------------------
Restaurants - 0.3%
-----------------------------------------------------------------------------------------------------------
YUM! Brands, Inc., 8.875%, 2011 $ 1,500,000 $ 1,701,221
-----------------------------------------------------------------------------------------------------------
Retailers - 0.5%
-----------------------------------------------------------------------------------------------------------
Couche-Tard, Inc., 7.5%, 2013 $ 420,000 $ 429,450
Dollar General Corp., 8.625%, 2010 315,000 333,113
Gap, Inc., 9.55%, 2008 940,000 1,009,800
Limited Brands, Inc., 5.25%, 2014 1,100,000 1,061,437
------------
$ 2,833,800
-----------------------------------------------------------------------------------------------------------
Specialty Stores - 0.1%
-----------------------------------------------------------------------------------------------------------
GSC Holdings Corp., 8%, 2012 $ 310,000 $ 323,175
-----------------------------------------------------------------------------------------------------------
Supranational - 0.3%
-----------------------------------------------------------------------------------------------------------
Central American Bank, 4.875%, 2012 (n) $ 1,426,000 $ 1,389,704
-----------------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 1.4%
-----------------------------------------------------------------------------------------------------------
AT&T Wireless Services, Inc., 8.75%, 2031 $ 1,500,000 $ 2,001,639
Centennial Communications Corp., 10.125%, 2013 240,000 258,000
Cingular Wireless LLC, 6.5%, 2011 1,700,000 1,798,875
Excelcomindo Finance Co., 7.125%, 2013 (n) 100,000 100,750
OJSC Vimpel Communications, 8.25%, 2016 2,036,000 2,117,440
Rogers Wireless, Inc., 6.375%, 2014 550,000 552,063
Rogers Wireless, Inc., 7.5%, 2015 450,000 482,063
------------
$ 7,310,830
-----------------------------------------------------------------------------------------------------------
Tobacco - 0.4%
-----------------------------------------------------------------------------------------------------------
Reynolds American, Inc., 7.25%, 2012 (n) $ 818,000 $ 858,988
Reynolds American, Inc., 7.3%, 2015 (n) 1,300,000 1,362,397
------------
$ 2,221,385
-----------------------------------------------------------------------------------------------------------
Transportation - Services - 0.2%
-----------------------------------------------------------------------------------------------------------
Hertz Corp., 8.875%, 2014 (n) $ 315,000 $ 326,813
Stena AB, 7%, 2016 375,000 357,656
Westinghouse Air Brake Technologies Corp., 6.875%, 2013 370,000 365,375
------------
$ 1,049,844
-----------------------------------------------------------------------------------------------------------
U.S. Government Agencies - 2.7%
-----------------------------------------------------------------------------------------------------------
Small Business Administration, 4.34%, 2024 $ 7,061,529 $ 6,830,291
Small Business Administration, 4.77%, 2024 5,289,809 5,240,161
Small Business Administration, 5.11%, 2025 2,429,243 2,444,804
------------
$ 14,515,256
-----------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 9.3%
-----------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 12%, 2013 $ 4,500,000 $ 5,036,837
U.S. Treasury Bonds, 10.625%, 2015 3,350,000 4,824,523
U.S. Treasury Bonds, 6.25%, 2023 (f) 8,000,000 9,458,752
U.S. Treasury Bonds, 5.375%, 2031 477,000 528,799
U.S. Treasury Bonds, 4.5%, 2036 158,000 156,432
U.S. Treasury Notes, 4.25%, 2014 2,500,000 2,466,603
U.S. Treasury Notes, 4.125%, 2015 1,285,000 1,255,837
U.S. Treasury Notes, 9.875%, 2015 5,025,000 7,013,604
U.S. Treasury Notes, 4.5%, 2016 4,128,000 4,139,608
U.S. Treasury Notes, TIPS, 2%, 2014 11,156,328 11,018,165
U.S. Treasury Notes, TIPS, 1.625%, 2015 3,832,385 3,676,844
------------
$ 49,576,004
-----------------------------------------------------------------------------------------------------------
Utilities - Electric Power - 3.8%
-----------------------------------------------------------------------------------------------------------
Allegheny Energy Supply Co. LLC, 8.25%, 2012 (n) $ 370,000 $ 404,225
Duke Capital Corp., 8%, 2019 1,350,000 1,602,775
Edison Mission Energy, 7.75%, 2016 765,000 799,425
Empresa Nacional de Electricidad S.A., 8.35%, 2013 1,269,000 1,452,195
Enersis S.A., 7.375%, 2014 1,273,000 1,383,737
FirstEnergy Corp., 6.45%, 2011 4,199,000 4,424,915
HQI Transelec Chile S.A., 7.875%, 2011 1,500,000 1,604,520
Majapahit Holding B.V., 7.75%, 2016 (n) 119,000 126,289
Midwest Generation LLC, 8.75%, 2034 315,000 341,775
Mirant North American LLC, 7.375%, 2013 710,000 718,875
NorthWestern Corp., 5.875%, 2014 1,435,000 1,431,770
NRG Energy, Inc., 7.375%, 2016 1,290,000 1,290,000
Reliant Resources, Inc., 9.25%, 2010 200,000 210,250
Reliant Resources, Inc., 9.5%, 2013 235,000 249,981
System Energy Resources, Inc., 5.129%, 2014 (n) 2,255,683 2,215,532
TXU Corp., 5.55%, 2014 746,000 716,812
TXU Energy Co., 7%, 2013 1,220,000 1,290,719
------------
$ 20,263,795
-----------------------------------------------------------------------------------------------------------
TOTAL BONDS (IDENTIFIED COST, $503,057,424) $510,247,226
-----------------------------------------------------------------------------------------------------------
Floating Rate Loans - 0.3% (g)(r)
-----------------------------------------------------------------------------------------------------------
Automotive - 0.1%
-----------------------------------------------------------------------------------------------------------
General Motors, Term Loan B, 7%, 2013 351,700 $ 352,051
-----------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.1%
-----------------------------------------------------------------------------------------------------------
HCA, Inc., Term Loan B, 7%, 2013 311,002 $ 312,946
-----------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.1%
-----------------------------------------------------------------------------------------------------------
Idearc, Inc., Term Loan B, 7%, 2014 640,422 $ 643,274
-----------------------------------------------------------------------------------------------------------
TOTAL FLOATING RATE LOANS (IDENTIFIED COST, $1,304,338) $ 1,308,271
-----------------------------------------------------------------------------------------------------------
Common Stocks - 0.0%
-----------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.0%
-----------------------------------------------------------------------------------------------------------
Golden Books Family Entertainment, Inc. (a) 3,683 $ 0
-----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $0) $ 0
-----------------------------------------------------------------------------------------------------------
Warrants - 0.0%
-----------------------------------------------------------------------------------------------------------
STRIKE FIRST
PRICE EXERCISE
-----------------------------------------------------------------------------------------------------------
Loral Space & Communications Ltd. (a) $ 0.14 1/28/1997 1,625 $ 0
Loral Space & Communications Ltd. (a) 0.14 1/28/1997 750 0
-----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS (IDENTIFIED COST, $29,434) $ 0
-----------------------------------------------------------------------------------------------------------
Short-Term Obligations - 3.8%
-----------------------------------------------------------------------------------------------------------
General Electric Co., 5.31%, due 12/01/06, at Amortized Cost
and Value (y) $ 20,491,000 $ 20,491,000
-----------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST, $524,882,196) (k) $532,046,497
-----------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.1% 776,400
-----------------------------------------------------------------------------------------------------------
NET ASSETS - 100.0% $532,822,897
-----------------------------------------------------------------------------------------------------------
(a) Non-income producing security.
(f) All or a portion of the security has been segregated as collateral for an open futures contract.
(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 November 30, 2006, the trust held securities fair valued in accordance with the policies
adopted by the Board of Trustees, aggregating $495,978,784 and 93.22% of market value. An independent
pricing service provided an evaluated bid for 92.36% of the market value.
(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
$45,679,554, representing 8.6% of net assets.
(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.
(y) The rate shown represents an annualized yield at time of purchase.
(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
-------------------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011 8/08/03 - 4/25/06 $761,563 $772,125
Bayview Financial Revolving Mortgage
Loan Trust, FRN, 6.12%, 2040 3/01/06 1,160,000 1,161,596
Bombardier, Inc., 8%, 2014 11/10/06 - 11/29/06 238,250 238,185
Bosphorus Financial Services Ltd., FRN,
7.1738%, 2012 3/08/05 1,500,000 1,520,630
DFS Funding Corp., FRN, 7.39%, 2010 6/24/05 1,750,000 1,767,500
Griffin Coal Mining Co., 9.5%, 2016 11/10/06 190,000 191,425
HCA, Inc., 9.25%, 2016 11/09/06 - 11/28/06 795,463 814,125
Idearc, Inc., 8%, 2016 11/01/06 - 11/28/06 1,100,563 1,107,713
Momentive Performance Materials, Inc.,
11.5%, 2016 11/29/06 369,581 369,844
Mosaic Co., 7.625%, 2016 11/16/06 - 11/20/06 $365,631 $368,100
Spirit Master Funding LLC,
5.05%, 2023 7/15/05 1,883,751 1,843,160
Wyndham Worldwide Corp., 6%, 2016 11/30/06 268,761 268,781
-------------------------------------------------------------------------------------------------------
Total Restricted Securities $10,423,184 2.0%
The following abbreviations are used in this report and are defined:
FRN Floating Rate Note. Interest rate resets periodically and may not be the rate reported
at period end.
REIT Real Estate Investment Trust
TIPS Treasury Inflation Protected Security
Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in
U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:
AUD Australian Dollar GBP British Pound
CAD Canadian Dollar JPY Japanese Yen
CNY Chinese Yuan Renminbi MXN Mexican Peso
DKK Danish Krone MYR Malaysian Ringgit
EUR Euro NOK Norwegian Krone
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Sales and Purchases in the table below are reported by currency.
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
DELIVER/RECEIVE SETTLEMENT DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
-----------------------------------------------------------------------------------------------------
SALES
AUD 617,083 12/06/06 $ 473,749 $ 486,959 $ (13,210)
CAD 12,191,481 12/04/06 - 2/06/07 10,796,063 10,690,021 106,042
DKK 29,589,167 12/18/06 - 12/27/06 4,992,810 5,263,615 (270,805)
EUR 77,945,029 12/18/06 - 1/29/07 98,162,578 103,356,007 (5,193,429)
GBP 5,948,897 2/26/07 11,314,811 11,700,136 (385,325)
JPY 666,860,877 1/18/07 - 1/23/07 5,696,756 5,800,116 (103,360)
NOK 54,514 1/08/07 8,428 8,872 (444)
-----------------------------------------------------------------------------------------------------
$131,445,195 $137,305,726 $(5,860,531)
-----------------------------------------------------------------------------------------------------
PURCHASES
AUD 213,661 12/06/06 $ 161,059 $ 168,606 $ 7,547
CAD 5,684,282 12/04/06 5,002,008 4,979,823 (22,185)
CNY 42,072,400 1/10/07 5,374,947 5,401,392 26,445
EUR 13,486,354 12/18/06 17,349,342 17,882,939 533,597
MXN 14,299,601 12/06/06 1,320,138 1,302,488 (17,650)
MYR 4,696,964 12/26/06 1,290,020 1,299,878 9,858
-----------------------------------------------------------------------------------------------------
$ 30,497,514 $ 31,035,126 $ 537,612
-----------------------------------------------------------------------------------------------------
At November 30, 2006, forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $53,967 with Goldman Sachs & Co. and $94,976 with
Merrill Lynch International.
FUTURES CONTRACTS OUTSTANDING AT 11/30/06:
UNREALIZED
EXPIRATION APPRECIATION
DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION)
--------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond (Long) 50 $5,718,750 Mar-07 $45,932
U.S. Treasury Note 10 year (Long) 8 873,500 Mar-07 4,472
--------------------------------------------------------------------------------------------------------------
$50,404
--------------------------------------------------------------------------------------------------------------
SWAP AGREEMENTS AT 11/30/06
--------------------------------------------------------------------------------------------------------------
UNREALIZED
NOTIONAL CASH FLOWS CASH FLOWS APPRECIATION
EXPIRATION AMOUNT COUNTERPARTY TO RECEIVE TO PAY (DEPRECIATION)
--------------------------------------------------------------------------------------------------------------
CREDIT DEFAULT SWAPS
3/20/11 USD 1,270,000 Citibank, N.A. (1) 0.65% (fixed rate) $(15,422)
3/20/11 USD 2,500,000 Merrill Lynch
International (2) 0.43% (fixed rate) 65
--------------------------------------------------------------------------------------------------------------
$(15,357)
--------------------------------------------------------------------------------------------------------------
(1) Trust to receive notional amount upon a defined credit default event by Autozone, Inc., 5.875%, 10/15/12.
(2) Trust to receive notional amount upon a defined credit default event by New York Times Co.,
4.61%, 9/26/12.
At November 30, 2006, the trust had sufficient cash and/or securities to cover any commitments under
these derivative contracts.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 11/30/06
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 (identified cost, $524,882,196) $532,046,497
Cash 14,838
Receivable for forward foreign currency exchange contracts 683,489
Receivable for forward foreign currency exchange contracts
subject to master netting agreements 148,943
Receivable for daily variation margin on open futures contracts 37,625
Receivable for investments sold 6,435,683
Interest receivable 7,201,385
Unrealized appreciation on credit default swaps 65
Other assets 17,290
------------------------------------------------------------------------------------------------------
Total assets $546,585,815
------------------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------------------
Distributions payable $159,142
Payable for forward foreign currency exchange contracts 6,006,408
Payable for investments purchased 7,247,112
Unrealized depreciation on credit default swaps 15,422
Payable to affiliates
Management fee 16,712
Transfer agent and dividend disbursing costs 23,809
Administrative services fee 557
Payable for independent trustees' compensation 169,412
Accrued expenses and other liabilities 124,344
------------------------------------------------------------------------------------------------------
Total liabilities $13,762,918
------------------------------------------------------------------------------------------------------
Net assets $532,822,897
------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
------------------------------------------------------------------------------------------------------
Paid-in capital $585,060,773
Unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies 2,114,124
Accumulated net realized gain (loss) on investments and foreign
currency transactions (55,494,429)
Undistributed net investment income 1,142,429
------------------------------------------------------------------------------------------------------
Net assets $532,822,897
------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding (59,865,883 issued,
less 4,601,344 treasury shares) 55,264,539
------------------------------------------------------------------------------------------------------
Net asset value per share (net assets of $532,822,897/
55,264,539 shares of beneficial interest outstanding) $9.64
------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF OPERATIONS
Year ended 11/30/06
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 $28,320,011
Dividends 28,038
------------------------------------------------------------------------------------------------------
Total investment income $28,348,049
------------------------------------------------------------------------------------------------------
Expenses
Management fee $3,125,943
Transfer agent and dividend disbursing costs 110,197
Administrative services fee 90,031
Independent trustees' compensation 76,039
Custodian fee 206,145
Shareholder communications 144,222
Auditing fees 72,192
Legal fees 10,999
Miscellaneous 164,166
------------------------------------------------------------------------------------------------------
Total expenses $3,999,934
------------------------------------------------------------------------------------------------------
Fees paid indirectly (71,728)
Reduction of expenses by investment adviser (2,943)
------------------------------------------------------------------------------------------------------
Net expenses $3,925,263
------------------------------------------------------------------------------------------------------
Net investment income $24,422,786
------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
------------------------------------------------------------------------------------------------------
Realized gain (loss) (identified cost basis)
Investment transactions $(171,382)
Futures contracts 605,551
Swap transactions (38,311)
Foreign currency transactions (4,785,742)
------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $(4,389,884)
------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments $13,899,728
Futures contracts 24,541
Swap transactions (15,357)
Translation of assets and liabilities in foreign currencies (4,469,207)
------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $9,439,705
------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $5,049,821
------------------------------------------------------------------------------------------------------
Change in net assets from operations $29,472,607
------------------------------------------------------------------------------------------------------
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 11/30
------------------------------------
2006 2005
CHANGE IN NET ASSETS
FROM OPERATIONS
------------------------------------------------------------------------------------------------------
Net investment income $24,422,786 $25,609,734
Net realized gain (loss) on investments and foreign
currency transactions (4,389,884) 20,004,433
Net unrealized gain (loss) on investments and foreign
currency translation 9,439,705 (24,950,918)
------------------------------------------------------------------------------------------------------
Change in net assets from operations $29,472,607 $20,663,249
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
------------------------------------------------------------------------------------------------------
From net investment income $(27,468,629) $(29,042,810)
------------------------------------------------------------------------------------------------------
TRUST SHARE (PRINCIPAL) TRANSACTIONS
------------------------------------------------------------------------------------------------------
Change in net assets from trust share transactions $(8,672,032) $(10,569,915)
------------------------------------------------------------------------------------------------------
Total change in net assets $(6,668,054) $(18,949,476)
------------------------------------------------------------------------------------------------------
NET ASSETS
------------------------------------------------------------------------------------------------------
At beginning of period 539,490,951 558,440,427
At end of period (including undistributed net investment
income of $1,142,429 and $5,440,460, respectively) $532,822,897 $539,490,951
------------------------------------------------------------------------------------------------------
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. This information has been audited by the trust's independent registered public
accounting firm, whose report, together with the trust's financial statements, are included in this report.
YEARS ENDED 11/30
--------------------------------------------------------------------------
2006 2005 2004 2003 2002
Net asset value, beginning of period $9.58 $9.71 $9.58 $9.09 $9.17
-----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
-----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.44 $0.45 $0.49 $0.49 $0.52
Net realized and unrealized gain (loss)
on investments and foreign currency 0.09 (0.09) 0.17 0.51 (0.03)
-----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.53 $0.36 $0.66 $1.00 $0.49
-----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
-----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.49) $(0.51) $(0.55) $(0.53) $(0.49)
From paid-in capital -- -- -- -- (0.09)
-----------------------------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(0.49) $(0.51) $(0.55) $(0.53) $(0.58)
-----------------------------------------------------------------------------------------------------------------------------
Net increase from repurchase of
capital shares $0.02 $0.02 $0.02 $0.02 $0.01
-----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.64 $9.58 $9.71 $9.58 $9.09
-----------------------------------------------------------------------------------------------------------------------------
Per share market value, end of period $8.51 $8.43 $8.71 $8.78 $8.26
-----------------------------------------------------------------------------------------------------------------------------
Total return at market value (%) (r)(s) 6.98 2.57 5.52 13.02 5.99
-----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA:
-----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 0.76 0.79 0.80 0.83 0.85
Expenses after expense reductions (f) 0.76 0.79 0.80 N/A N/A
Net investment income 4.62 4.64 5.11 5.21 5.80
Portfolio turnover 57 73 70 129 137
Net assets at end of period (000 Omitted) $532,823 $539,491 $558,440 $561,900 $546,281
-----------------------------------------------------------------------------------------------------------------------------
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the trust may receive proceeds from litigation settlements, without which performance would be lower.
SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
MFS Charter Income Trust (the trust) is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as a closed-end diversified management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The trust
can invest in foreign securities, 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 - 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. Values of debt
instruments 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. 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. Short-term instruments with a
maturity at issuance of 60 days or less may be valued at amortized cost, which
approximates market value. Futures contracts are generally valued at last
posted settlement price as reported by an independent pricing service on the
market on which they are primarily traded. Futures contracts for which there
were no trades that day for a particular position are generally valued at the
closing bid quotation as reported by an independent pricing service on the
market on which they are primarily traded. 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 a broker-dealer bid
quotation. 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. 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. These investments are generally
valued at fair value based on information from independent pricing services.
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, 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, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
INFLATION-ADJUSTED DEBT SECURITIES - The trust invests in inflation-adjusted
debt securities issued by the U.S. Treasury. The trust may also invest in
inflation-adjusted debt securities issued by U.S. Government agencies and
instrumentalities other than the U.S. Treasury and by other entities such as
U.S. and foreign corporations and foreign governments. The principal value of
these debt securities is adjusted by references to changes in the Consumer
Price Index or another general price or wage index. These debt securities
typically pay a fixed rate of interest, but this fixed rate is applied to the
inflation-adjusted principal amount. The principal paid at maturity of the debt
security is typically equal to the inflation-adjusted principal amount, or the
security's original par value, whichever is greater. Other types of
inflation-adjusted securities may use other methods to adjust for other
measures of inflation.
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 futures contracts, forward foreign currency
exchange contracts, and swap agreements.
FUTURES CONTRACTS - The trust may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the trust is
required to deposit with the broker either in cash or securities an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the trust each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes as
unrealized gains or losses by the trust. Upon entering into such contracts, the
trust bears the risk of interest or exchange rates or securities prices moving
unexpectedly, in which case, the trust may not achieve the anticipated benefits
of the futures contracts and may realize a loss.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of the contract. The trust may enter into forward foreign currency exchange
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the trust may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
The trust may also use contracts in a manner intended to protect foreign
currency denominated securities from declines in value due to unfavorable
exchange rate movements. For non-hedging purposes, the trust may enter into
contracts with the intent of changing the relative exposure of the trust's
portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
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. 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.
CREDIT DEFAULT SWAPS - In a credit default swap, 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.
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. 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 fund. Additionally, in the normal
course of business, the fund 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 fund 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, 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 involving its
portfolio holdings. Any proceeds received are reflected in realized gain/loss
in the Statement of Operations, or in unrealized gain/loss if the security is
still held by the trust.
FEES PAID INDIRECTLY - The trust's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
trust. This amount, for the year ended November 30, 2006, is shown as a
reduction of total expenses on the Statement of Operations.
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. 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, straddle loss deferrals, foreign currency
transactions, and derivative transactions.
The tax character of distributions declared to shareholders is as follows:
11/30/06 11/30/05
Ordinary income (including any short-term
capital gains) $27,468,629 $29,042,810
The federal tax cost and the tax basis components of distributable earnings
were as follows:
AS OF 11/30/06
Cost of investments $529,478,776
----------------------------------------------------------
Gross appreciation $10,053,548
Gross depreciation (7,485,827)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $2,567,721
Undistributed ordinary income 467,478
Capital loss carryforwards (50,784,403)
Other temporary differences (4,488,672)
As of November 30, 2006, the trust had capital loss carryforwards available to
offset future realized gains. Such losses expire as follows:
11/30/09 $(21,374,410)
11/30/10 (23,905,212)
11/30/14 (5,504,781)
-----------------------------------------------
$(50,784,403)
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 no later than May 30, 2008. 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 is evaluating the application of the Interpretation to
the trust, and has not at this time determined the impact, if any, 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 0.32% of the trust's average daily net assets and 4.57% 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 November 30, 2006 was equivalent to an annual effective rate of
0.59% of the trust's average daily net assets.
TRANSFER AGENT - MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of
MFS, receives a fee from the trust for its services as registrar and dividend-
disbursing agent. Pursuant to a written agreement, the trust pays MFSC an
account maintenance fee of no more than $9.00 and a dividend services fee of
$0.75 per reinvestment. For the year ended November 30, 2006, these fees
amounted to $69,853. MFSC also receives payment from the trust for out-of-
pocket expenses paid by MFSC on behalf of the trust. For the year ended
November 30, 2006, these costs amounted to $25,793.
Computershare Trust Company, N.A. became the Transfer Agent and Registrar of
the trust effective December 18, 2006, succeeding MFSC.
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 calendar year average net assets. From July 1, 2005
through March 31, 2006, the trust's annual fixed amount was $10,000. Effective
April 1, 2006, the trust's annual fixed amount is $17,500.
The administrative services fee incurred for the year ended November 30, 2006
was equivalent to an annual effective rate of 0.0170% 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 $4,761. The trust also has an unfunded retirement benefit
deferral plan for certain independent trustees which resulted in an expense of
$4,355. Both amounts are included in independent trustees' compensation for the
year ended November 30, 2006. The deferred liability for retirement benefits
payable to certain independent trustees under both plans amounted to $155,427
at November 30, 2006, 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 the trust or
other MFS funds selected by the trustee. Deferred amounts represent an
unsecured obligation of the trust until distributed in accordance with the
Plan. Included in other assets and payable for independent trustees'
compensation is $13,863 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 November 30, 2006, the fee paid to Tarantino LLC
was $3,025. MFS has agreed to reimburse the trust for a portion of the payments
made by the funds to Tarantino LLC in the amount of $2,943, 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 purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
U.S. government securities $26,426,979 $14,730,670
------------------------------------------------------------------------------
Investments (non-U.S. government securities) $264,947,714 $290,336,639
------------------------------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. The Trustees have
authorized the repurchase by the trust of up to 10% annually of its own shares
of beneficial interest. The trust repurchased and retired 1,029,300 shares of
beneficial interest during the year ended November 30, 2006 at an average price
per share of $8.43 and a weighted average discount of 10.94% per share. The
trust repurchased and retired 1,219,100 shares of beneficial interest during
the year ended November 30, 2005 at an average price per share of $8.67 and a
weighted average discount of 10.39% per share. Transactions in trust shares
were as follows:
YEAR ENDED YEAR ENDED
11/30/06 11/30/05
SHARES AMOUNT SHARES AMOUNT
Treasury shares reacquired (1,029,300) $(8,672,032) (1,219,100) $(10,569,915)
(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 0.35%. 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
November 30, 2006, the trust's commitment fee and interest expense were $3,574
and $0, 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 Charter Income Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Charter Income Trust (the Fund), including the portfolio of investments, as of
November 30, 2006, 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 November 30, 2006, 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
Charter Income Trust at November 30, 2006, 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.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 18, 2007
RESULTS OF SHAREHOLDER MEETING
11/30/06 (unaudited)
At the annual meeting of shareholders of MFS Charter Income Trust, which was
held on October 6, 2006, the following actions were taken:
ITEM 1. To elect the following individuals as Trustees:
NUMBER OF SHARES
----------------
NOMINEE AFFIRMATIVE WITHHOLD AUTHORITY
------- ----------- ------------------
Robert E. Butler 49,061,787.20 2,831,634.98
David H. Gunning 49,071,552.78 2,821,869.40
Robert C. Pozen 49,038,690.03 2,854,732.15
J. Dale Sherratt 49,057,678.13 2,835,744.05
TRUSTEES AND OFFICERS --
IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of January 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); 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 (November 2000 until June
2002)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 3/11/37) Senior Cardiac Surgeon, Chief of
Cardiac Surgery (until 2005);
Harvard Medical School, Professor
of Surgery; Brigham and Women's
Hospital Physicians' Organization,
Chair (2000 to 2004)
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining
(born 5/30/42) products and service provider),
Vice Chairman/Director (since
April 2001); Encinitos Ventures
(private investment company),
Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.
(welding equipment manufacturer),
Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 9/27/41) consultant; Capitol Entertainment
Management Company (video
franchise), Vice Chairman
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 Private investor; Prism Venture
(born 8/05/57) Partners (venture capital), Co-
founder and General Partner (until
June 2004); St. Paul 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); 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, 2006, the Trustees served as board members of 98 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 9, 2006, 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 02116-3741 225 Franklin Street, Boston, MA 02110
PORTFOLIO MANAGERS INDEPENDENT REGISTERED PUBLIC
Richard O. Hawkins ACCOUNTING FIRM
John F. Addeo Ernst & Young LLP
David P. Cole 200 Clarendon Street, Boston, MA 02116
Matthew W. Ryan
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, 2006 ("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 which 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, 2005 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 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, 2005, which the Trustees believed was
a long enough period to reflect differing market conditions. The Fund ranked
4th out of a total of 5 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 1st out of a total of 5 funds for the one-year period and 3rd out of a
total of 5 funds for the five-year period ended December 31, 2005. 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 out-performed its
custom benchmark for each of the one-year, three-year, and five-year periods
ended December 31, 2005. Because of the passage of time, these performance
results may 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 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 and the
Fund's total expense ratio were each approximately at 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 which 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, 2006.
A discussion regarding the Board's most recent review and renewal of the Fund's
investment advisory agreement is available by visiting the Closed-End section
of 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 trust will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The trust's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
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 1-202-551-5850. The trust'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 2006 income
tax forms in January 2007.
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 November 30, 2006, our records indicate that there are 3,601 registered
shareholders and approximately 31,788 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.
A copy of the Code of Ethics is filed as an exhibit to 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 November 30, 2006 and 2005, audit fees billed to the
Fund by E&Y were as follows:
Audit Fees
FEES BILLED BY E&Y: 2006 2005
---- ----
MFS Charter Income Trust 41,610 41,610
For the fiscal years ended November 30, 2006 and 2005, 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: 2006 2005 2006 2005 2006 2005
---- ---- ---- ---- ---- ----
To MFS Charter Income 15,000 20,000 8,520 10,620 144 1,318
Trust
To MFS and MFS Related 0 0 0 15,500 0 670,399
Entities of MFS
Charter Income
Trust*
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2006 2005
---- ----
To MFS Charter Income 126,727 749,837
Trust, 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
SEPTEMBER 17, 2003, AS REVISED ON SEPTEMBER 20, 2004,
MARCH 15, 2005 AND MARCH 1, 2006
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 has carefully reviewed matters that in recent years have been
presented for shareholder vote by either management or shareholders of public
companies. Based on the 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
clearly governed by the guidelines, such as proposed mergers and acquisitions.
Some items that otherwise would be acceptable will be voted against the
proponent when it is seeking extremely broad flexibility without offering a
valid explanation. MFS reserves the right to override the guidelines with
respect to a particular shareholder vote when such an override is, in MFS' best
judgment, consistent with the 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 and corporate issuers.
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 Review Group 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 a
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 a nominee for
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 a nominee to the 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. In addition, MFS will withhold its
vote for all nominees standing for election to a board of a U.S. issuer if we
can determine: (1) if, since the last annual meeting of shareholders and
without shareholder approval, the board or its compensation committee has
repriced underwater options; or (2) if, within the last year, shareholders
approved by majority vote a resolution recommending that the board rescind a
"poison pill" and the board has failed to take responsive action to that
resolution. 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 public assurances that the terms of the "poison
pill" would be put to a binding shareholder vote within the next five to seven
years.
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
Restricted stock plans should reward results rather than tenure. In
some cases, restricted stock is granted to the recipient at deep discounts to
fair market value, sometimes at par value. The holder cannot sell for a period
of years, but in the meantime the holder is able to vote and receive dividends.
Eventually the restrictions lapse and the stock can be sold by the holder.
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 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 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 stock option and restricted stock plans 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.
MFS votes in favor of stock option or restricted stock plans for
non-employee directors as long as they satisfy the requirements set forth above
with respect to stock option and restricted stock plans for company executives.
EXPENSING OF STOCK OPTIONS
While we acknowledge that there is no agreement on a uniform
methodology for expensing 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, MFS opposes shareholder
proposals that seek to set limits on executive compensation. Shareholder
proposals seeking to set limits on executive compensation tend to specify
arbitrary compensation criteria. 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 stock performance, MFS opposes shareholder proposals that
mandate a link of performance-based options to a specific industry or peer
group 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 evaluates other executive
compensation restrictions (e.g., terminating the company's stock option or
restricted stock programs, freezing executive pay during periods of large
layoffs, and establishing a maximum ratio between the highest paid executive
and lowest paid employee) based on whether such proposals are in the best
long-term economic interests of our clients.
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
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 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.
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 now
for the first time (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 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. Recently, some shareholder
groups have submitted proposals to limit the non-audit activities of a
company's audit firm. Some proposals would prohibit the provision of any
non-audit services 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.
BEST PRACTICES STANDARDS
Best practices standards are rapidly developing in the corporate
governance areas as a result of recent corporate scandals, the Sarbanes-Oxley
Act of 2002 and revised listing standards on major stock exchanges. MFS
generally support these developments. However, many issuers are not publicly
registered, are not subject to these enhanced listing standards, or are not
operating in an environment that is comparable to that in the United States. In
reviewing proxy proposals under these circumstances, MFS votes for proposals
that enhance standards of corporate governance so long as we believe that -
given the circumstances or the environment within which the issuers operate -
the proposal is consistent with the best long-term economic interests of our
clients.
SOCIAL ISSUES
There are many groups advocating social change, and many have chosen
the publicly-held corporation as a vehicle for advancing their agenda. Common
among these are resolutions requiring the corporation to refrain from investing
or conducting business in certain countries, to adhere to some list of goals or
principles (e.g., environmental standards) or to promulgate special reports on
various activities. MFS votes against such proposals unless their
shareholder-oriented benefits will outweigh any costs or disruptions to the
business, including those that use corporate resources to further a particular
social objective outside the business of the company or when no discernible
shareholder economic advantage is evident.
The laws of various states may regulate how the interests of certain
clients subject to those laws (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
MFS will evaluate items on proxies for foreign companies in the
context of the guidelines described above, as well as local market standards
and best practices. Proxies for foreign companies often contain significantly
more voting items than those of U.S. companies. Many of these items on foreign
proxies involve repetitive, non-controversial matters that are mandated by
local law. Accordingly, 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; (v)
approval of share repurchase programs; (vi) election of directors in
uncontested elections and (vii) appointment of auditors.
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 REVIEW GROUP
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
clearly 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, 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 at least one 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, and the basis for the
determination that the votes ultimately were cast in what MFS
believes to be the best long-term economic interests of MFS'
clients, and not in MFS' corporate interests. A copy of the
foregoing documentation will be provided to the 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, retirement plan administration and institutional business
units. 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 proper 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 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 the upcoming shareholders' meetings of over
10,000 corporations 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. 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.
-----------
(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 within a few business days prior to the
shareholder meeting, the MFS Proxy Review Group may determine to vote the
proxy in what it believes to be the best long-term economic interests of
MFS' clients.
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
therefor; (iii) a review of the procedures used by MFS to identify material
conflicts of interest; and (iv) a review of these policies and the guidelines
and, as necessary or appropriate, any proposed modifications thereto to reflect
new developments in corporate governance and other issues. Based on these
reviews, the Trustees, 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 Charter
Income Trust (the "Fund") is set forth below.
TITLE AND FIVE YEAR
PORTFOLIO MANAGER PRIMARY ROLE SINCE HISTORY
----------------- ------------ ----- -------------------
Richard O. Hawkins Lead Portfolio Manager 2004 Senior Vice President of
MFS; employed in the
investment management
area of MFS since 1988.
Matthew W. Ryan Emerging Markets Debt 2004 Senior Vice President of
Securities Portfolio MFS; employed in the
Manager investment management
area of MFS since 1997.
John Addeo High Yield Debt 2005 Vice President of MFS;
Securities Portfolio employed in the
Manager investment management
area of MFS since 1998.
David P. Cole High Yield Debt October 2006 Vice President of MFS;
Securities Portfolio employed in the
Manager 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 November 30, 2006. 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
------------------------- -----------------------------------------
Richard O. Hawkins N
Matthew W. Ryan N
John Addeo 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 November 30, 2006 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
Richard O. Hawkins 11 $25.0 billion 0 N/A 1 $40.9
million
Matthew W. Ryan 15 $5.1 billion 3 $2.0 billion 8 $1.4 billion
John Addeo 14 $4.9 billion 3 $517.2 million 2 $542.2
million
David P. Cole 11 $4.5 billion 2 $241.0 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 CHARTER INCOME 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 BE PURCHASED UNDER
PERIOD SHARES PURCHASED PER SHARE OR PROGRAMS THE PLANS OR PROGRAMS
=============================================================================================================
12/1/05-12/31/05 103,600 $8.46 103,600 4,628,124
-------------------------------------------------------------------------------------------------------------
1/1/06-1/31/06 100,400 $8.67 100,400 4,527,724
-------------------------------------------------------------------------------------------------------------
2/1/06-2/28/06 84,300 $8.60 84,300 4,443,424
-------------------------------------------------------------------------------------------------------------
3/1/06-3/31/06 161,800 $8.47 161,800 5,438,754
-------------------------------------------------------------------------------------------------------------
4/1/06-4/30/06 73,100 $8.32 73,100 5,365,654
-------------------------------------------------------------------------------------------------------------
5/1/06-5/31/06 131,900 $8.37 131,900 5,233,754
-------------------------------------------------------------------------------------------------------------
6/1/06-6/30/06 96,200 $8.28 96,200 5,137,554
-------------------------------------------------------------------------------------------------------------
7/1/06-7/31/06 119,000 $8.31 119,000 5,018,554
-------------------------------------------------------------------------------------------------------------
8/1/06-8/31/06 159,000 $8.38 159,000 4,859,554
-------------------------------------------------------------------------------------------------------------
9/1/06-9/30/06 0 -- 0 4,859,554
-------------------------------------------------------------------------------------------------------------
10/1/06-10/31/06 0 -- 0 4,859,554
-------------------------------------------------------------------------------------------------------------
11/1/06 - 11/30/06 0 -- 0 4,859,554
-------------------------------------------------------------------------------------------------------------
TOTAL 1,029,300 8.43 1,029,300
=============================================================================================================
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, 2006 plan year is 5,600,554.
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 407(c)(2)(iv) of Regulation S-K (as required by Item
22(b)(15) of Schedule 14A), or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the effectiveness 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 report on 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 have materially
affected, or are 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 CHARTER INCOME TRUST
------------------------------------------------------------------
By (Signature and Title)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President
Date: January 18, 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: January 18, 2007
----------------
By (Signature and Title)* TRACY ATKINSON
-----------------------------------------------------
Tracy Atkinson, Treasurer (Principal Financial Officer
and Accounting Officer)
Date: January 18, 2007
----------------
* Print name and title of each signing officer under his or her signature.