UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-5912
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MFS SPECIAL VALUE TRUST
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: October 31
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Date of reporting period: October 31, 2005
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds 10/31/05
ANNUAL REPORT
MFS(R) SPECIAL VALUE
TRUST
A path for pursuing opportunity
[logo] M F S(SM)
INVESTMENT MANAGEMENT(R)
[graphic omitted]
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NOT FDIC INSURED MAY LOSE VALUE NO BANK OR CREDIT UNION GUARANTEE NOT A DEPOSIT
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF
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MFS(R) SPECIAL VALUE TRUST 10/31/05
The trust seeks to maintain an annual distribution rate of 10%
based on its average daily net asset value, while seeking
opportunities for capital appreciation.
New York Stock Exchange Symbol: MFV
TABLE OF CONTENTS
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LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 2
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MANAGEMENT REVIEW 3
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PORTFOLIO MANAGERS' PROFILES 5
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PERFORMANCE SUMMARY 6
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DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 8
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PORTFOLIO OF INVESTMENTS 9
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FINANCIAL STATEMENTS 20
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NOTES TO FINANCIAL STATEMENTS 24
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 31
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TRUSTEES AND OFFICERS 32
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 37
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PROXY VOTING POLICIES AND INFORMATION 41
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QUARTERLY PORTFOLIO DISCLOSURE 41
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FEDERAL TAX INFORMATION 41
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CONTACT INFORMATION BACK COVER
LETTER FROM THE CEO
[Photo of Robert J. Manning]
Dear Shareholders,
Most investors are familiar with the basic principles of investing - focus on
the long term and keep your assets diversified across different investment
categories. Still, it is surprising how often we forget these basic lessons.
Certainly, the dot-com euphoria that overtook Wall Street in the late 1990s
had many people hoping they could become millionaires overnight. But the
market decline that started in the spring of 2000 taught everyone how
misguided those hopes had been.
Now, less than five years after the market taught a harsh lesson in the
follies of speculative investing, we are seeing a number of trends that
suggest many investors, including professionals, are hoping for overnight
miracles again. We see a steady stream of market "gurus" on television news
shows, promising to teach amateur investors the strategies that will allow
them to get rich quick. Hedge funds - which by their nature move in and out of
investments rapidly - have soared in popularity over the past five years. We
are reminded every day that we live in a "what have you done for me lately?"
world, but this mindset should not influence how we invest and manage our
money. In fact, investors often fall short of their goals because they trade
in and out of investments too frequently and at inopportune times.
Throughout our entire 80-year history, MFS' money management process has
focused on long-term investment opportunities. We firmly believe that one of
the best ways to realize long-term financial goals - be it a college
education, a comfortable retirement, or a secure family legacy - is to follow
a three-pronged approach that focuses on longer time horizons. Allocate
holdings across the major asset classes - including stocks, bonds, and cash.
Diversify within each class to take advantage of different market segments and
investing styles. And rebalance assets regularly to maintain a desired asset
allocation.*
This long-term approach requires diligence and patience, two traits that in
our experience 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)
December 15, 2005
* Asset allocation, diversification, and rebalancing does not guarantee a
profit or protect against a loss. The opinions expressed in this letter are
those of MFS, and no forecasts can be guaranteed.
PORTFOLIO COMPOSITION
PORTFOLIO STRUCTURE*
Bonds 65.3%
Stocks 28.3%
Preferred Stocks 3.6%
Convertible Preferred Stocks 0.3%
Cash & Other Net Assets 2.5%
MARKET SECTORS*
High Yield Corporates 56.4%
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U.S. Equities 29.2%
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Emerging Market Bonds 4.4%
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Non U.S. Equities 2.7%
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Cash & Other Net Assets 2.5%
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Commercial Mortgage-Backed
Securities 2.2%
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High Grade Corporates 1.2%
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Asset Backed Securities 1.1%
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U.S. Convertibles 0.3%
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CREDIT QUALITY OF BONDS**
AAA 0.3%
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A 0.1%
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BBB 2.3%
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BB 19.8%
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B 39.2%
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CCC 30.3%
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CC 3.1%
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D 0.9%
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Not Rated 4.0%
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PORTFOLIO FACTS
Average Duration***** 4.6
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Average Life*** 8.4 yrs.
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Average Maturity*** 9.2 yrs.
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Average Credit Quality of Rated
Securities**** B
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Average Short Term Quality A-1
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* For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
** 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 a
"AAA"-rating category. Percentages are based on the total market value
of investments as of 10/31/05.
*** The average maturity shown is calculated using the final stated maturity
on the portfolio's holdings without taking into account any holdings
which have been pre-refunded to an earlier date or which have a
mandatory put date prior to the stated maturity. The average life shown
takes into account these earlier dates.
**** The Average Credit Quality of Rated Securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
***** Duration is a measure of how much a bond fund's price is likely to
fluctuate with general changes in interest rates, e.g., if rates rise
1.00%, a fund with a 5-year duration is likely to lose about 5.00% of
its value.
Percentages are based on net assets as of 10/31/05, unless otherwise noted.
The portfolio is actively managed, and current holdings may be different.
MANAGEMENT REVIEW
SUMMARY OF RESULTS
For the twelve months ended October 31, 2005, the MFS Special Value Trust
provided a total return of 4.89%, at net asset value. In comparison, the
trust's equity benchmark, the Russell 1000 Value Index, returned 11.86% and
its fixed income benchmark, the Lehman Brothers U.S. High-Yield Corporate
Index (the Lehman index), returned 4.08%.
DETRACTORS FROM PERFORMANCE
While the overall trust outperformed its fixed income benchmark, there were
some negative factors which hurt relative performance. The trust's credit
exposure to "BB"-rated bonds and lower-rated "CCC" bonds held back results.
(Bonds rated "BBB" or higher are considered investment-grade; bonds rated "BB"
or lower are considered non-investment grade.) Relative detractors, at the
security level, included Pliant, INTERMET, JSG Funding, and Worldspan.
In the equity portion of the portfolio, the principal source of
underperformance relative to the trust's equity benchmark was stock selection
in the health care, technology, and transportation sectors. In health care, our
holdings of poor-performing Tenet Healthcare were among the trust's top
detractors for the period.
In technology, our positioning in telecommunications equipment provider Nortel
Networks, which is not a constituent of the index, held back performance as the
stock delivered disappointing results for the period. Not holding
strong-performing Hewlett-Packard was also a negative. In the transportation
sector, our holdings in Southwest Airlines detracted from relative returns.
Stocks in other sectors that dampened investment results included our position
in cable services provider Comcast and electric utility firm Calpine, which
are not benchmark constituents, as well as our overweighted position in
package manufacturer Owens-Illinois. Not holding strong-performing oil and gas
company ConocoPhillips or tobacco company Altria Group also held
back performance.
CONTRIBUTORS TO PERFORMANCE
For the fixed income portion of the portfolio, security selection was the
principal contributor to the trust's performance relative to the Lehman index.
Continental Airlines, Safilo, designer of eyeglass frames, consumer products
company Revlon, and chemical company Rhodia were among the trust's top
individual contributors. Our exposure to securities with higher yields,
relative to those in the index, also delivered strong results.
On the equity side, top contributing sectors relative to the equity benchmark
included energy, financial services, and industrial goods & services. In
energy, positive stock selection and our heavily overweighted position in this
strong-performing sector helped boost the trust's relative performance. Our
holdings in drilling rig operator GlobalSantaFe, offshore drilling company
Noble, and oilfield services provider BJ Services (none of which are in the
benchmark) were among the trust's top individual contributors. Our
overweighting in oil and gas equipment manufacturer Cooper Cameron, which
posted strong gains for the period, also helped relative results.
Our avoidance of the financial services sector had a positive impact on
relative performance. Not owning index constituents JPMorgan Chase, Bank of
America, and Citigroup, all of which underperformed the broad benchmark, aided
results.
In the industrial goods & services sector, not holding General Electric, a
benchmark constituent that underperformed the overall index, added to relative
returns. Not holding telecom services provider Verizon Communications and
pharmaceutical company Pfizer also helped lift relative performance as both
stocks delivered disappointing results for the period.
Respectfully,
John F. Addeo Scott B. Richards
Portfolio Manager Portfolio Manager
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 as an indication of
trading intent on behalf of any MFS fund. References to specific securities are
not recommendations of such securities and may not be representative of any MFS
fund's current or future investments.
PORTFOLIO MANAGERS' PROFILES
John F. Addeo, CFA, is Vice President and Associate Director of Fixed Income
Research of MFS Investment Management(R) (MFS(R)) and a portfolio manager of
the high-yield bond portfolios for our mutual funds, variable annuities,
offshore accounts and closed-end funds. John joined MFS as a research analyst
in 1998 and became portfolio manager in 2001. He was named Associate Director
of Fixed Income Research in 2004. He received a Bachelor of Science degree
from Siena College in 1984. He holds the Chartered Financial Analyst (CFA)
designation.
Scott B. Richards, CFA, is Vice President of MFS Investment Management(R)
(MFS(R)) and a portfolio manager for high-yield portfolios of our mutual
funds, variable annuities, closed end funds and offshore accounts. Scott
joined MFS in May 2004 with more than 24 years experience as a high-yield bond
portfolio manager and research director at several leading investment
management firms. He earned a Master of Business Administration degree from
the Amos Tuck School at Dartmouth College in 1984 and a bachelor's degree in
applied economics from Cornell University in 1981. He holds the Chartered
Financial Analyst (CFA) designation and is a member of the Boston Security
Analyst Society.
PERFORMANCE SUMMARY THROUGH 10/31/05
All results are historical. Investment return and principal value will
fluctuate, and shares, when sold, may be worth more or less than their
original cost. More recent returns may be more or less than those shown. Past
performance is no guarantee of future results.
PRICE SUMMARY
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Year ended 10/31/05
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Date Price
Net asset value per share 10/31/05 $9.66
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10/31/04 $10.12
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New York Stock Exchange Price 10/31/05 $10.85
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2/03/05 (high)* $12.20
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4/20/05 (low)* $10.42
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10/31/04 $11.60
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* For the period November 1, 2004 through October 31, 2005.
TOTAL RETURNS VS BENCHMARKS
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Year ended 10/31/05
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New York Stock Exchange price** 2.77%
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Net asset value** 4.89%
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Lehman Brothers U.S. High-Yield Corporate Index# 4.08%
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Russell 1000 Value Index# 11.86%
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** Includes reinvestment of dividends and capital gain distributions.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITIONS
Lehman Brothers U.S. High-Yield Corporate Index - measures the universe of
non-investment grade, fixed rate debt. Eurobonds and debt issues from
countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela,
etc.) are excluded.
Russell 1000 Value Index - is constructed to provide a comprehensive barometer
for the value securities in the large-cap segment of the U.S. equity universe.
Companies in this index generally have lower price-to-book ratios and lower
forecasted growth values.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
The trust's shares may trade at a discount or premium 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 return that is calculated based on the net asset value and
New York Stock Exchange price can be different.
The trust's monthly distributions may include a return of capital to
shareholders. Distributions that are treated for federal income tax purposes as
a return of capital will reduce each shareholder's basis in his or her shares
and, to the extent the return of capital exceeds such basis, will be treated as
gain to the shareholder from a sale of shares. Returns of shareholder capital
have the effect of reducing the trust's assets and increasing the trust's
expense ratio.
The trust's target annual distribution rate is calculated based on the trust's
average daily net asset value, not a fixed share price, and the trust's
dividend amount will fluctuate with changes in the trust's average daily net
asset value.
From time to time the trust may receive proceeds from litigation settlements,
without which performance would be lower.
KEY RISK CONSIDERATIONS
The portfolio may invest in derivative securities, which may include futures,
options and swaps. These types of instruments can increase price fluctuation.
The portfolio may invest in government guaranteed securities. These guarantees
apply to the underlying securities only and not to the prices and yields of
the portfolio. The portfolio invests in high yield or lower-rated securities,
which may provide greater returns but are subject to greater-than-average
risk. Because the portfolio invests in a limited number of companies, a change
in one security's value may have a more significant effect on the portfolio's
value. The trust limits investment in securities of foreign issuers which are
not traded on a U.S. exchange (excluding American Depository Receipts) to 10%
of its total assets. For purposes of determining this investment limitation,
foreign securities traded in U.S. markets which are well established and
liquid (such as Rule 144A and Yankee Bond markets) are considered as being
equivalent to U.S. exchange-traded securities, and therefore are not subject
to this 10% limitation. Foreign and/or emerging market securities are more
susceptible to risks relating to interest rates, currency exchange rates and
economic and political risks.
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.
PORTFOLIO OF INVESTMENTS - 10/31/05
The Portfolio of Investments is a complete list of all securities owned by
your trust. It is categorized by broad-based asset classes.
Bonds - 63.8%
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ISSUER PAR AMOUNT $ VALUE
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Advertising & Broadcasting - 4.2%
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Allbritton Communications Co., 7.75%, 2012 $ 350,000 $ 345,625
Directv Holdings, 6.375%, 2015 90,000 88,312
EchoStar DBS Corp., 6.375%, 2011 315,000 306,337
Granite Broadcasting Corp., 9.75%, 2010 210,000 196,350
Inmarsat Finance II PLC, 0% to 2008, 10.375% to 2012 360,000 294,300
Intelsat Ltd., 8.625%, 2015## 135,000 136,687
Intelsat Ltd., 0% to 2010, 9.25% to 2015## 180,000 118,350
LBI Media Holdings, Inc., 0% to 2008, 11% to 2013 875,000 640,937
Panamsat Holding Corp., 0% to 2009, 10.375% to 2014 640,000 436,800
Sirius Satellite Radio, Inc., 9.625%, 2013## 185,000 175,056
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$ 2,738,754
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Airlines - 0.8%
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Continental Airlines, Inc., 8.307%, 2018 $ 215,952 $ 188,895
Continental Airlines, Inc., 6.795%, 2018 331,351 285,519
Continental Airlines, Inc., 7.566%, 2020 56,616 50,418
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$ 524,832
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Apparel Manufacturers - 1.1%
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Levi Strauss & Co., 9.75%, 2015 $ 345,000 $ 348,450
Propex Fabrics, Inc., 10%, 2012 395,000 343,156
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$ 691,606
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Asset Backed & Securitized - 3.3%
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Anthracite CDO Ltd., 6%, 2037## $ 450,000 $ 392,355
Asset Securitization Corp., FRN, 8.4971%, 2029## 700,000 632,516
Falcon Franchise Loan LLC, FRN, 3.7867%, 2025^^ 656,797 108,858
GMAC Commercial Mortgage Securities, Inc., 6.02%, 2033 250,000 236,138
Morgan Stanley Capital I, Inc., FRN, 1.4835%, 2039^^## 697,506 48,553
Preferred Term Securities XII Ltd., 9.8%, 2033##(S)(S)(S) 225,000 219,510
Preferred Term Securities XVI Ltd., 14%, 2034##(S)(S)(S) 300,000 311,580
Preferred Term Securities XVII Ltd., 9.3%, 2035##(S)(S)(S) 187,000 185,392
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$ 2,134,902
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Automotive - 4.0%
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Advanced Accessory Systems LLC, 10.75%, 2011 $ 60,000 $ 51,000
Affinia Group, Inc., 9%, 2014## 130,000 100,750
Delphi Corp., 6.55%, 2006** 320,000 221,600
Delphi Corp., 6.5%, 2013** 190,000 131,575
Ford Motor Credit Co., 6.625%, 2008 133,000 127,541
Ford Motor Credit Co., 5.8%, 2009 90,000 82,427
Ford Motor Credit Co., 8.625%, 2010 125,000 122,812
Ford Motor Credit Co., 7%, 2013 92,000 84,204
General Motors Acceptance Corp., 5.85%, 2009 130,000 124,278
General Motors Acceptance Corp., 6.75%, 2014 571,000 546,010
General Motors Corp., 8.375%, 2033 314,000 232,752
INTERMET Corp., 9.75%, 2009** 205,000 32,800
Lear Corp., 8.11%, 2009 440,000 413,600
Lear Corp., 5.75%, 2014 125,000 100,625
Metaldyne Corp., 11%, 2013## 280,000 252,000
TRW Automotive, Inc., 11%, 2013 13,000 14,528
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$ 2,638,502
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Banks & Credit Companies - 0.4%
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ATF Bank JSC, 9.25%, 2012## $ 279,000 $ 285,975
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Basic Industry - 0.1%
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Trimas Corp., 9.875%, 2012 $ 105,000 $ 85,050
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Broadcast & Cable TV - 4.4%
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Cablevision Systems Corp., 8%, 2012 $ 180,000 $ 171,900
CCH I Holdings LLC, 9.92%, 2014 358,000 232,700
CCH I Holdings LLC, 11%, 2015## 378,000 342,090
Charter Communications, Inc., 8.625%, 2009 48,000 39,360
CSC Holdings, Inc., 8.125%, 2009 155,000 158,487
CSC Holdings, Inc., 6.75%, 2012## 110,000 106,150
FrontierVision Holdings LP, 11.875%, 2007** 300,000 369,000
FrontierVision Operating Partners LP, 11%, 2006** 115,000 156,400
Kabel Deutschland, 10.625%, 2014## 230,000 247,537
Mediacom Broadband LLC, 9.5%, 2013 285,000 278,588
Mediacom Broadband LLC, 11%, 2013 150,000 160,500
Telenet Group Holdings N.V., 0% to 2008, 11.5% to 2014## 780,000 620,100
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$ 2,882,812
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Building - 1.8%
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Goodman Global Holdings, Inc., 7.875%, 2012## $ 355,000 $ 333,700
Interface, Inc., 10.375%, 2010 180,000 193,950
Interface, Inc., 9.5%, 2014 150,000 149,250
Nortek Holdings, Inc., 8.5%, 2014 65,000 62,075
Nortek Holdings, Inc., 0% to 2009, 10.75% to 2014 632,000 379,200
Texas Industries, Inc., 7.25%, 2013## 70,000 72,800
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$ 1,190,975
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Business Services - 0.6%
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Lucent Technologies, Inc., 6.45%, 2029 $ 100,000 $ 85,500
Northern Telecom Corp., 6.875%, 2023 75,000 68,625
Northern Telecom Corp., 7.875%, 2026 45,000 44,100
Sungard Data Systems, Inc., 10.25%, 2015## 165,000 163,556
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$ 361,781
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Chemicals - 4.6%
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ARCO Chemical Co., 9.8%, 2020 $ 160,000 $ 178,400
Crystal U.S. Holdings LLC, "A", 0% to 2009, 10% to 2014 36,000 25,290
Crystal U.S. Holdings LLC, "B", 0% to 2009, 10.5% to 2014 390,000 270,075
Equistar Chemicals LP, 10.625%, 2011 80,000 87,200
Huntsman International LLC, 10.125%, 2009 1,000 1,029
Huntsman International LLC, 7.375%, 2015## 55,000 52,250
IMC Global, Inc., 10.875%, 2013 70,000 81,200
KI Holdings, Inc., 0% to 2009, 9.875% to 2014 547,000 367,174
Lyondell Chemical Co., 11.125%, 2012 340,000 379,100
Nalco Co., 8.875%, 2013 65,000 66,381
Nell AF S.a.r.L., 8.375%, 2015## 225,000 216,000
NOVA Chemicals Corp., 6.5%, 2012 125,000 119,375
Polypore, Inc., 8.75%, 2012 195,000 171,600
Resolution Performance Products LLC, 13.5%, 2010 340,000 358,275
Rhodia S.A., 8.875%, 2011 415,000 392,175
Rockwood Specialties Group, Inc., 10.625%, 2011 219,000 234,330
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$ 2,999,854
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Consumer Goods & Services - 2.4%
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Acco Brands Corp., 7.625%, 2015## $ 30,000 $ 28,500
Church & Dwight Co., Inc., 6%, 2012 75,000 72,750
GEO Group, Inc., 8.25%, 2013 65,000 62,887
Integrated Electrical Services, Inc., 9.375%, 2009 215,000 154,800
Revlon Consumer Products Corp., 9.5%, 2011 465,000 435,938
Safilo Capital International S.A., 9.625%, 2013##EUR 400,000 538,194
Worldspan LP, 10.04%, 2011## $ 330,000 268,950
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$ 1,562,019
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Containers - 0.6%
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Crown European Holdings S.A., 10.875%, 2013 $ 190,000 $ 223,725
Huntsman Packaging Corp., 13%, 2010** 85,000 12,325
Owens-Illinois, Inc., 7.8%, 2018 90,000 86,400
Pliant Corp., 13%, 2010** 425,000 61,625
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$ 384,075
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Defense Electronics - 0.2%
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L-3 Communications Holdings, Inc., 6.125%, 2014 $ 130,000 $ 127,075
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Electronics - 0%
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Magnachip Semiconductor S.A., 8%, 2014 $ 20,000 $ 18,300
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Emerging Market Quasi-Sovereign - 0.7%
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Gazprom OAO, 9.625%, 2013## $ 150,000 $ 180,000
Gazprom OAO, 9.625%, 2013 60,000 72,000
Pemex Project Funding Master Trust, 8.625%, 2022 143,000 170,885
------------
$ 422,885
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Emerging Market Sovereign - 1.9%
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Federal Republic of Brazil, 8.875%, 2019 $ 483,000 $ 509,565
Federal Republic of Brazil, 5.1875%, 2024 54,000 51,435
Republic of Argentina, 5.83%, 2033**ARS 851,667 358,686
Republic of Panama, 9.375%, 2023 $ 43,000 52,245
Republic of Panama, 9.375%, 2029 185,000 226,163
United Mexican States, 8.3%, 2031 41,000 50,225
------------
$ 1,248,319
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Energy - Independent - 0.9%
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Belden & Blake Corp., 8.75%, 2012 $ 280,000 $ 288,400
Chesapeake Energy Corp., 7%, 2014 52,000 54,080
Chesapeake Energy Corp., 6.875%, 2016 130,000 131,625
Clayton Williams Energy, Inc., 7.75%, 2013## 80,000 77,200
Pogo Producing Co., 6.875%, 2017## 40,000 39,600
------------
$ 590,905
----------------------------------------------------------------------------------------------
Entertainment - 1.6%
----------------------------------------------------------------------------------------------
Loews Cineplex Entertainment Corp., 9%, 2014 $ 130,000 $ 125,125
Marquee Holdings, Inc., 0% to 2009, 12% to 2014 415,000 250,038
Six Flags, Inc., 9.75%, 2013 415,000 412,925
Universal City, Florida Holding Co., 8.375%, 2010 240,000 246,000
------------
$ 1,034,088
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Food & Non-Alcoholic Beverages - 0.7%
----------------------------------------------------------------------------------------------
Chaoda Modern Agriculture Holdings, 7.75%, 2010## $ 359,000 $ 348,230
Doane Petcare Co., 10.625%, 2015## 135,000 136,687
------------
$ 484,917
----------------------------------------------------------------------------------------------
Forest & Paper Products - 2.7%
----------------------------------------------------------------------------------------------
Georgia-Pacific Corp., 7.75%, 2029 $ 485,000 $ 497,125
Graphic Packaging International Corp., 9.5%, 2013 345,000 309,637
Jefferson Smurfit Corp., 8.25%, 2012 140,000 131,950
JSG Funding LLC, 11.5%, 2015#,##EUR 476,666 495,108
Newark Group, Inc., 9.75%, 2014 $ 155,000 133,300
Norske Skog Canada Ltd., 7.375%, 2014 125,000 111,250
Sino-Forest Corp., 9.125%, 2011## 12,000 12,750
Stone Container Corp., 7.375%, 2014 90,000 79,875
------------
$ 1,770,995
----------------------------------------------------------------------------------------------
Gaming & Lodging - 2.4%
----------------------------------------------------------------------------------------------
Chukchansi Economic Development Authority, 8%, 2013## $ 30,000 $ 30,000
GTECH Holdings Corp., 5.25%, 2014 265,000 223,747
NCL Corp., 11.625%, 2014## 360,000 369,900
Penn National Gaming, Inc., 6.75%, 2015 95,000 91,200
Pinnacle Entertainment, Inc., 8.25%, 2012 195,000 193,538
Resorts International Hotel & Casino, Inc., 11.5%, 2009 400,000 445,500
Station Casinos, Inc., 6.875%, 2016## 25,000 25,188
Wynn Las Vegas LLC, 6.625%, 2014 215,000 204,788
------------
$ 1,583,861
----------------------------------------------------------------------------------------------
Industrial - 1.7%
----------------------------------------------------------------------------------------------
Amsted Industries, Inc., 10.25%, 2011## $ 195,000 $ 208,650
Da-Lite Screen Co., Inc., 9.5%, 2011 120,000 126,600
JohnsonDiversey Holdings, Inc., 0% to 2007, 10.67% to 2013 335,000 241,200
Knowledge Learning Corp., 7.75%, 2015## 85,000 79,050
Milacron Escrow Corp., 11.5%, 2011 390,000 335,400
Wesco Distribution, Inc., 7.5%, 2017## 105,000 104,869
------------
$ 1,095,769
----------------------------------------------------------------------------------------------
Machinery & Tools - 0.8%
----------------------------------------------------------------------------------------------
Case New Holland, Inc., 9.25%, 2011 $ 205,000 $ 215,762
United Rentals, Inc., 7.75%, 2013 335,000 318,250
------------
$ 534,012
----------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 2.2%
----------------------------------------------------------------------------------------------
CDRV Investors, Inc., 0% to 2010, 9.625% to 2015 $ 370,000 $ 205,350
DaVita, Inc., 6.625%, 2013 80,000 81,000
DaVita, Inc., 7.25%, 2015 95,000 95,950
Fisher Scientific International, Inc., 6.125%, 2015## 210,000 208,425
Healthsouth Corp., 8.5%, 2008 150,000 147,000
Lifecare Holdings, Inc., 9.25%, 2013## 185,000 136,900
Psychiatric Solutions, Inc., 7.75%, 2015 55,000 56,650
Select Medical Corp., 7.625%, 2015 115,000 106,663
U.S. Oncology, Inc., 10.75%, 2014 275,000 303,188
Universal Hospital Services, Inc., 10.125%, 2011 105,000 105,263
------------
$ 1,446,389
----------------------------------------------------------------------------------------------
Medical Equipment - 0.5%
----------------------------------------------------------------------------------------------
Warner Chilcott Corp., 8.75%, 2015## $ 375,000 $ 345,000
----------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 1.3%
----------------------------------------------------------------------------------------------
ANR Pipeline Co., 9.625%, 2021 $ 105,000 $ 127,198
Colorado Interstate Gas Co., 5.95%, 2015 95,000 90,226
El Paso Energy Corp., 7%, 2011 300,000 295,500
El Paso Energy Corp., 7.75%, 2013 235,000 242,050
Markwest Energy Partners LP, 6.875%, 2014## 90,000 86,400
------------
$ 841,374
----------------------------------------------------------------------------------------------
Network & Telecom - 5.0%
----------------------------------------------------------------------------------------------
Axtel S.A. de C.V., 11%, 2013 $ 565,000 $ 629,975
Cincinnati Bell, Inc., 8.375%, 2014 155,000 150,737
Citizens Communications Co., 9.25%, 2011 170,000 184,025
Citizens Communications Co., 6.25%, 2013 305,000 288,987
Global Crossing UK Finance, 10.75%, 2014 80,000 70,800
Hawaiian Telecom Communications, Inc., 9.75%, 2013## 130,000 129,350
Hawaiian Telecom Communications, Inc., 12.5%, 2015## 190,000 185,725
MCI, Inc., 6.908%, 2007 100,000 101,000
MCI, Inc., 7.688%, 2009 110,000 113,987
Qwest Capital Funding, Inc., 7.25%, 2011 175,000 167,125
Qwest Corp., 7.875%, 2011 180,000 188,550
Qwest Corp., 8.875%, 2012 175,000 192,063
Qwest Services Corp., 13.5%, 2010 475,000 542,688
Time Warner Telecom Holdings, Inc., 9.25%, 2014 335,000 335,000
------------
$ 3,280,012
----------------------------------------------------------------------------------------------
Oil Services - 0.2%
----------------------------------------------------------------------------------------------
Hanover Compressor Co., 9%, 2014 $ 125,000 $ 136,562
----------------------------------------------------------------------------------------------
Precious Metals & Minerals - 0.4%
----------------------------------------------------------------------------------------------
Freeport-McMoRan Copper & Gold, Inc., 6.875%, 2014 $ 254,000 $ 250,190
----------------------------------------------------------------------------------------------
Printing & Publishing - 2.8%
----------------------------------------------------------------------------------------------
American Media Operations, Inc., 8.875%, 2011 $ 260,000 $ 222,300
Dex Media, Inc., 0% to 2008, 9% to 2013 840,000 651,000
Dex Media, Inc., 0% to 2008, 9% to 2013 135,000 104,625
Hollinger, Inc., 12.875%, 2011## 50,000 52,812
Houghton Mifflin Co., 0% to 2008, 11.5% to 2013 385,000 279,125
Lighthouse International Co. S.A., 8%, 2014##EUR 160,000 201,373
WDAC Subsidiary Corp., 8.375%, 2014## $ 365,000 344,013
------------
$ 1,855,248
----------------------------------------------------------------------------------------------
Railroad & Shipping - 0.4%
----------------------------------------------------------------------------------------------
TFM S.A. de C.V., 9.375%, 2012## $ 241,000 $ 261,485
----------------------------------------------------------------------------------------------
Restaurants - 0.5%
----------------------------------------------------------------------------------------------
Carrols Holdings Corp., 9%, 2013## $ 130,000 $ 128,700
Uno Restaurant Corp., 10%, 2011## 195,000 173,550
------------
$ 302,250
----------------------------------------------------------------------------------------------
Retailers - 1.6%
----------------------------------------------------------------------------------------------
Buhrmann U.S., Inc., 7.875%, 2015 $ 95,000 $ 93,812
Couche-Tard, Inc., 7.5%, 2013 170,000 172,550
Eye Care Centers of America, Inc., 10.75%, 2015## 165,000 154,687
Finlay Fine Jewelry Corp., 8.375%, 2012 100,000 85,000
GSC Holdings Corp., 8%, 2012## 70,000 68,075
Mothers Work, Inc., 11.25%, 2010 145,000 124,700
Neiman Marcus Group, Inc., 9%, 2015## 165,000 162,113
Rite Aid Corp., 8.125%, 2010 130,000 130,000
Rite Aid Corp., 7.7%, 2027 95,000 72,200
------------
$ 1,063,137
----------------------------------------------------------------------------------------------
Specialty Stores - 0.2%
----------------------------------------------------------------------------------------------
Payless ShoeSource, Inc., 8.25%, 2013 $ 125,000 $ 126,875
----------------------------------------------------------------------------------------------
Steel - 0.6%
----------------------------------------------------------------------------------------------
AK Steel Holding Corp., 7.75%, 2012 $ 355,000 $ 319,500
Chaparral Steel Co., 10%, 2013## 60,000 62,100
Northwestern Steel & Wire Co., 9.5%, 2049** 300,000 0
------------
$ 381,600
----------------------------------------------------------------------------------------------
Telecommunications - Wireless - 1.7%
----------------------------------------------------------------------------------------------
Alamosa Holdings, Inc., 12%, 2009 $ 129,000 $ 141,255
American Towers, Inc., 7.25%, 2011 85,000 88,825
Centennial Communications Corp., 10.125%, 2013 140,000 156,450
Dobson Cellular Systems, Inc., 9.875%, 2012 35,000 37,800
Dolphin Telecom PLC, 11.5%, 2008** 750,000 0
IWO Holdings, Inc., 7.9%, 2012 15,000 15,600
Rogers Wireless, Inc., 7.5%, 2015 65,000 69,713
Rural Cellular Corp., 9.75%, 2010 508,000 505,460
U.S. Unwired, Inc., 10%, 2012 100,000 113,750
------------
$ 1,128,853
----------------------------------------------------------------------------------------------
Tire & Rubber - 1.0%
----------------------------------------------------------------------------------------------
Cooper Standard Automotive, Inc., 8.375%, 2014 $ 265,000 $ 198,750
Goodyear Tire & Rubber Co., 9%, 2015## 480,000 463,200
------------
$ 661,950
----------------------------------------------------------------------------------------------
Tobacco - 0.5%
----------------------------------------------------------------------------------------------
R.J. Reynolds Tobacco Holdings, Inc., 7.3%, 2015## $ 340,000 $ 338,300
----------------------------------------------------------------------------------------------
Utilities - Electric Power - 3.0%
----------------------------------------------------------------------------------------------
Allegheny Energy Supply Co., LLC, 8.25%, 2012## $ 70,000 $ 78,225
FirstEnergy Corp., 6.45%, 2011 99,000 104,139
Midwest Generation LLC, 8.75%, 2034 145,000 158,775
Mission Energy Holding Co., 13.5%, 2008 250,000 289,375
NGC Corp. Capital Trust, 8.316%, 2027 275,000 239,250
NRG Energy, Inc., 8%, 2013 169,000 184,210
Reliant Energy, Inc., 6.75%, 2014 60,000 55,800
Reliant Resources, Inc., 9.25%, 2010 200,000 210,000
Sierra Pacific Resources, 6.75%, 2017## 335,000 333,325
Texas Genco LLC, 6.875%, 2014## 120,000 128,400
TXU Corp., 5.55%, 2014 220,000 202,228
------------
$ 1,983,727
----------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $42,363,877) $ 41,795,215
----------------------------------------------------------------------------------------------
Stocks - 28.3%
----------------------------------------------------------------------------------------------
ISSUER SHARES $ VALUE
----------------------------------------------------------------------------------------------
Airlines - 1.5%
----------------------------------------------------------------------------------------------
Southwest Airlines Co.^ 60,500 $ 968,605
----------------------------------------------------------------------------------------------
Automotive - 1.0%
----------------------------------------------------------------------------------------------
Magna International, Inc., "A"^ 9,500 $ 662,340
----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 2.8%
----------------------------------------------------------------------------------------------
Comcast Corp., "Special A"^* 43,100 $ 1,181,371
NTL, Inc.^* 6,812 417,712
Sinclair Broadcast Group, Inc., "A"^ 30,000 248,700
------------
$ 1,847,783
----------------------------------------------------------------------------------------------
Business Services - 0.3%
----------------------------------------------------------------------------------------------
Anacomp, Inc., "B"^* 30 $ 318
Brink's Co.^ 4,500 176,715
------------
$ 177,033
----------------------------------------------------------------------------------------------
Containers - 2.8%
----------------------------------------------------------------------------------------------
Owens-Illinois, Inc.^* 97,000 $ 1,846,880
----------------------------------------------------------------------------------------------
Forest & Paper Products - 0%
----------------------------------------------------------------------------------------------
Corporacion Durango S.A. de C.V.* 8,698 $ 5,405
----------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 1.4%
----------------------------------------------------------------------------------------------
Tenet Healthcare Corp.^* 110,500 $ 930,410
----------------------------------------------------------------------------------------------
Metals & Mining - 0%
----------------------------------------------------------------------------------------------
International Utility Structures Inc.* 254,700 $ 0
----------------------------------------------------------------------------------------------
Natural Gas - Distribution - 0.7%
----------------------------------------------------------------------------------------------
Ferrell Gas Partners LP 6,088 $ 131,318
Northwestern Corp.^ 10,109 300,743
------------
$ 432,061
----------------------------------------------------------------------------------------------
Network & Telecom - 4.8%
----------------------------------------------------------------------------------------------
Nokia Corp., ADR^ 100,200 $ 1,685,364
Nortel Networks Corp.^* 439,300 1,427,725
------------
$ 3,113,089
----------------------------------------------------------------------------------------------
Oil Services - 7.2%
----------------------------------------------------------------------------------------------
BJ Services Co. 29,000 $ 1,007,750
Cooper Cameron Corp.^* 16,530 1,218,757
GlobalSantaFe Corp.^ 36,830 1,640,777
Noble Corp.^ 13,390 862,048
------------
$ 4,729,332
----------------------------------------------------------------------------------------------
Pharmaceuticals - 1.8%
----------------------------------------------------------------------------------------------
Merck & Co., Inc.^ 3,900 $ 110,058
Wyeth 24,600 1,096,176
------------
$ 1,206,234
----------------------------------------------------------------------------------------------
Printing & Publishing - 0%
----------------------------------------------------------------------------------------------
Golden Books Family Entertainment, Inc.* 53,266 $ 0
----------------------------------------------------------------------------------------------
Specialty Chemicals - 0%
----------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.* 55 $ 1,265
----------------------------------------------------------------------------------------------
Telecommunications - Wireless - 0.2%
----------------------------------------------------------------------------------------------
Vodafone Group PLC, ADR^ 4,432 $ 116,384
----------------------------------------------------------------------------------------------
Telephone Services - 2.2%
----------------------------------------------------------------------------------------------
Adelphia Business Solutions, Inc.* 40,000 $ 0
Sprint Nextel Corp.^ 62,300 1,452,213
------------
$ 1,452,213
----------------------------------------------------------------------------------------------
Utilities - Electric Power - 1.6%
----------------------------------------------------------------------------------------------
Calpine Corp.* 331,670 $ 789,375
NRG Energy, Inc.* 6,073 261,200
------------
$ 1,050,575
----------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $19,066,307) $ 18,539,609
----------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.3%
----------------------------------------------------------------------------------------------
Automotive - 0.3%
----------------------------------------------------------------------------------------------
General Motors Corp., 5.25% (Identified Cost, $204,661) 11,530 $ 190,245
----------------------------------------------------------------------------------------------
Preferred Stocks - 3.6%
----------------------------------------------------------------------------------------------
Broadcast & Cable TV - 3.6%
----------------------------------------------------------------------------------------------
Paxson Communications Corp., 14.25%^ 229 $ 1,562,925
Spanish Broadcasting Systems, Inc., "B", 10.75% 775 829,250
------------
$ 2,392,175
----------------------------------------------------------------------------------------------
Consumer Goods & Services - 0%
----------------------------------------------------------------------------------------------
Renaissance Cosmetics, Inc., 14%#* 1,266 $ 0
----------------------------------------------------------------------------------------------
Real Estate - 0%
----------------------------------------------------------------------------------------------
HRPT Properties Trust, "B", 8.75% 200 $ 5,194
----------------------------------------------------------------------------------------------
Telephone Services - 0%
----------------------------------------------------------------------------------------------
PTV, Inc., "A", 10%^ 8 $ 12
----------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $2,543,908) $ 2,397,381
----------------------------------------------------------------------------------------------
Portfolio of Investments - continued
Warrants - 0%
----------------------------------------------------------------------------------------------
STRIKE FIRST
ISSUER PRICE EXERCISE SHARES $ VALUE
----------------------------------------------------------------------------------------------
Anacomp, Inc. (Business Services)* $61.54 12/10/01 5,841 $ 263
Metricom, Inc. (Network & Telecom)* 87.00 8/15/00 775 0
Ono Finance (Broadcast & Cable TV)* 0.00 5/31/09 1,000 0
Renaissance Cosmetics, Inc.
(Consumer Goods & Services)* 0.01 8/08/96 1,024 0
Sirius Satellite Radio, Inc.
(Advertising & Broadcasting)* 24.92 8/13/99 2,700 0
Sterling Chemicals, Inc.
(Specialty Chemicals)* 52.00 12/31/02 90 90
Thermadyne Holdings Corp.
(Machinery & Tools)* 20.78 5/29/03 3,330 500
----------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $38,821) $ 853
----------------------------------------------------------------------------------------------
Collateral for Securities Loaned - 15.5%
----------------------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio,
at Cost and Net Asset Value 10,133,045 $ 10,133,045
----------------------------------------------------------------------------------------------
Repurchase Agreement - 3.5%
----------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
----------------------------------------------------------------------------------------------
Merrill Lynch & Co., 4.01%, dated 10/31/05,
due 11/01/05, total to be received $2,274,253
(secured by various U.S. Treasury and Federal Agency
obligations in a jointly traded account), at Cost $ 2,274,000 $ 2,274,000
----------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $76,624,619)@ $ 75,330,348
----------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (15.0)% (9,852,782)
----------------------------------------------------------------------------------------------
Net Assets - 100.0% $ 65,477,566
----------------------------------------------------------------------------------------------
* Non-income producing security.
** Non income producing security - in default.
@ As of October 31, 2005, the trust had 11 securities representing $32,800 and
less than 0.1% of net assets that were fair valued in accordance with the
policies adopted by the Board of Trustees.
^ All or a portion of this security is on loan.
^^ 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.
# Payment-in-kind security.
## SEC Rule 144A restriction.
(S)(S)(S) The rate shown represents a current effective yield.
The following abbreviations are used in the Portfolio of Investments and are
defined:
ADR American Depository Receipt
FRN Floating Rate Note. The interest rate is the rate in effect as of period end.
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:
ARS Argentine Peso
EUR Euro
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
Sales and Purchases in the table below are netted by currency.
NET UNREALIZED
CONTRACTS TO SETTLEMENT CONTRACTS APPRECIATION
DELIVER/RECEIVE DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
-----------------------------------------------------------------------------------------------
SALES
-----------------------------------------------------------------------------------------------
EUR 1,805,282 11/22/05 $2,178,578 $2,166,467 $12,111
-----------------------------------------------------------------------------------------------
PURCHASES
-----------------------------------------------------------------------------------------------
EUR 101,715 11/22/05 $123,647 $122,065 $(1,582)
-----------------------------------------------------------------------------------------------
At October 31, 2005, forward foreign currency purchases and sales under master netting
agreements excluded above amounted to a net payable of $1,314 with Merrill Lynch
International.
At October 31, 2005, the trust had sufficient cash and/or securities to cover any
commitments under all derivative contracts.
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statement of Assets and Liabilities
This statement represents your trust's balance sheet, which details the assets
and liabilities composing the total value of the trust.
AT 10/31/05
ASSETS
------------------------------------------------------------------------------------------------------
Investments, at value, including $9,873,627 of securities on
loan (identified cost, $76,624,619) $75,330,348
Receivable for forward foreign currency exchange contracts 12,111
Receivable for investments sold 580,567
Interest and dividends receivable 946,543
Other assets 10,825
------------------------------------------------------------------------------------------------------
Total assets $76,880,394
------------------------------------------------------------------------------------------------------
LIABILITIES
------------------------------------------------------------------------------------------------------
Payable to custodian $132,883
Payable to dividend disbursing agent 568,438
Payable for forward foreign currency exchange contracts 1,582
Payable for forward foreign currency exchange contracts subject
to master netting agreements 1,314
Payable for investments purchased 348,657
Collateral for securities loaned, at value 10,133,045
Payable to affiliates
Management fee 4,890
Transfer agent and dividend disbursing costs 2,080
Administrative services fee 125
Accrued expenses and other liabilities 209,814
------------------------------------------------------------------------------------------------------
Total liabilities $11,402,828
------------------------------------------------------------------------------------------------------
Net assets $65,477,566
------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
------------------------------------------------------------------------------------------------------
Paid-in capital $71,758,912
Unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies (1,285,417)
Accumulated net realized gain (loss) on investments and foreign
currency transactions (4,646,096)
Accumulated distributions in excess of net investment income (349,833)
------------------------------------------------------------------------------------------------------
Net assets $65,477,566
------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding (7,031,788 issued,
less 256,600 treasury shares) 6,775,188
------------------------------------------------------------------------------------------------------
Net asset value per share (net assets of $65,477,566 /
6,775,188 shares of beneficial interest outstanding) $9.66
------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statement of Operations
This statement describes how much your trust received in investment income and paid in expenses.
It also describes any gains and/or losses generated by trust operations.
YEAR ENDED 10/31/05
NET INVESTMENT INCOME
-------------------------------------------------------------------------------------------------------
Income
Interest $4,510,241
Dividends 473,249
Foreign taxes withheld (8,691)
-------------------------------------------------------------------------------------------------------
Total investment income $4,974,799
-------------------------------------------------------------------------------------------------------
Expenses
Management fee $636,991
Transfer agent and dividend disbursing costs 26,443
Administrative services fee 10,694
Independent trustees' compensation 14,102
Stock exchange fee 19,957
Custodian fee 49,944
Printing 23,583
Postage 46,382
Auditing fees 75,924
Legal fees 3,030
Shareholder solicitation expenses 1,946
Miscellaneous 29,000
-------------------------------------------------------------------------------------------------------
Total expenses $937,996
-------------------------------------------------------------------------------------------------------
Fees paid indirectly (27,784)
Reduction of expenses by investment adviser (246)
-------------------------------------------------------------------------------------------------------
Net expenses $909,966
-------------------------------------------------------------------------------------------------------
Net investment income $4,064,833
-------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
-------------------------------------------------------------------------------------------------------
Realized gain (loss) (identified cost basis)
Investment transactions $741,343
Foreign currency transactions (41,106)
-------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments and foreign
currency transactions $700,237
-------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments $(1,196,161)
Translation of assets and liabilities in foreign currencies 191,407
-------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments and foreign
currency translation $(1,004,754)
-------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency $(304,517)
-------------------------------------------------------------------------------------------------------
Change in net assets from operations $3,760,316
-------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statements of Changes in Net Assets
This statement describes the increases and/or decreases in net assets resulting from operations,
any distributions, and any shareholder transactions.
FOR YEARS ENDED 10/31 2005 2004
CHANGE IN NET ASSETS
------------------------------------------------------------------------------------------------------
FROM OPERATIONS
------------------------------------------------------------------------------------------------------
Net investment income $4,064,833 $3,937,607
Net realized gain (loss) on investments and foreign
currency transactions 700,237 (874,157)
Net unrealized gain (loss) on investments and foreign
currency translation (1,004,754) 5,782,913
------------------------------------------------------------------------------------------------------
Change in net assets from operations $3,760,316 $8,846,363
------------------------------------------------------------------------------------------------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
------------------------------------------------------------------------------------------------------
From net investment income $(4,852,320) $(3,870,737)
From paid-in capital (2,004,062) (2,877,470)
------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(6,856,382) $(6,748,207)
------------------------------------------------------------------------------------------------------
Change in net assets from trust share transactions $634,182 $645,801
------------------------------------------------------------------------------------------------------
Total change in net assets $(2,461,884) $2,743,957
------------------------------------------------------------------------------------------------------
NET ASSETS
------------------------------------------------------------------------------------------------------
At beginning of period $67,939,450 $65,195,493
At end of period (including accumulated distributions
in excess of net investment income of $349,833 and
$323,492, respectively) $65,477,566 $67,939,450
------------------------------------------------------------------------------------------------------
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 10/31
--------------------------------------------------------------------------
2005 2004 2003 2002 2001
Net asset value, beginning of period $10.12 $9.80 $7.50 $8.63 $11.67
------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS(S)
------------------------------------------------------------------------------------------------------------------------------
Net investment income# $0.60 $0.59 $0.59 $0.71 $0.77
Net realized and unrealized gain (loss) on
investments and foreign currency (0.04) 0.74 2.56 (0.86) (2.16)
------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.56 $1.33 $3.15 $(0.15) $(1.39)
------------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
------------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.72) $(0.58) $(0.57) $(0.98) $(0.83)
From net realized gain on investments and
foreign currency transactions -- -- (0.28) -- --
From paid-in capital (0.30) (0.43) -- -- (0.82)
------------------------------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(1.02) $(1.01) $(0.85) $(0.98) $(1.65)
------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.66 $10.12 $9.80 $7.50 $8.63
------------------------------------------------------------------------------------------------------------------------------
Per share market value, end of period $10.85 $11.60 $10.40 $7.25 $14.30
------------------------------------------------------------------------------------------------------------------------------
Total return at market value(%)&*** 2.77 22.56+ 58.07 (43.54) 16.99
------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA:
------------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions## 1.37 1.28 1.34 1.56 1.53
Expenses after expense reductions## 1.37 1.28 1.34 1.56 1.53
Net investment income(S) 5.95 5.82 6.75 8.39 7.49
Portfolio turnover 47 72 94 137 49
Net assets at end of period (000 Omitted) $65,478 $67,939 $65,195 $49,622 $56,598
------------------------------------------------------------------------------------------------------------------------------
*** Certain expenses have been reduced without which performance would have been lower.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(S) Effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for Investment
Companies and began amortizing and accreting all premiums and discounts on debt securities. Per share data and ratios
for periods prior to November 1, 2001 have not been restated to reflect this change.
& From time to time the trust may receive proceeds from litigation settlements, without which performance would be
lower.
+ The trust's net asset value and total return calculation include a non-recurring accrual recorded as a result of an
administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales. The
non-recurring accrual did not have a material impact on the net asset value per share based on the shares outstanding
on the day the proceeds were recorded.
SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
(1) BUSINESS AND ORGANIZATION
MFS Special Value Trust (the trust) is a non-diversified trust that is
organized as a Massachusetts business trust and is registered under the
Investment Company Act of 1940, as amended, as a closed-end management
investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. The
trust can invest in high-yield securities rated below investment grade.
Investments in high-yield securities involve greater degrees of credit and
market risk than investments in higher-rated securities and tend to be more
sensitive to economic conditions. The trust can invest in foreign securities,
including securities of emerging market issuers. Investments in foreign
securities are vulnerable to the effects of changes in the relative values of
the local currency and the U.S. dollar and to the effects of changes in each
country's legal, political, and economic environment. The markets of emerging
markets countries are generally more volatile than the markets of developed
countries with more mature economies. All of the risks of investing in foreign
securities previously described are heightened when investing in emerging
markets countries.
INVESTMENT VALUATIONS - Bonds and other fixed income securities, including
restricted fixed income securities, (other than short-term obligations) in the
trust's portfolio are valued at an evaluated bid price as reported by an
independent pricing service, or to the extent a valuation is not reported by a
pricing service, such securities are valued on the basis of quotes from
brokers and dealers. Prices obtained from pricing services utilize both
dealer-supplied valuations and electronic data processing techniques which
take into account appropriate factors such as institutional-size trading in
similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics and other market data without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Equity securities, including restricted equity securities, in the
trust's portfolio for which market quotations are available are valued at the
last sale or official closing price as reported by an independent pricing
service on the primary market or exchange on which they are primarily traded,
or at the last quoted bid price for securities in which there were no sales
during the day. Equity securities traded over the counter are valued at the
last sales price traded each day as reported by an independent pricing
service, or to the extent there are no sales reported, such securities are
valued on the basis of quotations obtained from brokers and dealers. Forward
foreign currency contracts are valued using spot rates and forward points as
reported by an independent pricing source. Short-term obligations with a
remaining maturity in excess of 60 days will be valued upon dealer-supplied
valuations. All other short-term obligations in the trust's portfolio are
valued at amortized cost, which approximates market value as determined by the
Board of Trustees. Money market mutual funds are valued at net asset value.
Investment valuations, other assets, and liabilities initially expressed in
foreign currencies are converted each business day into U.S. dollars based
upon current exchange rates. When pricing service information or market
quotations are not readily available, securities are priced at fair value as
determined under the direction of the Board of Trustees. For example,
significant events (such as movement in the U.S. securities market, or other
regional and local developments) may occur between the time that foreign
markets close (where the security is principally traded) and the time that the
trust calculates its net asset value (generally, the close of the NYSE) that
may impact the value of securities traded in these foreign markets. In these
cases, the trust may utilize information from an external vendor or other
sources to adjust closing market quotations of foreign equity securities to
reflect what it believes to be the fair value of the securities as of the
trust's valuation time. Because the frequency of significant events is not
predictable, fair valuation of foreign equity securities may occur on a
frequent basis.
REPURCHASE AGREEMENTS - The trust may enter into repurchase agreements with
institutions that the trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The trust
requires that the securities collateral in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the trust to
obtain those securities in the event of a default under the repurchase
agreement. The trust monitors, on a daily basis, the value of the collateral
to ensure that its value, including accrued interest, is greater than amounts
owed to the trust under each such repurchase agreement. The trust, along with
other affiliated entities of Massachusetts Financial Services Company (MFS),
may utilize a joint trading account for the purpose of entering into one or
more repurchase agreements.
FOREIGN CURRENCY TRANSLATION - Purchases and sales of foreign investments,
income, and expenses are converted into U.S. dollars based upon currency
exchange rates prevailing on the respective dates of such transactions. Gains
and losses attributable to foreign currency exchange rates on sales of
securities are recorded for financial statement purposes as net realized gains
and losses on investments. Gains and losses attributable to foreign exchange
rate movements on income and expenses are recorded for financial statement
purposes as foreign currency transaction gains and losses. That portion of
both realized and unrealized gains and losses on investments that results from
fluctuations in foreign currency exchange rates is not separately disclosed.
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 forward foreign currency
exchange contracts.
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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the trust with indemnification against Borrower default. The
trust bears the risk of loss with respect to the investment of cash
collateral. On loans collateralized by cash, the cash collateral is invested
in a money market fund or short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
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. Dividends received in cash are recorded on the ex-dividend date.
Dividend and interest payments received in additional securities are recorded
on the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date. The trust may 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. Legal fees
and other related expenses incurred to preserve and protect the value of a
security owned are added to the cost of the security; other legal fees are
expensed. Capital infusions made directly to the security issuer, which are
generally non-recurring, incurred to protect or enhance the value of high-
yield debt securities, are reported as additions to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization
are reported as realized losses. Ongoing costs incurred to protect or enhance
an investment, or costs incurred to pursue other claims or legal actions, are
expensed.
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. During the year ended October 31, 2005, the trust's custodian fees
were reduced by $27,710 under this arrangement. The trust has entered into a
commission recapture agreement, under which certain brokers will credit the
trust a portion of the commissions generated, to offset certain expenses of
the trust. For the year ended October 31, 2005, the trust's miscellaneous
expenses were reduced by $74 under this agreement. These amounts are shown as
a reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The trust
pays monthly distributions based on an annual rate of 10% of the trust's
average daily net asset value. As a result, distributions may exceed actual
earnings which may result in a return of capital. The trust distinguishes
between distributions on a tax basis and a financial reporting basis and only
distributions in excess of tax basis earnings and profits are reported in the
financial statements as distributions from paid-in capital. Differences in the
recognition or classification of income between the financial statements and
tax earnings and profits, which result in temporary over-distributions for
financial statement purposes, are classified as distributions in excess of net
investment income or net realized gains. Common types of book and tax
differences that could occur include differences in accounting for foreign
currency transactions, amortization and accretion on debt securities,
derivatives, defaulted bonds, wash sales, and passive foreign investment
companies.
The tax character of distributions declared for the years ended October 31,
2005 and October 31, 2004 was as follows:
10/31/05 10/31/04
Distributions declared from:
Ordinary income $4,852,320 $3,870,737
Tax return of capital 2,004,062 2,877,470
-----------------------------------------------------------
Total distributions declared $6,856,382 $6,748,207
During the year ended October 31, 2005, accumulated distributions in excess of
net investment income decreased by $761,146, accumulated net realized loss on
investments and foreign currency transactions increased by $642,837, and paid-
in capital decreased by $118,309 due to differences between book and tax
accounting for foreign currency transactions, amortization and accretion on
debt securities, and defaulted bonds. This change had no effect on the net
assets or net asset value per share.
As of October 31, 2005, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $(1,466,084)
Unrealized appreciation (depreciation) (4,485,863)
Other temporary differences (329,399)
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on October 31, 2012, ($322,473), and
October 31, 2013, ($1,143,611).
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities.
The management fee is computed daily and paid monthly at an annual rate of
0.68% of the trust's average daily net assets and 3.40% of gross investment
income. The management fee, from net assets and gross investment income,
incurred for the year ended October 31, 2005 was equivalent to an annual
effective rate of 0.93% of the trust's average daily net assets.
TRANSFER AGENT - The trust pays a portion of transfer agent and dividend-
disbursing costs to MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary
of MFS. MFSC receives a fee from the trust, for its services as registrar and
dividend-disbursing agent. The agreement provides that the trust will pay MFSC
an account maintenance fee of no more than $9.00 and a dividend services fee of
$0.75 per reinvestment. For the year ended October 31, 2005, these fees
amounted to $14,750. MFSC also receives payment from the trust for
out-of-pocket expenses paid by MFSC on behalf of the trust. For the year ended
October 31, 2005, these costs amounted to $9,690.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement, the funds may partially reimburse MFS the costs incurred to provide
these services, subject to review and approval by the Board of Trustees. Each
fund is charged a fixed amount plus a fee based on calendar year average net
assets. Effective July 1, 2005, the fund's annual fixed amount is $10,000. The
administrative services fee incurred for the year ended October 31, 2005 was
equivalent to an annual effective rate of 0.0156% 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 who are officers of the investment
adviser, or to officers of the trust, all of whom receive remuneration for
their services to the trust from MFS. Certain officers and Trustees of the
trust are officers or directors of MFS and MFSC. The trust has an unfunded,
defined benefit plan for retired Independent Trustees which resulted in a
pension expense of $6,934. The fund also has an unfunded retirement benefit
deferral plan for certain current Independent Trustees which resulted in a net
decrease of $2,300. Both amounts are included in Independent trustees'
compensation for the year ended October 31, 2005.
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. Trusrees 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 accrued expenses and other liabilities, is
$10,241 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. MFS has agreed to
reimburse the fund for a portion of the payments made by the funds to
Tarantino LLC in the amount of $246, 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. The funds can terminate the Agreement with
Tarantino LLC at any time under the terms of the Agreement.
The trust's investment adviser, MFS, was the subject of an administrative
proceeding regarding disclosure of brokerage allocation practices in
connection with fund sales. As a result, proceeds in the amount of $441 were
paid to the trust on February 16, 2005.
(4) PORTFOLIO SECURITIES
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$30,882,757 and $33,700,011, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $79,816,211
----------------------------------------------------------
Gross unrealized appreciation $5,493,988
Gross unrealized depreciation (9,979,851)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $(4,485,863)
(5) SHARES OF BENEFICIAL INTEREST
The trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. The Trustees have
authorized the repurchase by the trust of up to 10% annually of its own shares
of beneficial interest. During the year ended October 31, 2005, the trust did
not repurchase any shares. Transactions in trust shares were as follows:
Year ended 10/31/05 Year ended 10/31/04
SHARES AMOUNT SHARES AMOUNT
Shares issued to shareholders in
reinvestment of distributions 58,705 $634,182 61,069 $645,801
(6) LINE OF CREDIT
The trust and other affiliated funds participate in a $1 billion unsecured
line of credit provided by a syndication of banks under a credit agreement.
Borrowings may be made for temporary financing needs. Interest is charged to
each fund, based on its borrowings, at a rate equal to the Federal Reserve
funds rate plus 0.35%. In addition, a commitment fee, based on the average
daily, unused portion of the line of credit, is allocated among the
participating funds at the end of each calendar quarter. The commitment fee
allocated to the trust for the year ended October 31, 2005 was $427, and is
included in miscellaneous expense. The trust had no significant borrowings
during the year ended October 31, 2005.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of MFS Special Value Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Special Value Trust (the Fund), including the portfolio of investments, as of
October 31, 2005, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. We were not engaged to perform an audit of the Fund's internal
control over financial reporting. Our audits included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements and financial highlights, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our procedures included
confirmation of securities owned as of October 31, 2005, by correspondence with
the custodian and brokers or by other appropriate auditing procedures where
replies from brokers were not received. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Special Value Trust at October 31, 2005, 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
December 13, 2005
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
The Trustees and officers of the Trust, as of December 2, 2005, are listed below, together with
their principal occupations during the past five years. (Their titles may have varied during that
period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts
02116.
PRINCIPAL OCCUPATIONS DURING
POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS &
NAME, DATE OF BIRTH WITH FUND SINCE(1) OTHER DIRECTORSHIPS(2)
------------------- ---------------- --------------- -----------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee February 2004 Massachusetts Financial Services
(born 10/20/63) Company, Chief Executive Officer,
President, Chief Investment
Officer and Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial Services
(born 08/08/46) Company, Chairman (since February
2004); Harvard Law School
(education), John Olin Visiting
Professor (since July 2002);
Secretary of Economic Affairs, The
Commonwealth of Massachusetts
(January 2002 to December 2002);
Fidelity Investments, Vice
Chairman (June 2000 to December
2001); Fidelity Management &
Research Company (investment
adviser), President (March 1997 to
July 2001); 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 05/01/36) of Trustees Enterprises (diversified services
company), Chairman, Trustee and
Chief Executive Officer (until
November 2000)
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital,
(born 03/11/37) 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 05/30/42) products and service provider),
Vice Chairman/Director (since
April 2001); Encinitos Ventures
(private investment company),
Principal (1997 to April 2001);
Lincoln Electric Holdings, Inc.
(welding equipment manufacturer),
Director
William R. Gutow Trustee December 1993 Private investor and real estate
(born 09/27/41) 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)
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch & Co.,
(born 02/08/53) Inc., Managing Director,
Investment Banking Group (1997 to
February 2001); Borders Group,
Inc. (book and music retailer),
Director; Federal Realty
Investment Trust (real estate
investment trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys),
(born 06/23/35) Partner
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President; Wellfleet
Investments (investor in health
care companies), Managing General
Partner (since 1993); Cambridge
Nutraceuticals (professional
nutritional products), Chief
Executive Officer (until May 2001)
Laurie J. Thomsen Trustee March 2005 Private investor; Prism Venture
(born 08/05/57) Partners (venture capital), Co-
founder and General Partner (until
June 2004); St. Paul Travelers
Companies (commercial property
liability insurance), Director
OFFICERS
Maria F. Dwyer(3) 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(3) 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(3) Assistant July 2005 Massachusetts Financial Services
(born 1/18/74) Secretary and Company, Vice President and Senior
Assistant Clerk Counsel (since April 2003);
Kirkpatrick & Lockhart LLP (law
firm), Associate (prior to April
2003); Nvest Services Company,
Assistant Vice President and
Associate Counsel (prior to
January 2001)
Jeffrey N. Carp(3) Secretary and September 2004 Massachusetts Financial Services
(born 12/19/56) Clerk Company, Executive Vice President,
General Counsel and Secretary
(since April 2004); Hale and Dorr
LLP (law firm), Partner (prior to
April 2004)
Ethan D. Corey(3) Assistant July 2005 Massachusetts Financial Services
(born 11/21/63) Secretary and Company, Special Counsel (since
Assistant Clerk December 2004); Dechert LLP (law
firm), Counsel (prior to December
2004)
David L. DiLorenzo(3) Assistant July 2005 Massachusetts Financial Services
(born 8/10/68) Treasurer Company, Vice President (since
June 2005); JP Morgan Investor
Services, Vice President (January
2001 to June 2005); State Street
Bank, Vice President and Corporate
Audit Manager (prior to January
2001)
Timothy M. Fagan(3) Assistant September 2005 Massachusetts Financial Services
(born 7/10/68) Secretary and Company, Vice President and Senior
Assistant Clerk 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(3) Assistant July 2005 Massachusetts Financial Services
(born 10/27/70) Treasurer Company, Vice President (since May
2005); JP Morgan Investment
Management Company, Vice President
(prior to May 2005)
Brian T. Hourihan(3) Assistant September 2004 Massachusetts Financial Services
(born 11/11/64) Secretary and Company, Vice President, Senior
Assistant Clerk Counsel and Assistant Secretary
(since June 2004); Affiliated
Managers Group, Inc., Chief Legal
Officer/Centralized Compliance
Program (January to April 2004);
Fidelity Research & Management
Company, Assistant General Counsel
(prior to January 2004)
Ellen Moynihan(3) Assistant April 1997 Massachusetts Financial Services
(born 11/13/57) Treasurer Company, Vice President
Susan S. Newton(3) Assistant May 2005 Massachusetts Financial Services
(born 03/07/50) Secretary and Company, Senior Vice President and
Assistant Clerk 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(3) Assistant July 2005 Massachusetts Financial Services
(born 11/05/70) Secretary and Company, Vice President and Senior
Assistant Clerk Counsel (since June 2004); Bingham
McCutchen LLP (law firm),
Associate (January 2001 to June
2004); Preti, Flaherty, Beliveau,
Pachios & Haley, LLC, Associate
(prior to January 2001)
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance compliance services), Principal
Officer (since June 2004); CRA Business
Strategies Group (consulting
services), Executive Vice
President (April 2003 to June
2004); David L. Babson & Co.
(investment adviser), Managing
Director, Chief Administrative
Officer and Director (February
1997 to March 2003)
James O. Yost(3) Assistant September 1990 Massachusetts Financial Services
(born 06/12/60) Treasurer Company, Senior Vice President
------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served
continuously since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange
Commission (i.e., "public companies").
(3) "Interested person" of 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.
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 has been
elected by shareholders and each Trustee and officer will serve until next elected or his or her
earlier death, resignation, retirement or removal.
Messrs. Ives and Sherratt and Mses. Lane and 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 December 31, 2004, each Trustee served as a board
member of 99 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 April 20, 2005, Robert J. Manning, as Chief Executive Officer of the Trust, certified to the New
York Stock Exchange that as of the date of his certification he was not aware of any violation by
the Trust of the corporate governance listing standards of the New York Stock Exchange.
The Trust filed with the Securities and Exchange Commission the certifications of its principal
executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of
2003 as an exhibit to the Trust's Form N-CSR for the period covered by this report.
-----------------------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110
02116-3741
JP Morgan Chase Bank
PORTFOLIO MANAGERS One Chase Manhattan Plaza
John F. Addeo New York, New York 10081
Scott B. Richards
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP
200 Clarendon Street, Boston, MA 02116
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 MFS Special Value Trust's
(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, 2005 ("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, 2004 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 ("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 peer funds identified by objective
criteria suggested by MFS, (iii) information provided by MFS on the advisory
fees of comparable portfolios of other clients of MFS, including institutional
separate account 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, 2004, which the Trustees believed was
a long enough period to reflect differing market conditions. The Fund's
performance was in the 29th percentile relative to the other funds in the
universe for this three-year period (the 1st percentile being the best
performers and the 100th percentile being the worst performers). The total
return performance of the Fund's common shares was in the 64th percentile
for the one-year period and the 58th percentile for the five-year period
ended December 31, 2004 relative to the Lipper performance universe. Because
of the passage of time, these performance results are likely to differ from
the performance results for more recent periods, including those shown
elsewhere in this report.
In the course of their deliberations, the Trustees took into account
information provided by MFS in connection with the contract review meetings,
as well as during investment review meetings conducted with portfolio
management personnel during the course of the year regarding the Fund's
performance. After reviewing these and related factors, the Trustees
concluded, within the context of their overall conclusions regarding the
investment advisory agreement, that they were satisfied with MFS' responses
and efforts relating to investment performance.
In assessing the reasonableness of the Fund's advisory fee, the Trustees
considered, among other information, the Fund's advisory fee and the total
expense ratio of the Fund's common shares as a percentage of average 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
whether the Fund was subject to any fee waivers or reductions or expense
limitations. The Trustees also considered that, according to the Lipper data,
the Fund's effective advisory fee rate and total expense ratio each were 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 nature and quality 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, including 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 to pay for research and other similar services
(including MFS' general policy to pay directly for third-party research), 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, 2005.
A discussion regarding the Board's most recent review and renewal of the
Fund's investment advisory agreement will be available on or before
December 1, 2005 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 fund will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet Web site at http://
www.sec.gov, and copies of this information may be obtained, upon payment of a
duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov or by writing the Public Reference Section at the above
address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
FEDERAL TAX INFORMATION (unaudited)
In January 2006, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2005.
For the year ended October 31, 2005, the amount of distributions from income
eligible for the 70% dividends received deductions for corporations is 6.71%.
The trust hereby designates the maximum amount allowable as qualified dividend
income eligible for a maximum tax rate of 15%, as provided for by the Jobs and
Growth Tax Relief Reconciliation Act of 2003. Complete information will be
reported in conjunction with your 2005 Form 1099-DIV.
CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS
INVESTOR INFORMATION
Transfer Agent, Registrar and Dividend Disbursing Agent
Call 1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time
Write to: State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
NUMBER OF SHAREHOLDERS
As of October 31, 2005, our records indicate that there are 572 registered
shareholders and approximately 5,290 shareholders owning trust shares
in "street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the trust, please write or
call:
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
1-800-637-2304
M F S(SM)
INVESTMENT MANAGEMENT(R)
(C) 2005 MFS Investment Management(R)
500 Boylston Street, Boston, MA 02116.
MFV-ANN-10/05 14M
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 amended its Code of Ethics to reflect that the
Registrant's Principal Financial Officer and Principal Executive Officer have
changed.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Mr. J. Atwood Ives and Mses. Amy B. Lane and 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, Mr. Ives
and Mses. Lane and Thomsen are "independent" members of the Audit Committee as
defined in Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
ITEMS 4(a) THROUGH 4(d) AND 4(g):
The Board of Trustees has appointed Ernst & Young LLP ("E&Y") to serve as
independent accountants to the Registrant (hereinafter the "Registrant" or the
"Fund"). The tables below set forth the audit fees billed to the Fund as well
as fees for non-audit services provided to the Fund and/or to the Fund's
investment adviser, Massachusetts Financial Services Company ("MFS") and to
various entities either controlling, controlled by, or under common control
with MFS that provide ongoing services to the Fund ("MFS Related Entities").
For the fiscal years ended October 31, 2005 and 2004, audit fees billed to the
Fund by E&Y were as follows:
Audit Fees
FEES BILLED BY E&Y: 2005 2004
---- ----
MFS Special Value Trust $37,375 $34,050
TOTAL
For the fiscal years ended October 31, 2005 and 2004, fees billed by E&Y for
audit-related, tax and other services provided to the Funds 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: 2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
To MFS Special Value $20,000 $0 $9,795 $11,040 $24 $0
Trust
To MFS and MFS Related $0 $0 $0 $0 $685,399 $20,000
Entities of MFS
Special Value
Trust*
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2005 2004
---- ----
To MFS Special Value Trust, $747,218 $38,040
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 services related to analysis of
fund administrative expenses, compliance program and records management projects.
For periods prior to May 6, 2003, the amounts shown above under "Audit-Related
Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services
that would have been subject to pre-approval if the Securities and Exchange
Commission's rules relating to pre-approval of non-audit services had been in
effect.
ITEM 4(e)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Funds and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the
Audit Committee and it is not practical to wait to seek pre-approval at the
next regular meeting of the Audit Committee, 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. J. Atwood Ives and J. Dale Sherratt and Mses. Amy B. Lane
and 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 AND MARCH 15, 2005
Massachusetts Financial Services Company, MFS Institutional Advisors,
Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have
adopted proxy voting policies and procedures, as set forth below, with respect
to securities owned by the clients for which MFS serves as investment adviser
and has the power to vote proxies, including the registered investment
companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the
"MFS Funds"). 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
MFS' proxy and voting policies.
These policies and procedures include:
A. Voting Guidelines;
B. Administrative Procedures;
C. Monitoring System;
D. Records Retention; and
E. Reports.
A. VOTING GUIDELINES
1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST
MFS' policy is that proxy voting decisions are made in what MFS
believes to be the best long-term economic interests of MFS' clients, and not
in the interests of any other party or in MFS' corporate interests, including
interests such as the distribution of MFS Fund shares, administration of 401(k)
plans, and institutional relationships.
MFS has carefully reviewed matters that in recent years have been
presented for shareholder vote by either management or shareholders of public
companies. Based on the 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 plans to 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 conflicts of interest do arise, MFS will analyze,
document and report on such potential conflicts (see Sections B.2 and E below),
and shall ultimately vote these proxies in what MFS believes to be the best
long-term economic interests of its clients. The MFS Proxy Review Group is
responsible for monitoring and reporting with respect to such potential
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 he or she failed to attend at least 75% of the board
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: (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.
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 are supposed to reward results rather than
tenure, so the issuance of restricted stock at bargain prices is not favored.
In some cases, restricted stock is granted to the recipient at deep discounts
to fair market value, sometimes at par value. The holder cannot sell for a
period of years, but in the meantime 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.
FOREIGN ISSUERS - SHARE BLOCKING
In accordance with local law or business practices, many foreign
companies prevent the sales of shares that have been voted for a certain period
beginning prior to the shareholder meeting and ending on the day following the
meeting ("share blocking"). Depending on the country in which a company is
domiciled, the blocking period may begin a stated number of days prior to the
meeting (e.g., one, three or five days) or on a date established by the
company. While practices vary, in many countries the block period can be
continued for a longer period if the shareholder meeting is adjourned and
postponed to a later date. Similarly, practices vary widely as to the ability
of a shareholder to have the "block" restriction lifted early (e.g., in some
countries shares generally can be "unblocked" up to two days prior to the
meeting whereas in other countries the removal of the block appears to be
discretionary with the issuer's transfer agent). Due to these restrictions, MFS
must balance the benefits to its clients of voting proxies against the
potentially serious portfolio management consequences of a reduced flexibility
to sell the underlying shares at the most advantageous time. For companies in
countries with potentially long block periods, the disadvantage of being unable
to sell the stock regardless of changing conditions generally outweighs the
advantages of voting at the shareholder meeting for routine items. Accordingly,
MFS generally will not vote those proxies in the absence of an unusual,
significant vote. Conversely, for companies domiciled in countries with very
short block periods, MFS generally will continue to cast votes in accordance
with these policies and procedures.
SOCIAL ISSUES
There are many groups advocating social change, and many have chosen
the publicly-held corporation as a vehicle for 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.
B. ADMINISTRATIVE PROCEDURES
1. MFS PROXY REVIEW GROUP
The administration of these policies and procedures is overseen by the
MFS Proxy Review Group, which includes senior MFS Legal Department officers and
MFS' Proxy Consultant. The MFS Proxy Review Group:
a. Reviews these policies and procedures at least annually and
recommends any amendments considered to be necessary or
advisable;
b. Determines whether any material conflicts of interest exist with
respect to instances in which (i) MFS seeks to override these
guidelines and (ii) votes not clearly governed by these
guidelines; and
c. Considers special proxy issues as they may arise from time to
time.
The current MFS Proxy Consultant is an independent proxy consultant
who performs these services exclusively for MFS.
2. POTENTIAL CONFLICTS OF INTEREST
The MFS Proxy Review Group is responsible for monitoring potential
material conflicts of interest on the part of MFS or its affiliates that could
arise in connection with the voting of proxies on behalf of MFS' clients. Any
significant attempt to influence MFS' voting on a particular proxy matter
should be reported to the MFS Proxy Review Group. The MFS Proxy Consultant will
assist the MFS Proxy Review Group in carrying out these monitoring
responsibilities.
In cases where proxies are voted in accordance with these policies and
guidelines, no conflict of interest will be deemed to exist. In cases where (i)
MFS is considering overriding these policies and guidelines, or (ii) matters
presented for vote are not clearly governed by these policies and guidelines,
the MFS Proxy Review Group and the MFS Proxy Consultant will follow these
procedures:
a. Compare the name of the issuer of such proxy against a list of
significant current and potential (i) distributors of MFS Fund
shares, (ii) retirement plans administered by MFS, and (iii) MFS
institutional clients (the "MFS Significant Client List");
b. If the name of the issuer does not appear on the MFS Significant
Client List, then no material conflict of interest will be deemed
to exist, and the proxy will be voted as otherwise determined by
the MFS Proxy Review Group;
c. If the name of the issuer appears on the MFS Significant Client
List, then at least one member of the MFS Proxy Review Group will
carefully evaluate the proposed votes in order to ensure that the
proxy ultimately is voted in what MFS believes to be the best
long-term economic interests of MFS' clients, and not in MFS'
corporate interests; and
d. For all potential material conflicts of interest identified under
clause (c) above, the MFS Proxy Review Group will document: the
name of the issuer, the issuer's relationship to MFS, the
analysis of the matters submitted for proxy vote, and the basis
for the determination that the votes ultimately were cast in what
MFS believes to be the best long-term economic interests of MFS'
clients, and not in MFS' corporate interests. A copy of the
foregoing documentation will be provided to the MFS' Conflicts
Officer.
The members of the MFS Proxy Review Group other than the Proxy Consultant
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 processing and recordkeeping
functions for MFS' Fund and institutional client accounts. The Proxy
Administrator does not make recommendations to MFS as to how to vote any
particular item. The Proxy Administrator receives proxy statements and proxy
cards directly 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, the MFS
Proxy Consultant and the MFS Proxy Review Group.
4. ANALYZING PROXIES
After input into the Proxy Administrator system, proxies which are
deemed to be routine and which do not require the exercise of judgment under
these guidelines (e.g., those involving only uncontested elections of directors
and the appointment of auditors)(1) are automatically voted in favor by the
Proxy Administrator without being sent to either the MFS Proxy Consultant or
the MFS Proxy Review Group for further review. All proxies that are reviewed by
either the MFS Proxy Consultant or a portfolio manager or analyst (e.g., those
that involve merger or acquisition proposals) are then forwarded with the
corresponding recommendation to the MFS Proxy Review Group.(2)
-----------
(1) Proxies for foreign companies often contain significantly more voting items
than those of U.S. companies. Many of these items on foreign proxies
involve repetitive, non-controversial matters that are mandated by local
law. Accordingly, the items that are generally deemed routine and which do
not require the exercise of judgment under these guidelines (and therefore
automatically 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.
(2) From time to time, due to travel schedules and other commitments, an
appropriate portfolio manager or research analyst is not available to
provide a recommendation on a merger or acquisition proposal. If such a
recommendation cannot be obtained within a few business days prior to the
shareholder meeting, the MFS Proxy Review Group may determine the vote in
what it believes to be the best long-term economic interests of MFS'
clients.
Recommendations with respect to voting on non-routine issues are
generally made by the MFS Proxy Consultant in accordance with the policies
summarized under "Voting Guidelines," and other relevant materials. His or her
recommendation as to how each proxy proposal should be voted, including his or
her rationale on significant items, is indicated on copies of proxy cards.
These cards are then forwarded to the MFS Proxy Review Group.
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., mergers
and acquisitions), the MFS Proxy Consultant or the MFS Proxy Review Group may
consult with or seek recommendations from portfolio managers or analysts. But,
the MFS Proxy Review Group would ultimately determine the manner in which all
proxies are voted.
As noted above, MFS reserves the right to override the guidelines when
such an override is, in MFS' best judgment, consistent with the 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
After the proxy card copies are reviewed, they are voted
electronically through the Proxy Administrator's system. In accordance with its
contract with MFS, the Proxy Administrator also generates a variety of reports
for the MFS Proxy Consultant and the MFS Proxy Review Group, and makes
available on-line various other types of information so that the MFS Proxy
Review Group and the MFS Proxy Consultant may monitor the votes cast by the
Proxy Administrator on behalf of MFS' clients.
C. MONITORING SYSTEM
It is the responsibility of the Proxy Administrator and MFS' Proxy
Consultant to monitor the proxy voting process. As noted above, when proxy
materials for clients are received, they are forwarded to the Proxy
Administrator and are input into the Proxy Administrator's system.
Additionally, through an interface with the portfolio holdings database of MFS,
the Proxy Administrator matches a list of all MFS Funds and clients who hold
shares of a company's stock and the number of shares held on the record date
with the Proxy Administrator's listing of any upcoming shareholder's meeting of
that company.
When the Proxy Administrator's system "tickler" shows that the date of
a shareholders' meeting is approaching, a Proxy Administrator representative
checks that the vote for MFS Funds and clients holding that security has been
recorded in the computer system. If a proxy card has not been received from the
client's custodian, the Proxy Administrator calls the custodian requesting that
the materials be forward immediately. If it is not possible to receive the
proxy card from the custodian in time to be voted at the meeting, MFS may
instruct the custodian to cast the vote in the manner specified and to mail the
proxy directly to the issuer.
D. RECORDS RETENTION
MFS will retain copies of these policies and procedures in effect from
time to time and will retain all proxy voting reports submitted to the Board of
Trustees and Board of Managers of the MFS Funds for the period required by
applicable law. Proxy solicitation materials, including electronic versions of
the proxy cards completed by the MFS Proxy Consultant and the MFS Proxy Review
Group, together with their respective notes and comments, are maintained in an
electronic format by the Proxy Administrator and are accessible on-line by the
MFS Proxy Consultant and the MFS Proxy Review Group. All proxy voting materials
and supporting documentation, including records generated by the Proxy
Administrator's system as to proxies processed, the dates when proxies were
received and returned, and the votes on each company's proxy issues, are
retained as required by applicable law.
E. REPORTS
MFS FUNDS
Annually, MFS will report the results of its voting to the Board of
Trustees and Board of Managers of the MFS Funds. These reports will include:
(i) a 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 and Managers of the MFS Funds will consider possible modifications
to these policies to the extent necessary or advisable.
ALL MFS ADVISORY CLIENTS
At any time, a report can be printed by MFS for each client who has
requested that MFS furnish a record of votes cast. The report specifies the
proxy issues which have been voted for the client during the year and the
position taken with respect to each issue.
Generally, MFS will not divulge actual voting practices to any party
other than the client or its representatives (unless required by applicable
law) because we consider that information to be confidential and proprietary to
the client.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
GENERAL. Information regarding the portfolio manager(s) of the MFS Special
Value Trust (the "Fund") is set forth below.
TITLE AND FIVE YEAR
PORTFOLIO MANAGER PRIMARY ROLE SINCE HISTORY
----------------- ------------ ----- -------------------
John F. Addeo Portfolio Manager 2002 Senior Vice President of
MFS; employed in the
investment management
area of MFS since 1998.
Scott B. Richards Portfolio Manager 2004 Vice President of MFS;
employed in the
investment management
area of MFS since 2004;
Head of the High Yield
Group at Columbia
Management Group from
1999 to 2003.
COMPENSATION. Portfolio manager total cash compensation is a combination of
base salary and performance bonus:
o Base Salary - Base salary represents a relatively 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. The 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 the investment process (distinct
from portfolio performance).
Portfolio managers also typically benefit from the opportunity to participate
in the MFS Equity Plan. 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 of compensation provided by these benefits depends upon the length
of the individual's tenure at MFS and salary level as well as other factors.
OWNERSHIP OF FUND SHARES. The following table shows the dollar range of equity
securities of the Fund beneficially owned by the Fund's portfolio manager as of
the Fund's fiscal year ended October 31, 2005. The following dollar ranges
apply:
N. None
A. $1 - $10,000
B. $10,001 - $50,000
C. $50,001 - $100,000
D. $100,001 - $500,000
E. $500,001 - $1,000,000
F. Over $1,000,000
NAME OF PORTFOLIO MANAGER DOLLAR RANGE OF EQUITY SECURITIES IN FUND
------------------------- -----------------------------------------
John F. Addeo N
Scott B. Richards N
OTHER ACCOUNTS. In addition to the Fund, the Fund's portfolio manager is
responsible (either individually or jointly) for the day-to-day management of
certain other accounts, the number and total assets of which as of the Fund's
fiscal year ended October 31, 2005 were as follows:
REGISTERED INVESTMENT OTHER POOLED INVESTMENT
COMPANIES VEHICLES OTHER ACCOUNTS
------------------------- ------------------------ ------------------------
NUMBER OF NUMBER OF NUMBER OF
NAME ACCOUNTS* TOTAL ASSETS* ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS
---- -------- ------------ -------- ------------ -------- ------------
John F. Addeo 9 $3.8 1 $213.4 million 2 $519.2
billion million
Scott B. Richards 12 $4.3 billion 2 $548.9 million 2 $519.2
million
--------------
* 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 seek 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.
In certain instances there may be securities which are suitable for the Fund's
portfolio as well as for accounts with similar investment objectives of the
Adviser or subsidiary of the Adviser. Securities transactions for the Fund and
other accounts with similar investment objectives are generally executed on the
same day, or the next day. Nevertheless, it may develop that a particular
security is bought or sold for only one client even though it might be held by,
or bought or sold for, other clients. Likewise, a particular security may be
bought for one or more clients when one or more other clients are selling that
same security.
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. MFS
and/or a portfolio manager may have an incentive to allocate favorable or
limited opportunity investments or structure the timing of investments to favor
accounts other than the Fund--for instance, those that pay a higher advisory
fee and/or have a performance fee.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
----------------------------------------------------------------------------------------------------------------
MFS SPECIAL VALUE TRUST
----------------------------------------------------------------------------------------------------------------
(D) MAXIMUM NUMBER
(C) TOTAL NUMBER OF (OR APPROXIMATE
SHARES PURCHASED AS DOLLAR VALUE) OF
(B) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET
(A) TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS BE PURCHASED UNDER
PERIOD SHARES PURCHASED PER SHARE OR PROGRAMS THE PLANS OR PROGRAMS
------------------------------------------------------------------------------------------------------------------
11/1/04-11/30/04 0 n/a 0 667,581
------------------------------------------------------------------------------------------------------------------
12/1/04-12/31/04 0 n/a 0 667,581
------------------------------------------------------------------------------------------------------------------
1/1/05-1/31/05 0 n/a 0 667,581
------------------------------------------------------------------------------------------------------------------
2/1/05-2/28/05 0 n/a 0 667,581
------------------------------------------------------------------------------------------------------------------
3/1/05-3/31/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
4/1/05-4/30/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
05/01/05-05/31/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
06/01/05-06/30/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
07/01/05-07/31/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
08/01/05-08/31/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
09/01/05-09/30/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
10/01/05-10/31/05 0 n/a 0 673,558
------------------------------------------------------------------------------------------------------------------
Total 0 n/a 0
------------------------------------------------------------------------------------------------------------------
Note: The Board of Trustees approves procedures to repurchase shares annually.
The notification to shareholders of the program is part of the semi-annual and
annual reports sent to shareholders. These annual programs begin on March 1st
of each year. The programs conform to the conditions of Rule 10b-18 of the
securities Exchange Act of 1934 and limit the aggregate number of shares that
may be purchased in each annual period (March 1 through the following February
28) to 10% of the Registrant's outstanding shares as of the first day of the
plan year (March 1). The aggregate number of shares available for purchase for
the March 1, 2005 plan year are 673,558.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Investment Company Act of
1940 (the "Act")) as conducted within 90 days of the filing date of this
Form N-CSR, the registrant's principal financial officer and principal
executive officer have concluded that those disclosure controls and
procedures provide reasonable assurance that the material information
required to be disclosed by the registrant on this report is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) There were no changes in the registrant's internal controls over financial
reporting (as defined in Rule 30a-3(d) under the Act) that occurred during
the second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant
intends to satisfy the Item 2 requirements through filing of an
exhibit: Code of Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(3) Any written solicitation to purchase securities under Rule 23c-1 under
the Act sent or given during the period covered by the report by or on
behalf of the Registrant to 10 or more persons. Not applicable.
(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act,
provide the certifications required by Rule 30a-2(b) under the Act (17 CFR
270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Registrant MFS SPECIAL VALUE TRUST
--------------------------------------------------------------------
By (Signature and Title)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President
Date: December 22, 2005
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President (Principal Executive
Officer)
Date: December 22, 2005
-----------------
By (Signature and Title)* TRACY ATKINSON
-----------------------------------------------------
Tracy Atkinson, Treasurer (Principal Financial Officer
and Accounting Officer)
Date: December 22, 2005
-----------------
* Print name and title of each signing officer under his or her signature.