N-CSRS 1 d649111.txt MFS CHARTER INCOME TRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5822 ------------------------------------------------------------------------------- MFS CHARTER INCOME TRUST ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 500 Boylston Street, Boston, Massachusetts 02116 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Susan S. Newton Massachusetts Financial Services Company 500 Boylston Street Boston, Massachusetts 02116 ------------------------------------------------------------------------------- (Name and address of agents for service) Registrant's telephone number, including area code: (617) 954-5000 ------------------------------------------------------------------------------- Date of fiscal year end: November 30 ------------------------------------------------------------------------------- Date of reporting period: May 31, 2006 ------------------------------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. MFS(R) Mutual Funds 5/31/06 SEMIANNUAL REPORT MFS(R) CHARTER INCOME TRUST [graphic omitted] A path for pursuing opportunity M F S(SM) INVESTMENT MANAGEMENT(R) ------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------
MFS(R) CHARTER INCOME TRUST 5/31/06 The trust seeks to maximize current income. New York Stock Exchange Symbol: MCR TABLE OF CONTENTS ---------------------------------------------------- LETTER FROM THE CEO 1 ---------------------------------------------------- PORTFOLIO COMPOSITION 2 ---------------------------------------------------- PORTFOLIO MANAGERS' PROFILES 3 ---------------------------------------------------- PERFORMANCE SUMMARY 4 ---------------------------------------------------- DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 7 ---------------------------------------------------- PORTFOLIO OF INVESTMENTS 8 ---------------------------------------------------- FINANCIAL STATEMENTS 22 ---------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 26 ---------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 34 ---------------------------------------------------- BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 35 ---------------------------------------------------- PROXY VOTING POLICIES AND INFORMATION 35 ---------------------------------------------------- QUARTERLY PORTFOLIO DISCLOSURE 35 ---------------------------------------------------- CONTACT INFORMATION BACK COVER LETTER FROM THE CEO [Photo of Robert J. Manning] Dear Shareholders, It has been said that change is the only constant in life. As investors have seen, that theme is still accurate today as we recently have experienced shifting economic cycles because of natural disasters and political instability around the globe. Markets worldwide have fluctuated in the past year as devastating hurricanes had a dramatic effect on the international economy, particularly on oil prices. We witnessed political unrest in the Middle East, highlighted by instability in Iraq, and in Africa, the usually stable Nigeria also experienced violence. As a result, energy prices have bounced up and down, with crude oil prices at one point topping a record $70 per barrel. Such cycles are not uncommon and in fact have almost become the norm in our everyday lives. What does all of this mean to you as an investor? In times like these, it helps to know that you're working with a seasoned investment professional who has experience to guide you through difficult times. At MFS(R), we believe our investment management team has the knowledge and confidence to navigate through difficult cycles and at the same time see through adversity to find investment opportunities for our clients and shareholders. Our investment management process, honed over 80 years, combines a unique concept of teamwork with our unwavering focus on the long term. We firmly believe that the best way 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. Rebalance assets regularly to maintain a desired asset allocation. Of course, these strategies cannot guarantee a profit or protect against a loss. 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 - through both up and down economic cycles. Respectfully, /s/ Robert J. Manning Robert J. Manning Chief Executive Officer and Chief Investment Officer MFS Investment Management(R) July 17, 2006 The opinions expressed in this letter are those of MFS, and no forecasts can be guaranteed. PORTFOLIO COMPOSITION PORTFOLIO STRUCTURE(i) Bonds 98.2% Cash & Other Net Assets 1.7% Convertible Stocks 0.1% FIXED INCOME SECTORS (i) Non-U.S. Government Bonds 24.0% ------------------------------------------------ High Yield Corporates 16.4% ------------------------------------------------ High Grade Corporates 15.6% ------------------------------------------------ Mortgage-Backed Securities 13.6% ------------------------------------------------ U.S. Treasury Securities 9.2% ------------------------------------------------ Emerging Market Bonds 7.5% ------------------------------------------------ Commercial Mortgage-Backed Securities 6.2% ------------------------------------------------ U.S. Government Agencies 3.8% ------------------------------------------------ Asset-Backed Securities 1.8% ------------------------------------------------ Residential Mortgage-Backed Securities 0.1% ------------------------------------------------ CREDIT QUALITY OF BONDS (r) AAA 55.8% ------------------------------------------------ AA 2.4% ------------------------------------------------ A 3.5% ------------------------------------------------ BBB 17.4% ------------------------------------------------ BB 14.8% ------------------------------------------------ B 5.7% ------------------------------------------------ CCC 0.3% ------------------------------------------------ Not Rated 0.1% ------------------------------------------------ PORTFOLIO FACTS Average Duration (d) 4.7 ------------------------------------------------ Average Life (m) 7.3 yrs. ------------------------------------------------ Average Maturity (m) 12.2 yrs. ------------------------------------------------ Average Credit Quality of Rated Securities (a) A+ ------------------------------------------------ Average Short Term Credit Quality A-1 ------------------------------------------------ COUNTRY WEIGHTINGS (i) United States 63.5% ------------------------------------------------ United Kingdom 4.7% ------------------------------------------------ Germany 4.6% ------------------------------------------------ France 3.3% ------------------------------------------------ Ireland 3.1% ------------------------------------------------ Finland 2.7% ------------------------------------------------ Netherlands 2.5% ------------------------------------------------ Spain 2.4% ------------------------------------------------ Russia 1.8% ------------------------------------------------ Other Countries 11.4% ------------------------------------------------ (a) The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. (d) Duration is a measure of how much a bond's price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. (i) For purposes of this graphical presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been prerefunded to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 5/31/06. Percentages are based on net assets as of 5/31/06, unless otherwise noted. The portfolio is actively managed, and current holdings may be different. 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 portfolio manager of the high-yield bond portfolios of our mutual funds, variable annuities, offshore accounts and closed-end funds. John joined MFS as a research analyst in 1998. He became Vice President in 1999, associate portfolio manager in 2000, and portfolio manager in 2001. He has been a portfolio manager of the fund since February 2005. John was named Associate Director of Fixed Income Research in 2004. Previously, he was a quantitative analyst and a vice president in the high-yield groups of several major investment companies. He received a Bachelor of Science degree from Siena College in 1984. He holds the Chartered Financial Analyst (CFA) designation. Richard O. Hawkins, CFA, is Senior Vice President of MFS Investment Management(R) an investment grade fixed income research analyst; and a portfolio manager of MFS(R) Charter Income Trust. Prior to joining the firm in 1988, he spent two years as an International Bond Analyst for Fidelity Management & Research Company; and five years as an International Lending Officer for Manufacturers Hanover Trust Company. He was named portfolio manager at MFS in 2004. He has been a portfolio manager of the fund since July 2004. Richard earned a bachelor's degree from Brown University and a Master's of Business Administration from the University of Pennsylvania. He is a member of the Association for Investment Management and Research (AIMR) and the Boston Security Analysts Society, Inc. He holds the Chartered Financial Analyst (CFA) designation. Scott B. Richards, CFA, is Vice President of MFS Investment Management(R) (MFS(R)) and a portfolio manager of the firm's high-yield and strategic income portfolios. He has been a portfolio manager of the fund since February 2005. 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 M.B.A. 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 Analysts Society, Inc. Matthew W. Ryan, CFA, is Senior Vice President of MFS Investment Management(R) (MFS(R)) and portfolio manager of strategic income and high yield portfolios, as well as the firm's emerging market debt portfolios. Before joining the firm in 1997, Matt worked for four years as an economist at the International Monetary Fund and for five years as an international economist with the U.S. Treasury Department. He was named a portfolio manager of MFS in 1998; Vice President in 1999; and Senior Vice President in 2005. He has been a portfolio manager of the fund since September 2004. Matt is a graduate of Williams College and earned a master's degree in international economics and foreign policy from Johns Hopkins University. Matt also holds the Chartered Financial Analyst (CFA) designation. PERFORMANCE SUMMARY THROUGH 5/31/06 All results are historical. Investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than their original cost. More recent returns may be more or less than those shown. Past performance is no guarantee of future results. PRICE SUMMARY Date Price Six months ended 5/31/06 Net asset value per share 5/31/06 $9.38 ------------------------------------------------------------------------------ 11/30/05 $9.58 ------------------------------------------------------------------------------ New York Stock Exchange Price 5/31/06 $8.30 ------------------------------------------------------------------------------ 1/24/06 (high) (t) $8.67 ------------------------------------------------------------------------------ 4/13/06 (low) (t) $8.23 ------------------------------------------------------------------------------ 11/30/05 $8.43 TOTAL RETURNS VS BENCHMARKS Six months ended 5/31/06 New York Stock Exchange Price (r) 1.41% ------------------------------------------------------------------------------ Net asset value (r) 0.85% ------------------------------------------------------------------------------ Citigroup World Government Bond Non-Dollar Hedged Index (f) 0.02% ------------------------------------------------------------------------------ J.P. Morgan EMBI Global (f) 1.16% ------------------------------------------------------------------------------ Lehman Brothers U.S. Credit Bond Index (f) -0.73% ------------------------------------------------------------------------------ Lehman Brothers U.S. Government/Mortgage Bond Index (f) 0.23% ------------------------------------------------------------------------------ Lehman Brothers U.S. High-Yield Corporate Bond Index (f) 4.41% (f) Source: FactSet Research Systems, Inc. (r) Includes reinvestment of dividends and capital gain distributions. (t) For the period December 1, 2005 through May 31, 2006. INDEX DEFINITIONS Citigroup World Government Bond Non-Dollar Hedged Index - a market capitalization-weighted index that tracks the currency-hedged performance of the major government bond markets, excluding the United States. Country eligibility is determined based upon market capitalization and investability criteria. J.P. Morgan Emerging Markets Bond Index Global (EMBI Global) - tracks total returns for U.S.-dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. Lehman Brothers U.S. Credit Bond Index - measures publicly issued, SEC- registered, U.S. corporate and specified foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. Lehman Brothers U.S. Government/Mortgage Bond Index - measures debt issued by the U.S. Government as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Lehman Brothers U.S. High-Yield Corporate Bond Index - measures the universe of non-investment grade, fixed rate debt. Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded. It is not possible to invest directly in an index. NOTES TO PERFORMANCE SUMMARY The trust's shares may trade at a discount to net asset value. Shareholders do not have the right to cause the trust to repurchase their shares at net asset value. When trust shares trade at a premium, buyers pay more than the net asset value underlying trust shares, and shares purchased at a premium would receive less than the amount paid for them in the event of the trust's liquidation. As a result, the total returns that are calculated based on the net asset value and New York Stock Exchange prices can be different. The trust's monthly distributions may include a return of capital to shareholders. Distributions that are treated for federal income tax purposes as a return of capital will reduce each shareholder's basis in his or her shares and, to the extent the return of capital exceeds such basis, will be treated as gain to the shareholder from a sale of shares. Returns of shareholder capital have the effect of reducing the trust's assets and may increase the trust's expense ratio. From time to time the trust may receive proceeds from litigation settlements, without which performance would be lower. Shareholders will be sent notices at least annually reporting the tax status of such distributions. The notices will indicate whether any portion of such distributions represent a return of capital. Effective August 1, 2006, the trust will only send monthly notices reporting the tax status of such distributions when required by SEC rules. KEY RISK CONSIDERATIONS The portfolio's yield and share prices change daily based on the credit quality of its investments and changes in interest rates. In general, the value of debt securities will decline when interest rates rise and will increase when interest rates fall. Debt securities with longer maturity dates will be subject to greater price fluctuations than those with shorter maturities. Mortgage securities are subject to prepayment risk which can offer less potential for gains in a declining interest rate environment and greater potential for loss in a rising interest rate environment. Derivatives involve risks different from, and greater than, those of the underlying indicator's in whose value the derivative is based. The value of the derivative can move in unexpected ways and result in unanticipated losses and increased volatility if the value of the underlying indicator(s) does not move in the direction or the extent anticipated. Interest payments on inflation adjusted debt instruments can be unpredictable and vary based on the level of inflation. The value of floating rate loans depends on the credit quality and adequacy of the collateral securing the loan. Enforcing rights against the collateral may be difficult or insufficient if the borrower of the floating rate loan defaults. Lower quality debt securities involve substantially greater risk of default and their value can decline significantly over time. Foreign investments can be more volatile than U.S. investments. Changes in currency exchange rates may affect the portfolio's net asset value, the value of dividends and interest earned and gains and losses realized on the sale of securities. Investing in emerging markets can involve risks in addition to those generally associated with investing in more developed foreign markets. When you sell your shares, they may be worth more or less than the amount you paid for them. Please see the prospectus for further information regarding these and other risk considerations. These risks may increase share price volatility. In accordance with Section 23(c) of the Investment Company Act of 1940, the trust hereby gives notice that it may from time to time repurchase shares of the trust in the open market at the option of the Board of Trustees and on such terms as the Trustees shall determine. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The trust offers a Dividend Reinvestment and Cash Purchase Plan that allows you to reinvest either all of the distributions paid by the trust or only the long-term capital gains. Purchases are made at the market price unless that price exceeds the net asset value (the shares are trading at a premium). If the shares are trading at a premium, purchases will be made at a discounted price of either the net asset value or 95% of the market price, whichever is greater. Twice each year you can also buy shares. Investments may be made in any amount over $100 in January and July on the 15th of the month or shortly thereafter. If your shares are in the name of a brokerage firm, bank, or other nominee, you can ask the firm or nominee to participate in the plan on your behalf. If the nominee does not offer the plan, you may wish to request that your shares be re-registered in your own name so that you can participate. There is no service charge to reinvest distributions, nor are there brokerage charges for shares issued directly by the trust. However, when shares are bought on the New York Stock Exchange or otherwise on the open market, each participant pays a pro rata share of the commissions. The automatic reinvestment of distributions does not relieve you of any income tax that may be payable (or required to be withheld) on the distributions. To enroll in or withdraw from the plan, or if you have any questions, call 1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please have available the name of the trust and your account and Social Security numbers. For certain types of registrations, such as corporate accounts, instructions must be submitted in writing. Please call for additional details. When you withdraw from the plan, you can receive the value of the reinvested shares in one of two ways: a check for the value of the full and fractional shares, or a certificate for the full shares and a check for the fractional shares. PORTFOLIO OF INVESTMENTS (unaudited) - 5/31/06 The Portfolio of Investments is a complete list of all securities owned by your trust. It is categorized by broad-based asset classes. Bonds - 98.6% ------------------------------------------------------------------------------------------------
ISSUER SHARES/PAR VALUE ($) ------------------------------------------------------------------------------------------------ Advertising & Broadcasting - 1.1% ------------------------------------------------------------------------------------------------ Allbritton Communications Co., 7.75%, 2012 $ 365,000 $ 365,456 CBS Corp., 6.625%, 2011 860,000 884,512 EchoStar DBS Corp., 6.375%, 2011 1,945,000 1,867,200 Intelsat Subsidiary Holding Co. Ltd., 8.625%, 2015 340,000 344,250 Lamar Media Corp., 7.25%, 2013 675,000 669,094 News America Holdings, 7.7%, 2025 1,140,000 1,206,475 News America, Inc., 6.2%, 2034 542,000 489,972 --------------- $ 5,826,959 ------------------------------------------------------------------------------------------------ Aerospace - 0.1% ------------------------------------------------------------------------------------------------ DRS Technologies, Inc., 7.625%, 2018 $ 440,000 $ 444,400 ------------------------------------------------------------------------------------------------ Agency - Other - 1.0% ------------------------------------------------------------------------------------------------ Financing Corp., 10.35%, 2018 $ 3,600,000 $ 5,103,112 ------------------------------------------------------------------------------------------------ Airlines - 0.2% ------------------------------------------------------------------------------------------------ Continental Airlines, Inc., 7.566%, 2020 $ 1,015,699 $ 955,076 ------------------------------------------------------------------------------------------------ Asset Backed & Securitized - 8.0% ------------------------------------------------------------------------------------------------ Amresco Commercial Mortgage Funding I, 7%, 2029 $ 3,000,000 $ 3,021,048 Asset Securitization Corp., 7.525%, 2029 1,586,134 1,714,918 Asset Securitization Corp., FRN, 8.2937%, 2029 2,000,000 2,066,849 Bayview Financial Acquisition Trust, FRN, 5.483%, 2041 404,000 399,518 Bayview Financial Revolving Mortgage Loan Trust, FRN, 5.8906%, 2040 (a) 1,160,000 1,161,845 Bear Stearns Commercial Mortgage Securities, Inc., FRN, 5.116%, 2041 1,120,248 1,066,015 Countrywide Asset-Backed Certificates, FRN, 5.147%, 2035 2,000,000 1,976,877 Credit Suisse First Boston Mortgage Securities Corp., 6.75%, 2030 (a) 2,000,000 2,001,479 Crest Ltd., 7%, 2040 (a) 2,000,000 1,795,800 DLJ Commercial Mortgage Corp., 6.04%, 2031 2,000,000 2,007,247 First Union-Lehman Brothers Bank of America, FRN, 0.6883%, 2035 (i) 67,839,557 1,191,147 First Union-Lehman Brothers Commercial Mortgage Trust, 7%, 2029 (a) 850,000 931,560 First Union-Lehman Brothers Commercial Mortgage Trust, FRN, 7.5%, 2029 3,000,000 3,318,322 J.P. Morgan Chase Commercial Mortgage Securities Corp., FRN, 5.038%, 2046 4,000,000 3,782,455 Morgan Stanley Capital I, Inc., 5.168%, 2042 1,532,020 1,463,847 Mortgage Capital Funding, Inc., FRN, 0.9324%, 2031 (i) 18,072,179 212,661 New Century Home Equity Loan Trust, FRN, 4.532%, 2035 2,500,000 2,437,528 Residential Asset Mortgage Products, Inc., 3.878%, 2035 1,340,523 1,324,288 Spirit Master Funding LLC, 5.05%, 2023 (a) 1,928,754 1,813,524 Structured Asset Securities Corp., FRN, 4.67%, 2035 2,484,152 2,445,935 TIAA Real Estate CDO Ltd., 7.17%, 2032 (a) 2,003,810 2,023,650 Wachovia Bank Commercial Mortgage Trust, FRN, 4.847%, 2041 2,000,000 1,867,381 Wachovia Bank Commercial Mortgage Trust, FRN, 5.083%, 2042 2,000,000 1,894,873 --------------- $ 41,918,767 ------------------------------------------------------------------------------------------------ Automotive - 1.6% ------------------------------------------------------------------------------------------------ American Axle & Manufacturing, Inc., 5.25%, 2014 $ 515,000 $ 426,806 DaimlerChrysler N.A. Holdings Corp., 8.5%, 2031 400,000 458,489 Ford Motor Credit Co., 4.95%, 2008 200,000 187,476 Ford Motor Credit Co., 6.625%, 2008 196,000 185,629 Ford Motor Credit Co., 5.8%, 2009 1,600,000 1,462,269 Ford Motor Credit Co., 7%, 2013 254,000 219,107 General Motors Acceptance Corp., 6.125%, 2008 234,000 226,594 General Motors Acceptance Corp., 5.85%, 2009 1,842,000 1,738,406 General Motors Acceptance Corp., 6.875%, 2011 1,400,000 1,315,188 General Motors Acceptance Corp., 6.75%, 2014 1,391,000 1,262,696 General Motors Acceptance Corp., 8%, 2031 534,000 501,583 General Motors Corp., 8.375%, 2033 100,000 75,875 Lear Corp., 8.11%, 2009 285,000 277,875 Lear Corp., 5.75%, 2014 50,000 40,750 --------------- $ 8,378,743 ------------------------------------------------------------------------------------------------ Banks & Credit Companies - 5.6% ------------------------------------------------------------------------------------------------ Abbey National Capital Trust I, 8.963% to 2030, FRN to 2049 $ 1,500,000 $ 1,872,987 Banco BMG S.A., 9.15%, 2016 (a) 982,000 962,360 Banco do Estado de Sao Paulo S.A., 8.7%, 2049 (a) 1,400,000 1,380,750 Banco Mercantil del Norte S.A., 5.875% to 2009, FRN to 2014 (a) 808,000 799,920 BNP Paribas, 5.186% to 2015, FRN to 2049 (a) 1,667,000 1,533,097 Bosphorus Financial Services Ltd., FRN, 6.97%, 2012 (a) 1,500,000 1,505,954 Chuo Mitsui Trust & Banking Co., 5.506% to 2015, FRN to 2049(a) 1,676,000 1,568,873 DFS Funding Corp., FRN, 6.91%, 2010 (a) 1,750,000 1,776,250 HBOS Capital Funding LP, 6.071% to 2014, FRN to 2049 (a) 1,330,000 1,306,369 HSBK Europe B.V., 7.75%, 2013 (a) 637,000 644,963 J.P. Morgan Chase & Co., 5.125%, 2014 2,100,000 1,986,531 Kazkommerts International B.V., 10.125%, 2007 (a) 367,000 379,295 Kazkommerts International B.V., 10.125%, 2007 128,000 132,288 Mizuho Capital Investment 1 Ltd., 6.686% to 2016, FRN to 2049(a) 3,800,000 3,670,747 Mizuho Financial Group, Inc., 5.79%, 2014 (a) 1,898,000 1,869,365 MUFG Capital Finance 1 Ltd., 6.346% to 2016, FRN to 2049 1,408,000 1,386,414 RBS Capital Trust II, 6.425% to 2034, FRN to 2049 829,000 806,437 Resona Bank Ltd., 5.85% to 2016, FRN to 2049 (a) 655,000 624,133 Russian Standard Finance S.A., 8.125%, 2008 (a) 682,000 681,148 Russian Standard Finance S.A., 7.5%, 2010 (a) 176,000 168,520 Russian Standard Finance S.A., 8.625%, 2011 (a) 498,000 493,070 Turanalem Finance B.V., 7.75%, 2013 (a) 590,000 584,100 UFJ Finance Aruba AEC, 6.75%, 2013 1,300,000 1,357,383 Woori Bank, FRN, 6.125%, 2016 (a) 1,490,000 1,477,156 --------------- $ 28,968,110 ------------------------------------------------------------------------------------------------ Broadcast & Cable TV - 1.2% ------------------------------------------------------------------------------------------------ CCH II LLC, 10.25%, 2010 $ 475,000 $ 473,812 CSC Holdings, Inc., 8.125%, 2009 1,050,000 1,076,250 Lenfest Communications, Inc., 10.5%, 2006 1,900,000 1,902,134 Mediacom LLC, 9.5%, 2013 280,000 281,400 Rogers Cable, Inc., 5.5%, 2014 1,025,000 927,625 TCI Communications, Inc., 9.8%, 2012 1,169,000 1,359,528 --------------- $ 6,020,749 ------------------------------------------------------------------------------------------------ Brokerage & Asset Managers - 1.0% ------------------------------------------------------------------------------------------------ Goldman Sachs Group, Inc., 5.7%, 2012 $ 2,680,000 $ 2,662,360 Morgan Stanley Dean Witter, Inc., 6.6%, 2012 2,537,000 2,642,077 --------------- $ 5,304,437 ------------------------------------------------------------------------------------------------ Business Services - 0.6% ------------------------------------------------------------------------------------------------ Iron Mountain, Inc., 7.75%, 2015 $ 175,000 $ 174,562 Xerox Corp., 7.625%, 2013 920,000 943,000 Xerox Corp., 6.4%, 2016 2,000,000 1,910,000 --------------- $ 3,027,562 ------------------------------------------------------------------------------------------------ Chemicals - 0.9% ------------------------------------------------------------------------------------------------ BCP Crystal Holdings Corp., 9.625%, 2014 $ 204,000 $ 223,890 Equistar Chemicals, LP, 10.125%, 2008 240,000 255,600 Hercules, Inc., 6.75%, 2029 860,000 817,000 Huntsman International LLC, 10.125%, 2009 331,000 336,792 Lyondell Chemical Co., 11.125%, 2012 615,000 676,500 Nalco Co., 7.75%, 2011 650,000 651,625 Nalco Co., 8.875%, 2013 70,000 72,013 Yara International A.S.A., 5.25%, 2014 (a) 2,000,000 1,863,654 --------------- $ 4,897,074 ------------------------------------------------------------------------------------------------ Conglomerates - 0.2% ------------------------------------------------------------------------------------------------ Kennametal, Inc., 7.2%, 2012 $ 1,140,000 $ 1,198,260 ------------------------------------------------------------------------------------------------ Construction - 0.5% ------------------------------------------------------------------------------------------------ Beazer Homes USA, Inc., 6.875%, 2015 $ 2,300,000 $ 2,173,500 M/I Homes, Inc., 6.875%, 2012 675,000 612,562 --------------- $ 2,786,062 ------------------------------------------------------------------------------------------------ Consumer Goods & Services - 0.1% ------------------------------------------------------------------------------------------------ Church & Dwight Co., Inc., 6%, 2012 $ 460,000 $ 437,000 Service Corp. International, 7.5%, 2017 (a) 260,000 247,000 --------------- $ 684,000 ------------------------------------------------------------------------------------------------ Containers - 0.4% ------------------------------------------------------------------------------------------------ Ball Corp., 6.625%, 2018 $ 475,000 $ 453,625 Crown Americas, 7.75%, 2015 (a) 565,000 569,238 Owens-Brockway Glass Container, Inc., 8.875%, 2009 430,000 443,975 Owens-Brockway Glass Container, Inc., 8.25%, 2013 865,000 873,650 --------------- $ 2,340,488 ------------------------------------------------------------------------------------------------ Defense Electronics - 0.9% ------------------------------------------------------------------------------------------------ BAE Systems Holdings, Inc., 4.75%, 2010 (a) $ 790,000 $ 758,590 BAE Systems Holdings, Inc., 5.2%, 2015 (a) 2,000,000 1,863,890 L-3 Communications Corp., 5.875%, 2015 750,000 690,000 L-3 Communications Corp., 6.375%, 2015 1,500,000 1,417,500 --------------- $ 4,729,980 ------------------------------------------------------------------------------------------------ Electronics - 0.1% ------------------------------------------------------------------------------------------------ Flextronics International Ltd., 6.5%, 2013 $ 790,000 $ 763,337 ------------------------------------------------------------------------------------------------ Emerging Market Quasi-Sovereign - 1.1% ------------------------------------------------------------------------------------------------ Banco do Brasil S.A., 7.95%, 2049 (a) $ 161,000 $ 152,950 Gazprom OAO, 9.625%, 2013 (a) 1,510,000 1,744,050 Pemex Project Funding Master Trust, 8.625%, 2022 1,218,000 1,370,250 Petroleum Export/Cayman, 5.265%, 2011 (a) 275,252 267,853 Petronas Capital Ltd., 7.875%, 2022 (a) 464,000 534,794 Petronas Capital Ltd., 7.875%, 2022 1,340,000 1,544,448 --------------- $ 5,614,345 ------------------------------------------------------------------------------------------------ Emerging Market Sovereign - 2.5% ------------------------------------------------------------------------------------------------ Republic of Argentina, FRN, 4.889%, 2012 $ 1,449,000 $ 1,330,929 Republic of Bulgaria, 8.25%, 2015 600,000 686,160 Republic of Colombia, FRN, 6.97%, 2015 1,514,000 1,566,936 Republic of Indonesia, 6.875%, 2017 (a) 171,000 167,477 Republic of Panama, 9.375%, 2029 1,121,000 1,367,620 Republic of South Africa, 9.125%, 2009 469,000 511,210 Russian Federation, 3%, 2008 6,252,000 5,913,767 Russian Federation, 11%, 2018 326,000 453,564 United Mexican States, 8.125%, 2019 976,000 1,094,584 --------------- $ 13,092,247 ------------------------------------------------------------------------------------------------ Energy - Independent - 0.7% ------------------------------------------------------------------------------------------------ Chesapeake Energy Corp., 7.5%, 2014 $ 335,000 $ 342,119 Chesapeake Energy Corp., 7%, 2014 240,000 239,100 Chesapeake Energy Corp., 6.875%, 2016 1,025,000 996,812 Forest Oil Corp., 7.75%, 2014 550,000 555,500 Newfield Exploration Co., 6.625%, 2014 540,000 517,050 Quicksilver Resources, Inc., 7.125%, 2016 510,000 487,050 Vintage Petroleum, Inc., 8.25%, 2012 550,000 583,046 --------------- $ 3,720,677 ------------------------------------------------------------------------------------------------ Entertainment - 0.5% ------------------------------------------------------------------------------------------------ AMC Entertainment, Inc., 9.5%, 2011 $ 224,000 $ 222,338 AMC Entertainment, Inc., 11%, 2016 (a) 200,000 216,000 Six Flags, Inc., 9.75%, 2013 220,000 220,550 Turner Broadcasting System, Inc., 8.375%, 2013 1,784,000 1,972,710 --------------- $ 2,631,598 ------------------------------------------------------------------------------------------------ Financial Institutions - 0.3% ------------------------------------------------------------------------------------------------ HSBC Finance Corp., 5.5%, 2016 $ 1,481,000 $ 1,415,694 International Lease Finance Corp., 5%, 2010 321,000 312,959 --------------- $ 1,728,653 ------------------------------------------------------------------------------------------------ Food & Non Alcoholic Beverages - 0.1% ------------------------------------------------------------------------------------------------ B&G Foods Holding Corp., 8%, 2011 $ 170,000 $ 171,275 Michael Foods, Inc., 8%, 2013 315,000 314,212 --------------- $ 485,487 ------------------------------------------------------------------------------------------------ Forest & Paper Products - 0.8% ------------------------------------------------------------------------------------------------ Buckeye Technologies, Inc., 8.5%, 2013 $ 460,000 $ 450,800 Jefferson Smurfit Corp., 8.25%, 2012 185,000 173,900 MDP Acquisitions PLC, 9.625%, 2012 310,000 323,175 Norske Skog Canada Ltd., 7.375%, 2014 695,000 639,400 Stone Container Corp., 7.375%, 2014 1,000,000 895,000 Stora Enso Oyj, 6.404%, 2016 (a) 1,560,000 1,532,954 --------------- $ 4,015,229 ------------------------------------------------------------------------------------------------ Gaming & Lodging - 2.3% ------------------------------------------------------------------------------------------------ Boyd Gaming Corp., 6.75%, 2014 $ 520,000 $ 501,800 Caesars Entertainment, Inc., 8.125%, 2011 730,000 777,450 GTECH Holdings Corp., 5.25%, 2014 235,000 226,125 Harrah's Operating Co., Inc., 5.625%, 2015 2,147,000 2,017,815 Host Marriott LP, 7.125%, 2013 465,000 467,325 Host Marriott LP, 6.375%, 2015 250,000 238,125 Host Marriott LP, 6.75%, 2016 (a) 1,000,000 971,250 Mandalay Resort Group, 9.375%, 2010 450,000 480,375 MGM Mirage, Inc., 8.375%, 2011 1,155,000 1,206,975 MGM Mirage, Inc., 6.75%, 2013 (a) 230,000 224,538 MGM Mirage, Inc., 6.875%, 2016 (a) 195,000 187,200 Royal Caribbean Cruises Ltd., 8%, 2010 990,000 1,042,567 Scientific Games Corp., 6.25%, 2012 380,000 365,750 Starwood Hotels & Resorts Worldwide, Inc., 7.875%, 2012 2,390,000 2,527,425 Station Casinos, Inc., 6.5%, 2014 440,000 420,200 Wynn Las Vegas LLC, 6.625%, 2014 225,000 213,469 --------------- $ 11,868,389 ------------------------------------------------------------------------------------------------ Industrial - 0.2% ------------------------------------------------------------------------------------------------ Amsted Industries, Inc., 10.25%, 2011 (a) $ 725,000 $ 783,000 JohnsonDiversey Holdings, Inc., "B", 9.625%, 2012 310,000 313,100 --------------- $ 1,096,100 ------------------------------------------------------------------------------------------------ Insurance - 0.9% ------------------------------------------------------------------------------------------------ American International Group, Inc., 4.25%, 2013 $ 4,250,000 $ 3,871,746 UnumProvident Corp., 7.625%, 2011 215,000 225,750 UnumProvident Corp., 6.85%, 2015 (a) 580,000 573,438 --------------- $ 4,670,934 ------------------------------------------------------------------------------------------------ Insurance - Property & Casualty - 0.6% ------------------------------------------------------------------------------------------------ AXIS Capital Holdings Ltd., 5.75%, 2014 $ 1,689,000 $ 1,611,029 Fund American Cos., Inc., 5.875%, 2013 1,351,000 1,311,283 --------------- $ 2,922,312 ------------------------------------------------------------------------------------------------ International Market Quasi-Sovereign - 2.6% ------------------------------------------------------------------------------------------------ KfW Bankengruppe, FRN, 2.844%, 2007 EUR 3,321,000 $ 4,250,289 Landesbank Baden-Wurttemberg, FRN, 2.764%, 2007 EUR 1,105,000 1,414,837 Landesbank Baden-Wurttemberg, FRN, 2.879%, 2007 EUR 1,033,000 1,318,758 Landesbank Baden-Wurttemberg, FRN, 2.704%, 2007 EUR 1,950,000 2,497,209 Network Rail MTN Finance PLC, FRN, 2.913%, 2007 EUR 3,359,000 4,301,568 --------------- $ 13,782,661 ------------------------------------------------------------------------------------------------ International Market Sovereign - 20.8% ------------------------------------------------------------------------------------------------ Federal Republic of Germany, 3.5%, 2008 EUR 4,199,000 $ 5,380,749 Federal Republic of Germany, 3.75%, 2015 EUR 3,906,000 4,936,858 Federal Republic of Germany, 6.25%, 2030 EUR 774,000 1,278,045 Government of New Zealand, 6.5%, 2013 NZD 9,660,000 6,367,638 Government of New Zealand, 6%, 2017 NZD 1,975,000 1,278,072 Kingdom of Netherlands, 5.75%, 2007 EUR 4,645,000 6,052,640 Kingdom of Netherlands, 3.75%, 2009 EUR 5,253,000 6,767,279 Kingdom of Spain, 6%, 2008 EUR 5,210,000 6,945,670 Kingdom of Spain, 5.35%, 2011 EUR 3,009,000 4,144,686 Republic of Austria, 5.5%, 2007 EUR 5,174,000 6,813,612 Republic of Finland, 5.375%, 2013 EUR 8,575,000 12,004,613 Republic of France, 4.75%, 2007 EUR 9,352,000 12,173,111 Republic of France, 4.75%, 2012 EUR 1,219,000 1,643,687 Republic of France, 6%, 2025 EUR 814,000 1,284,861 Republic of Ireland, 4.25%, 2007 EUR 9,448,000 12,249,490 Republic of Ireland, 4.6%, 2016 EUR 2,507,000 3,374,033 United Kingdom Treasury, 5.75%, 2009 GBP 3,138,000 6,060,100 United Kingdom Treasury, 5%, 2012 GBP 3,055,000 5,807,331 United Kingdom Treasury, 8%, 2015 GBP 1,584,000 3,723,273 --------------- $ 108,285,748 ------------------------------------------------------------------------------------------------ Machinery & Tools - 0.5% ------------------------------------------------------------------------------------------------ Case New Holland, Inc., 6%, 2009 $ 1,415,000 $ 1,390,237 Case New Holland, Inc., 9.25%, 2011 160,000 170,000 Case New Holland, Inc., 7.125%, 2014 (a) 380,000 368,600 Manitowoc Co., Inc., 10.5%, 2012 331,000 360,790 Terex Corp., 9.25%, 2011 265,000 280,237 --------------- $ 2,569,864 ------------------------------------------------------------------------------------------------ Medical & Health Technology & Services - 1.6% ------------------------------------------------------------------------------------------------ AmerisourceBergen Corp., 5.875%, 2015 (a) $ 2,465,000 $ 2,374,330 DaVita, Inc., 6.625%, 2013 170,000 163,412 DaVita, Inc., 7.25%, 2015 400,000 390,000 Fisher Scientific International, Inc., 6.125%, 2015 1,500,000 1,458,750 HCA, Inc., 8.75%, 2010 960,000 1,026,611 HCA, Inc., 6.375%, 2015 740,000 701,023 Omnicare, Inc., 6.875%, 2015 760,000 737,200 Owens & Minor, Inc., 6.35%, 2016 970,000 951,120 Triad Hospitals, Inc., 7%, 2013 315,000 305,156 --------------- $ 8,107,602 ------------------------------------------------------------------------------------------------ Metals & Mining - 0.9% ------------------------------------------------------------------------------------------------ Codelco, Inc., 5.625%, 2035 (a) $ 552,000 $ 494,255 Foundation PA Coal Co., 7.25%, 2014 900,000 904,500 Ispat Inland ULC, 9.75%, 2014 1,200,000 1,342,500 Massey Energy Co., 6.875%, 2013 (a) 785,000 753,600 Peabody Energy Corp., 5.875%, 2016 425,000 398,437 Peabody Energy Corp., "B", 6.875%, 2013 355,000 355,000 U.S. Steel Corp., 9.75%, 2010 413,000 443,975 --------------- $ 4,692,267 ------------------------------------------------------------------------------------------------ Mortgage Backed - 13.6% ------------------------------------------------------------------------------------------------ Fannie Mae, 4.845%, 2013 $ 251,917 $ 240,810 Fannie Mae, 4.1%, 2013 942,224 866,397 Fannie Mae, 4.19%, 2013 796,800 734,699 Fannie Mae, 3.81%, 2013 584,655 529,037 Fannie Mae, 4.6%, 2014 759,991 713,664 Fannie Mae, 4.667%, 2014 1,343,004 1,264,911 Fannie Mae, 4.519%, 2014 906,209 845,736 Fannie Mae, 4.77%, 2014 593,248 560,844 Fannie Mae, 4.56%, 2015 318,496 296,222 Fannie Mae, 4.665%, 2015 257,927 241,549 Fannie Mae, 4.7%, 2015 246,095 230,995 Fannie Mae, 4.89%, 2015 173,356 164,737 Fannie Mae, 4.74%, 2015 600,000 563,731 Fannie Mae, 4.87%, 2015 519,609 492,712 Fannie Mae, 4.925%, 2015 1,935,921 1,842,324 Fannie Mae, 4.815%, 2015 600,000 565,872 Fannie Mae, 6%, 2016 - 2034 6,566,849 6,564,636 Fannie Mae, 5.5%, 2019 - 2035 41,275,166 39,994,371 Fannie Mae, 4.88%, 2020 573,170 555,613 Fannie Mae, 6.5%, 2032 - 2033 3,410,269 3,449,800 Freddie Mac, 6%, 2034 2,259,396 2,240,264 Freddie Mac, 5.5%, 2034 7,978,615 7,719,539 --------------- $ 70,678,463 ------------------------------------------------------------------------------------------------ Natural Gas - Distribution - 0.1% ------------------------------------------------------------------------------------------------ AmeriGas Partners LP, 7.25%, 2015 $ 470,000 $ 458,250 AmeriGas Partners LP, 7.125%, 2016 175,000 168,437 --------------- $ 626,687 ------------------------------------------------------------------------------------------------ Natural Gas - Pipeline - 1.2% ------------------------------------------------------------------------------------------------ Atlas Pipeline Partners LP, 8.125%, 2015 (a) $ 375,000 $ 382,500 CenterPoint Energy Resources Corp., 7.875%, 2013 1,600,000 1,757,762 Colorado Interstate Gas Co., 5.95%, 2015 170,000 158,788 Kinder Morgan Energy Partners, 7.125%, 2012 2,000,000 2,074,200 Magellan Midstream Partners LP, 5.65%, 2016 311,000 298,039 Southern Natural Gas Co., Inc., 8.875%, 2010 550,000 582,224 Williams Cos., Inc., 8.75%, 2032 800,000 896,000 --------------- $ 6,149,513 ------------------------------------------------------------------------------------------------ Network & Telecom - 1.7% ------------------------------------------------------------------------------------------------ Citizens Communications Co., 9.25%, 2011 $ 815,000 $ 885,294 Citizens Communications Co., 9%, 2031 405,000 425,250 Deutsche Telekom International Finance B.V., 8.25%, 2030 1,500,000 1,733,769 Nordic Telephone Co. Holdings, 8.875%, 2016 (a) 180,000 185,850 Qwest Corp., 7.875%, 2011 860,000 884,725 Qwest Corp., 8.875%, 2012 450,000 482,625 Telecom Italia Capital, 6%, 2034 1,000,000 866,322 Telefonica Europe B.V., 7.75%, 2010 1,000,000 1,066,892 Verizon New York, Inc., 6.875%, 2012 2,542,000 2,594,424 --------------- $ 9,125,151 ------------------------------------------------------------------------------------------------ Oil Services - 0.1% ------------------------------------------------------------------------------------------------ Basic Energy Services, Inc., 7.125%, 2016 (a) $ 130,000 $ 126,100 GulfMark Offshore, Inc., 7.75%, 2014 435,000 429,562 --------------- $ 555,662 ------------------------------------------------------------------------------------------------ Oils - 0.7% ------------------------------------------------------------------------------------------------ Premcor Refining Group, Inc., 7.5%, 2015 $ 3,550,000 $ 3,677,335 ------------------------------------------------------------------------------------------------ Printing & Publishing - 0.5% ------------------------------------------------------------------------------------------------ Dex Media East LLC, 9.875%, 2009 $ 565,000 $ 598,900 Dex Media West LLC, 9.875%, 2013 1,527,000 1,664,430 MediaNews Group, Inc., 6.875%, 2013 515,000 484,100 --------------- $ 2,747,430 ------------------------------------------------------------------------------------------------ Railroad & Shipping - 0.6% ------------------------------------------------------------------------------------------------ TFM S.A. de C.V., 9.375%, 2012 $ 2,809,000 $ 2,991,585 ------------------------------------------------------------------------------------------------ Real Estate - 0.5% ------------------------------------------------------------------------------------------------ EOP Operating LP, 4.75%, 2014 $ 1,500,000 $ 1,369,932 HRPT Properties Trust, 6.25%, 2016 1,324,000 1,317,483 --------------- $ 2,687,415 ------------------------------------------------------------------------------------------------ Restaurants - 0.3% ------------------------------------------------------------------------------------------------ YUM! Brands, Inc., 8.875%, 2011 $ 1,500,000 $ 1,678,657 ------------------------------------------------------------------------------------------------ Retailers - 0.7% ------------------------------------------------------------------------------------------------ Couche-Tard, Inc., 7.5%, 2013 $ 420,000 $ 423,150 Dollar General Corp., 8.625%, 2010 315,000 335,475 Gap, Inc., 9.55%, 2008 940,000 1,015,644 GSC Holdings Corp., 8%, 2012 (a) 250,000 248,750 Limited Brands, Inc., 5.25%, 2014 1,100,000 1,015,304 Rite Aid Corp., 8.125%, 2010 365,000 367,737 Steinway Musical Instruments, Inc., 7%, 2014 (a) 305,000 299,663 --------------- $ 3,705,723 ------------------------------------------------------------------------------------------------ Steel - 0.1% ------------------------------------------------------------------------------------------------ Chaparral Steel Co., 10%, 2013 $ 515,000 $ 572,937 ------------------------------------------------------------------------------------------------ Supranational - 0.3% ------------------------------------------------------------------------------------------------ Central American Bank, 4.875%, 2012 (a) $ 1,426,000 $ 1,332,249 ------------------------------------------------------------------------------------------------ Telecommunications - Wireless - 1.2% ------------------------------------------------------------------------------------------------ AT&T Wireless Services, Inc., 8.75%, 2031 $ 1,500,000 $ 1,841,125 Centennial Communications Corp., 10.125%, 2013 240,000 258,600 Cingular Wireless LLC, 6.5%, 2011 1,700,000 1,756,204 Excelcomindo Finance Co., 7.125%, 2013 (a) 100,000 97,500 Nextel Communications, Inc., 5.95%, 2014 1,315,000 1,277,859 Rogers Wireless, Inc., 6.375%, 2014 550,000 523,875 Rogers Wireless, Inc., 7.5%, 2015 450,000 457,875 --------------- $ 6,213,038 ------------------------------------------------------------------------------------------------ Tobacco - 0.4% ------------------------------------------------------------------------------------------------ R.J. Reynolds Tobacco Holdings, Inc., 7.25%, 2012 $ 818,000 $ 811,865 R.J. Reynolds Tobacco Holdings, Inc., 7.3%, 2015 1,300,000 1,270,750 --------------- $ 2,082,615 ------------------------------------------------------------------------------------------------ Transportation - Services - 0.2% ------------------------------------------------------------------------------------------------ Hertz Corp., 8.875%, 2014 (a) $ 315,000 $ 327,600 Stena AB, 7%, 2016 375,000 349,688 Westinghouse Air Brake Technologies Corp., 6.875%, 2013 370,000 364,450 --------------- $ 1,041,738 ------------------------------------------------------------------------------------------------ U.S. Government Agencies - 2.8% ------------------------------------------------------------------------------------------------ Small Business Administration, 4.34%, 2024 $ 7,277,666 $ 6,671,555 Small Business Administration, 4.77%, 2024 5,582,028 5,268,469 Small Business Administration, 5.11%, 2025 2,526,531 2,427,355 --------------- $ 14,367,379 ------------------------------------------------------------------------------------------------ U.S. Treasury Obligations - 9.8% ------------------------------------------------------------------------------------------------ U.S. Treasury Bonds, 12%, 2013 $ 7,500,000 $ 8,581,057 U.S. Treasury Bonds, 10.625%, 2015 3,350,000 4,685,290 U.S. Treasury Bonds, 6.25%, 2023 (f) 8,000,000 8,789,376 U.S. Treasury Bonds, 5.375%, 2031 635,000 642,243 U.S. Treasury Notes, 4.25%, 2014 2,500,000 2,352,930 U.S. Treasury Notes, 4.125%, 2015 1,285,000 1,193,694 U.S. Treasury Notes, 9.875%, 2015 5,025,000 6,783,162 U.S. Treasury Notes, 4.5%, 2016 4,128,000 3,928,857 U.S. Treasury Notes, TIPS, 2%, 2014 10,982,119 10,664,241 U.S. Treasury Notes, TIPS, 1.625%, 2015 3,772,561 3,539,575 --------------- $ 51,160,425 ------------------------------------------------------------------------------------------------ Utilities - Electric Power - 3.9% ------------------------------------------------------------------------------------------------ Allegheny Energy Supply Co. LLC, 8.25%, 2012 (a) $ 370,000 $ 396,825 DPL, Inc., 6.875%, 2011 634,000 657,624 Duke Capital Corp., 8%, 2019 1,350,000 1,544,075 Edison Mission Energy, 7.75%, 2016 (a) 385,000 381,150 Empresa Nacional de Electricidad S.A., 8.35%, 2013 1,269,000 1,381,428 Enersis S.A., 7.375%, 2014 1,273,000 1,311,615 FirstEnergy Corp., 6.45%, 2011 4,199,000 4,288,985 HQI Transelec Chile S.A., 7.875%, 2011 1,500,000 1,592,160 Midwest Generation LLC, 8.75%, 2034 315,000 337,050 Mirant North America LLC, 7.375%, 2013 (a) 555,000 548,063 MSW Energy Holdings LLC, 7.375%, 2010 545,000 547,725 Nevada Power Co., 5.875%, 2015 900,000 862,419 NorthWestern Corp., 5.875%, 2014 1,435,000 1,403,330 NRG Energy, Inc., 7.375%, 2016 1,110,000 1,111,388 Reliant Resources, Inc., 9.5%, 2013 235,000 237,350 System Energy Resources, Inc., 5.129%, 2014 (a) 2,255,683 2,174,208 TXU Corp., 5.55%, 2014 570,000 523,564 TXU Energy Co., 7%, 2013 1,220,000 1,260,597 --------------- $ 20,559,556 ------------------------------------------------------------------------------------------------ TOTAL BONDS (IDENTIFIED COST, $524,311,410) $ 514,584,787 ------------------------------------------------------------------------------------------------ Common Stocks - 0.0% ------------------------------------------------------------------------------------------------ Printing & Publishing - 0.0% ------------------------------------------------------------------------------------------------ Golden Books Family Entertainment, Inc. (n) 3,683 $ 0 ------------------------------------------------------------------------------------------------ Specialty Chemicals - 0.0% ------------------------------------------------------------------------------------------------ Sterling Chemicals, Inc. (n) 1 $ 13 ------------------------------------------------------------------------------------------------ TOTAL COMMON STOCKS (IDENTIFIED COST, $0) $ 13 ------------------------------------------------------------------------------------------------ Convertible Preferred Stocks - 0.1% ------------------------------------------------------------------------------------------------ Automotive - 0.1% ------------------------------------------------------------------------------------------------ General Motors Corp., "B", 5.25% (Identified Cost, $263,915) 17,225 $ 302,643 ------------------------------------------------------------------------------------------------ Warrants - 0.0% ------------------------------------------------------------------------------------------------ STRIKE FIRST PRICE EXERCISE ------------------------------------------------------------------------------------------------ Business Services - 0.0% ------------------------------------------------------------------------------------------------ Loral Space & Communications Ltd. (n) $ 0.14 1/28/97 1,625 $0 Loral Space & Communications Ltd. (n) 0.14 1/28/97 750 0 ------------------------------------------------------------------------------------------------ Specialty Chemicals - 0.0% ------------------------------------------------------------------------------------------------ Sterling Chemicals, Inc. (n) 52.00 12/31/02 1 $0 ------------------------------------------------------------------------------------------------ TOTAL WARRANTS (IDENTIFIED COST, $29,434) $ 0 ------------------------------------------------------------------------------------------------ Short-Term Obligations - 1.7% ------------------------------------------------------------------------------------------------ Edison Asset Securitization LLC, 5.06%, due 6/01/06, at Amortized Cost and Value (t)(y) $ 8,650,000 $ 8,650,000 ------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS (IDENTIFIED COST, $533,254,759) (k) $ 523,537,443 ------------------------------------------------------------------------------------------------ Other Assets, Less Liabilities - (0.4)% (1,924,166) ------------------------------------------------------------------------------------------------ NET ASSETS - 100.0% $ 521,613,277 ------------------------------------------------------------------------------------------------ (a) Security exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $54,303,047, representing 10.4% of net assets. (f) All or a portion of the security has been segregated as collateral for an open futures contract. (i) Interest only security for which the trust receives interest on notional principal (Par amount). Par amount shown is the notional principal and does not reflect the cost of the security. (k) As of May 31, 2006, the trust held securities fair valued in accordance with the policies adopted by the Board of Trustees, aggregating $502,587,160 and 96.00% of market value, of which 96.00% of market value was provided by an independent pricing service using an evaluated bid. (n) Non-income producing security. (t) Security exempt from registration with the U.S. Securities and Exchange Commission under Section 4(2) of the Securities Act of 1933. (y) The rate shown represents an annualized yield at time of purchase. The following abbreviations are used in the Portfolio of Investments and are defined: FRN Floating Rate Note. The interest rate is the rate in effect as of period end. TIPS Treasury Inflation Protected Security Abbreviations have been used throughout this report to indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below: AUD Australian Dollar GBP British Pound CLP Chilean Peso JPY Japanese Yen CNY Chinese Yuan Renminbi NZD New Zealand Dollar EUR Euro TRY Turkish Lira FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Sales and Purchases in the table below are reported by currency. NET UNREALIZED CONTRACTS TO SETTLEMENT CONTRACTS APPRECIATION DELIVER/RECEIVE DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION) -------------------------------------------------------------------------------------------------------- SALES ------------------------------------------------------------------------------------------------------- AUD 6,837,378 6/08/06-6/19/06 $ 5,223,251 $5,141,794 $ 81,457 EUR 79,291,220 6/08/06-7/17/06 96,892,572 101,638,469 (4,745,897) GBP 19,182,069 6/05/06-8/02/06 34,624,192 35,861,054 (1,236,862) NZD 22,360,296 6/06/06-6/26/06 13,728,272 14,184,713 (456,441) ------------------------------------------------------------------------------------------------------- $150,468,287 $156,826,030 $(6,357,743) ------------------------------------------------------------------------------------------------------- PURCHASES ------------------------------------------------------------------------------------------------------- AUD 5,150,171 6/08/06-6/19/06 $ 3,931,598 $3,873,122 $ (58,476) CLP 1,360,389,921 6/30/06 2,589,246 2,550,651 (38,595) CNY 42,072,400 6/06/06 5,280,171 5,246,328 (33,843) EUR 857,718 6/13/06 1,098,817 1,099,389 572 GBP 10,728,550 6/05/06 20,015,535 20,048,848 33,313 JPY 298,100,968 6/08/06 2,635,613 2,648,221 12,608 NZD 12,175,332 6/06/06-6/19/06 7,666,017 7,722,143 56,126 TRY 2,033,507 6/26/06 1,294,815 1,283,762 (11,053) ------------------------------------------------------------------------------------------------------- $ 44,511,812 $44,472,464 $ (39,348) ------------------------------------------------------------------------------------------------------- At May 31, 2006, forward foreign currency purchases and sales under master netting agreements excluded above amounted to a net payable of $101,815 with Merrill Lynch International. FUTURES CONTRACTS OUTSTANDING AT MAY 31, 2006: UNREALIZED EXPIRATION APPRECIATION/ DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION) -----------------------------------------------------------------------------------------------------------------= U.S. Treasury Bond (Long) 50 $5,310,938 Sep-06 $(32,206) U.S. Treasury Note 10 year (Short) 88 9,233,125 Sep-06 45,783 ----------------------------------------------------------------------------------------------------------------- $ 13,577 ----------------------------------------------------------------------------------------------------------------- CREDIT DEFAULT SWAPS UNREALIZED NOTIONAL PRINCIPAL APPRECIATION EXPIRATION AMOUNT OF CONTRACT DESCRIPTION (DEPRECIATION) --------------------------------------------------------------------------------------------------------------- 3/20/11 $1,270,000 Agreement between the trust and Citibank, N.A. $ (503) to exchange the credit risk of AutoZone, Inc. As a buyer of protection, the trust agrees to pay Citibank N.A. quarterly at a fixed annual rate of 0.65% of the notional amount of $1,270,000 until maturity on March 20, 2011. If AutoZone, Inc. experiences one of the following credit events: bankruptcy, failure to pay, or a restructuring, the trust would then purchase $1,270,000 par of AutoZone bonds at the post credit event market price, and then deliver those bonds to Citibank N.A., who in turn would deliver $1,270,000 in cash to the trust. 3/20/11 $2,700,000 Agreement between the trust and Merrill Lynch (27,400) Capital Services to exchange the credit risk of Kohls Corp. As a buyer of protection, the trust agrees to pay Merrill Lynch quarterly at a fixed annual rate of 0.42% of the notional amount of $2,700,000 until maturity on March 20, 2011. If Kohls Corp. experiences one of the following credit events: bankruptcy, failure to pay, or a restructuring, the trust would then purchase $2,700,000 par of Kohls bonds at the post credit event market price, and then deliver those bonds to Merrill Lynch, who in turn would deliver $2,700,000 in cash to the trust. 3/20/11 $2,500,000 Agreement between the trust and Merrill Lynch (7,751) Capital Services to exchange the credit risk of New York Times Co. As a buyer of protection, the trust agrees to pay Merrill Lynch quarterly at a fixed annual rate of 0.43% of the notional amount of $2,500,000 until maturity on March 20, 2011. If New York Times Co. experiences one of the following credit events: bankruptcy, failure to pay, or a restructuring, the trust would then purchase $2,500,000 par of New York Times bonds at the post credit event market price, and then deliver those bonds to Merrill Lynch who in turn would deliver $2,500,000 in cash to the trust. -------- $(35,654) At May 31, 2006 the trust had sufficient cash and/or securities to cover any commitments under these derivative contracts. SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statement of Assets and Liabilities (unaudited) This statement represents your trust's balance sheet, which details the assets and liabilities comprising the total value of the trust. AT 5/31/06 ASSETS ------------------------------------------------------------------------------------------------------ Investments, at value (identified cost, $533,254,759) $523,537,443 Cash 223,025 Foreign currency, at value (identified cost, $29,042) 28,891 Receivable for forward foreign currency exchange contracts 327,445 Receivable for daily variation margin on open futures contracts 10,500 Interest receivable 8,101,296 Other assets 12,717 ------------------------------------------------------------------------------------------------------ Total assets $532,241,317 ------------------------------------------------------------------------------------------------------ LIABILITIES ------------------------------------------------------------------------------------------------------ Distributions payable $191,721 Payable for forward foreign currency exchange contracts 6,724,536 Payable for forward foreign currency exchange contracts subject to master netting agreements 101,815 Payable for investments purchased 3,119,165 Payable for treasury shares reacquired 159,167 Unrealized depreciation on credit default swaps 35,654 Payable to affiliates Management fee 20,920 Transfer agent and dividend disbursing costs 8,908 Administrative services fee 269 Payable for independent trustees' compensation 178,409 Accrued expenses and other liabilities 87,476 ------------------------------------------------------------------------------------------------------ Total liabilities $10,628,040 ------------------------------------------------------------------------------------------------------ Net assets $521,613,277 ------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF: ------------------------------------------------------------------------------------------------------ Paid-in capital $588,262,477 Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (16,086,671) Accumulated net realized gain (loss) on investments and foreign currency transactions (54,022,668) Undistributed net investment income 3,460,139 ------------------------------------------------------------------------------------------------------ Net assets $521,613,277 ------------------------------------------------------------------------------------------------------ Shares of beneficial interest outstanding (60,240,083 issued, less 4,601,344 treasury shares) 55,638,739 ------------------------------------------------------------------------------------------------------ Net asset value per share (net assets of $521,613,277 / 55,638,739 shares of beneficial interest outstanding) $9.38 ------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Statement of Operations (unaudited) This statement describes how much your trust earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by trust operations. SIX MONTHS ENDED 5/31/06 NET INVESTMENT INCOME ------------------------------------------------------------------------------------------------------- Income Interest $14,131,401 Dividends 16,734 ------------------------------------------------------------------------------------------------------- Total investment income $14,148,135 ------------------------------------------------------------------------------------------------------- Expenses Management fee $1,570,119 Transfer agent and dividend disbursing costs 55,086 Administrative services fee 38,563 Independent trustees' compensation 40,669 Custodian fee 115,978 Shareholder communications 82,195 Auditing fees 29,415 Legal fees 4,832 Miscellaneous 117,251 ------------------------------------------------------------------------------------------------------- Total expenses $2,054,108 ------------------------------------------------------------------------------------------------------- Fees paid indirectly (40,991) Reduction of expenses by investment adviser (1,842) ------------------------------------------------------------------------------------------------------- Net expenses $2,011,275 ------------------------------------------------------------------------------------------------------- Net investment income $12,136,860 ------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ------------------------------------------------------------------------------------------------------- Realized gain (loss) (identified cost basis) Investment transactions $(967,626) Futures contracts 434,334 Swap transactions (2,079) Foreign currency transactions (1,046,344) ------------------------------------------------------------------------------------------------------- Net realized gain (loss) on investments and foreign currency transactions $(1,581,715) ------------------------------------------------------------------------------------------------------- Change in unrealized appreciation (depreciation) Investments $(2,981,889) Futures contracts (12,286) Swap transactions (35,654) Translation of assets and liabilities in foreign currencies (5,731,261) ------------------------------------------------------------------------------------------------------- Net unrealized gain (loss) on investments and foreign currency translation $(8,761,090) ------------------------------------------------------------------------------------------------------- Net realized and unrealized gain (loss) on investments and foreign currency $(10,342,805) ------------------------------------------------------------------------------------------------------- Change in net assets from operations $1,794,055 ------------------------------------------------------------------------------------------------------- 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.
SIX MONTHS ENDED YEAR ENDED 5/31/06 11/30/05 (UNAUDITED) CHANGE IN NET ASSETS ------------------------------------------------------------------------------------------------------ FROM OPERATIONS ------------------------------------------------------------------------------------------------------ Net investment income $12,136,860 $25,609,734 Net realized gain (loss) on investments and foreign currency transactions (1,581,715) 20,004,433 Net unrealized gain (loss) on investments and foreign currency translation (8,761,090) (24,950,918) ------------------------------------------------------------------------------------------------------ Change in net assets from operations $1,794,055 $20,663,249 ------------------------------------------------------------------------------------------------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------ From net investment income $(14,117,181) $(29,042,810) ------------------------------------------------------------------------------------------------------ TRUST SHARE (PRINCIPAL) TRANSACTIONS ------------------------------------------------------------------------------------------------------ Cost of shares reacquired $(5,554,548) $(10,569,915) ------------------------------------------------------------------------------------------------------ Total change in net assets $(17,877,674) $(18,949,476) ------------------------------------------------------------------------------------------------------ NET ASSETS ------------------------------------------------------------------------------------------------------ At beginning of period 539,490,951 558,440,427 At end of period (including undistributed net investment income of $3,460,139 and $5,440,460, respectively) $521,613,277 $539,490,951 ------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS Financial Highlights The financial highlights table is intended to help you understand the trust's financial performance for the semiannual period and the past 5 fiscal 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.
SIX MONTHS YEARS ENDED 11/30 ENDED ---------------------------------------------------------------------- 5/31/06 2005 2004 2003 2002 2001 (UNAUDITED) Net asset value, beginning of period $9.58 $9.71 $9.58 $9.09 $9.17 $9.20 ------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS (x) ------------------------------------------------------------------------------------------------------------------------------ Net investment income (d) $0.22 $0.45 $0.49 $0.49 $0.52 $0.67 Net realized and unrealized gain (loss) on investments and foreign currency (0.18) (0.09) 0.17 0.51 (0.03) (0.01) ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations $0.04 $0.36 $0.66 $1.00 $0.49 $0.66 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------------------------------ From net investment income $(0.25) $(0.51) $(0.55) $(0.53) $(0.49) $(0.64) From paid-in capital -- -- -- -- (0.09) (0.05) ------------------------------------------------------------------------------------------------------------------------------ Total distributions declared to shareholders $(0.25) $(0.51) $(0.55) $(0.53) $(0.58) $(0.69) ------------------------------------------------------------------------------------------------------------------------------ Net increase from repurchase of capital shares $0.01 $0.02 $0.02 $0.02 $0.01 $0.00(w) ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.38 $9.58 $9.71 $9.58 $9.09 $9.17 ------------------------------------------------------------------------------------------------------------------------------ Per share market value, end of period $8.30 $8.43 $8.71 $8.78 $8.26 $8.35 ------------------------------------------------------------------------------------------------------------------------------ Total return at market value (%)(r)(s) 1.41(n) 2.57 5.52 13.02 5.99 6.92 ------------------------------------------------------------------------------------------------------------------------------ RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ------------------------------------------------------------------------------------------------------------------------------ Expenses before expense reductions (f) 0.78(a) 0.79 0.80 0.83 0.85 0.91 Expenses after expense reductions (f) 0.78(a) 0.79 0.80 0.83 0.85 0.91 Net investment income (x) 4.56(a) 4.64 5.11 5.21 5.80 7.18 Portfolio turnover 28 73 70 129 137 98 Net assets at end of period (000 Omitted) $521,613 $539,491 $558,440 $561,900 $546,281 $556,614 ------------------------------------------------------------------------------------------------------------------------------ (a) Annualized. (d) Per share data are based on average shares outstanding. (f) Ratios do not reflect reductions from fees paid indirectly. (n) Not annualized. (r) Certain expenses have been reduced without which performance would have been lower. (s) From time to time the trust may receive proceeds from litigation settlements, without which performance would be lower. (w) Per share amount was less than $0.01. (x) Effective December 31, 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 30, 2002 have not been restated to reflect this change. SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS (unaudited) (1) BUSINESS AND ORGANIZATION MFS Charter Income Trust (the trust) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end management investment company. (2) SIGNIFICANT ACCOUNTING POLICIES GENERAL - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The trust can invest in foreign securities, including securities of emerging market issuers. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country's legal, political, and economic environment. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries. INVESTMENT VALUATIONS - Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as reported by an independent pricing service. Values of debt instruments obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics and other market data. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as reported by an independent pricing service on the market or exchange on which they are primarily traded. For securities for which there were no sales reported that day, equity securities are generally valued at the last quoted daily bid quotation as reported by an independent pricing service on the market or exchange on which they are primarily traded. Short-term instruments with a maturity at issuance of 397 days or less are generally valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as reported by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as reported by an independent pricing service on the market on which they are primarily traded. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates reported by an independent pricing service for proximate time periods. Swaps are generally valued at a broker-dealer bid quotation. Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker-dealer bid quotation. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates reported by an independent pricing service. The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the trust's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the trust's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments. These investments are generally valued at fair value based on information from independent pricing services. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the trust's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the trust's net asset value may differ from quoted or published prices for the same investments. REPURCHASE AGREEMENTS - The trust may enter into repurchase agreements with institutions that the trust's investment adviser has determined are creditworthy. Each repurchase agreement is recorded at cost. The trust requires that the securities collateral in a repurchase transaction be transferred to the custodian in a manner sufficient to enable the trust to obtain those securities in the event of a default under the repurchase agreement. The trust monitors, on a daily basis, the value of the collateral to ensure that its value, including accrued interest, is greater than amounts owed to the trust under each such repurchase agreement. The trust, along with other affiliated entities of Massachusetts Financial Services Company (MFS), may utilize a joint trading account for the purpose of entering into one or more repurchase agreements. INFLATION-ADJUSTED DEBT SECURITIES - The trust invests in inflation-adjusted debt securities issued by the U.S. Treasury. The trust may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted by references to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security's original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation. FOREIGN CURRENCY TRANSLATION - Purchases and sales of foreign investments, income, and expenses are converted into U.S. dollars based upon currency exchange rates prevailing on the respective dates of such transactions. Gains and losses attributable to foreign currency exchange rates on sales of securities are recorded for financial statement purposes as net realized gains and losses on investments. Gains and losses attributable to foreign exchange rate movements on income and expenses are recorded for financial statement purposes as foreign currency transaction gains and losses. That portion of both realized and unrealized gains and losses on investments that results from fluctuations in foreign currency exchange rates is not separately disclosed. DERIVATIVE RISK - The trust may invest in derivatives for hedging or non- hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the trust uses derivatives as an investment to gain market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative's original cost. Derivative instruments include forward foreign currency exchange contracts, swap agreements, and futures contracts. FUTURES CONTRACTS - The trust may enter into futures contracts for the delayed delivery of securities or currency, or contracts based on financial indices at a fixed price on a future date. In entering such contracts, the trust is required to deposit with the broker either in cash or securities an amount equal to a certain percentage of the contract amount. Subsequent payments are made or received by the trust each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gains or losses by the trust. Upon entering into such contracts, the trust bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, the trust may not achieve the anticipated benefits of the futures contracts and may realize a loss. FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS - The trust may enter into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. Risks may arise upon entering into these contracts from the potential inability of counterparties to meet the terms of their contracts and from unanticipated movements in the value of the contract. The trust may enter into forward foreign currency exchange contracts for hedging purposes as well as for non-hedging purposes. For hedging purposes, the trust may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. The trust may also use contracts in a manner intended to protect foreign currency denominated securities from declines in value due to unfavorable exchange rate movements. For non-hedging purposes, the trust may enter into contracts with the intent of changing the relative exposure of the trust's portfolio of securities to different currencies to take advantage of anticipated changes. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. On contract settlement date, the gains or losses are recorded as realized gains or losses on foreign currency transactions. SWAP AGREEMENTS - The trust may enter into swap agreements. A swap is an exchange of cash payments between the trust and another party. Net cash payments are exchanged at specified intervals and are recorded as a realized gain or loss in the Statement of Operations. The value of the swap is adjusted daily and the change in value is recorded as unrealized appreciation or depreciation in the Statement of Operations. Risks may arise upon entering into these agreements from the potential inability of counterparties to meet the terms of their contract and from unanticipated changes in the value of the financial index on which the swap agreement is based. CREDIT DEFAULT SWAPS - The trust may enter into credit default swaps to limit or to reduce risk exposure of the trust to credit events such as bankruptcy, failure to pay, or a restructuring of corporate and sovereign issuers. The trust may also use credit default swaps to create direct or synthetic short or long exposure to domestic or foreign corporate debt securities or certain sovereign debt securities to which the trust is not otherwise exposed. In a credit default swap, one party makes a stream of payments to another party in exchange for the right to receive a specified return in the event of a default by a third party, such as a corporate issuer or foreign issuer on its obligation. 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. At May 31, 2006, there were no securities on loan. 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. Certain dividends from foreign securities will be recorded when the trust is informed of the dividend if such information is obtained subsequent to the ex- dividend date. Dividend and interest payments received in additional securities are recorded on the ex-dividend or ex-interest date in an amount equal to the value of the security on such date. The trust may receive proceeds from litigation settlements involving its portfolio holdings. Any proceeds received are reflected in realized gain/loss in the Statement of Operations, or in unrealized gain/loss if the security is still held by the trust. FEES PAID INDIRECTLY - The trust's custody fee is reduced according to an arrangement that measures the value of cash deposited with the custodian by the trust. This amount, for the six months ended May 31, 2006, is shown as a reduction of total expenses on the Statement of Operations. TAX MATTERS AND DISTRIBUTIONS - The trust intends to continue to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. Accordingly, no provision for federal income tax is required in the financial statements. Foreign taxes, if any, have been accrued by the trust in the accompanying financial statements. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes. Book/tax differences primarily relate to amortization and accretion of debt securities, defaulted bonds, wash sale loss deferrals, straddle loss deferrals, foreign currency transactions, and derivative transactions. The tax character of distributions made during the current period will be determined at fiscal year end. The tax character of distributions declared to shareholders is as follows: NOVEMBER 30, 2005 NOVEMBER 30, 2004 Ordinary income (including any short-term capital gains) $29,042,810 $31,836,028 The federal tax cost and the tax basis components of distributable earnings were as follows: AS OF MAY 31, 2006 Cost of investments $541,116,892 --------------------------------------------------------- Gross appreciation $4,824,317 Gross depreciation (22,403,766) --------------------------------------------------------- Net unrealized appreciation (depreciation) $(17,579,449) AS OF NOVEMBER 30, 2005 Undistributed ordinary income 6,866,994 Capital loss carryforwards (45,279,622) Other temporary differences (1,990,248) Net unrealized appreciation (depreciation) (13,923,198) The aggregate cost above includes prior fiscal year end tax adjustments. As of May 31, 2006, the trust had available capital loss carryforwards to offset future realized gains. Such losses expire as follows: November 30, 2009 $(21,374,410) November 30, 2010 (23,905,212) ----------------------------------------------------- $(45,279,622) (3) TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISER - The trust has an investment advisory agreement with MFS to provide overall investment advisory and administrative services, and general office facilities. The management fee is computed daily and paid monthly at an annual rate of 0.32% of the trust's average daily net assets and 4.57% of gross investment income. The management fee, from net assets and gross investment income, incurred for the six months ended May 31, 2006 was equivalent to an annual effective rate of 0.59% 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 six months ended May 31, 2006, these fees amounted to $37,200. MFSC also receives payment from the trust for out-of-pocket expenses paid by MFSC on behalf of the trust. For the six months ended May 31, 2006, these costs amounted to $11,868. 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. From July 1, 2005 through March 31, 2006, the trust's annual fixed amount was $10,000. Effective April 1, 2006, the trust's annual fixed amount is $17,500. The administrative services fee incurred for the six months ended May 31, 2006 was equivalent to an annual effective rate of 0.0145% of the trust's average daily net assets. TRUSTEES' AND OFFICERS' COMPENSATION - The trust pays compensation to Independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The trust does not pay compensation directly to Trustees or to officers of the trust who are also officers of the investment adviser, all of whom receive remuneration for their services to the trust from MFS. Certain officers and Trustees of the trust are officers or directors of MFS and MFSC. The trust has an unfunded, defined benefit plan for certain retired Independent Trustees which resulted in a pension expense of $2,496. The trust also has an unfunded retirement benefit deferral plan for certain Independent Trustees which resulted in an expense of $1,017. Both amounts are included in Independent trustees' compensation for the six months ended May 31, 2006. The deferred liability for retirement benefits payable to certain Trustees under both plans amounted to $155,871 at May 31, 2006, and is included in payable for independent trustees' compensation. DEFERRED TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan) Independent Trustees previously were allowed to elect to defer receipt of all or a portion of their annual compensation. Trustees are no longer allowed to defer compensation under the Plan. Amounts previously deferred are treated as though equivalent dollar amounts had been invested in shares of the trust or other MFS funds selected by the Trustee. Deferred amounts represent an unsecured obligation of the trust until distributed in accordance with the Plan. Included in other assets and payable for independent trustees' compensation is $12,717 of Deferred Trustees' Compensation. OTHER - This trust and certain other MFS funds (the funds) have entered into a services agreement (the Agreement) which provides for payment of fees by the funds to Tarantino LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the Agreement with Tarantino LLC at any time under the terms of the Agreement. For the six months ended May 31, 2006, the fee paid to Tarantino LLC was $2,195. MFS has agreed to reimburse the trust for a portion of the payments made by the funds to Tarantino LLC in the amount of $1,842, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO. (4) PORTFOLIO SECURITIES Purchases and sales of investments, other than purchased option transactions and short-term obligations, were as follows: PURCHASES SALES U.S. government securities $7,938,390 $6,294,306 ------------------------------------------------------------------------------- Investments (non-U.S. government securities) $142,060,697 $139,263,957 ------------------------------------------------------------------------------- (5) SHARES OF BENEFICIAL INTEREST The trust's Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. The Trustees have authorized the repurchase by the trust of up to 10% annually of its own shares of beneficial interest. The trust repurchased and retired 655,100 shares of beneficial interest during the six months ended May 31, 2006 at an average price per share of $8.35 and a weighted average discount of 10.84% per share. The trust repurchased and retired 1,219,000 shares of beneficial interest during the year ended November 30, 2005 at an average price per share of $8.67 and a weighted average discount of 10.39% per share. Transactions in trust shares were as follows: SIX MONTHS ENDED YEAR ENDED MAY 31, 2006 NOVEMBER 30, 2005 SHARES AMOUNT SHARES AMOUNT Treasury shares reacquired (655,100) $(5,554,548) (1,219,100) $(10,569,915) (6) LINE OF CREDIT The trust and other affiliated funds participate in a $1 billion unsecured committed line of credit provided by a syndication of banks under a credit agreement. In addition, the trust and other affiliated funds have established uncommitted borrowing arrangements with certain banks. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, at a rate equal to the Federal Reserve funds rate plus 0.35%. In addition, a commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. The commitment fee allocated to the trust for the six months ended May 31, 2006 was $2,681 and is included in miscellaneous expense on the Statement of Operations. The trust had no significant borrowings during the six months ended May 31, 2006. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Trustees and Shareholders of the MFS Charter Income Trust: We have reviewed the accompanying statement of assets and liabilities of the MFS Charter Income Trust (the Trust), including the portfolio of investments, as of May 31, 2006, and the related statements of operations, changes in net assets, and financial highlights for the six-month period ended May 31, 2006. These interim financial statements are the responsibility of the Trust's management. We conducted our review in accordance with the standards of the Public Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with U.S. generally accepted accounting principles. We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the statement of changes in net assets for the year ended November 30, 2005, and financial highlights for each of the five years in the period ended November 30, 2005, and in our report dated January 10, 2006, we expressed an unqualified opinion on such statement of changes in net assets and financial highlights. ERNST & YOUNG LLP Boston, Massachusetts July 14, 2006 BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT A discussion regarding the Board's most recent review and renewal of the Fund's investment advisory agreement is available by clicking on the fund's name under "Select a fund" on the MFS Web site (mfs.com). PROXY VOTING POLICIES AND INFORMATION A general description of the MFS funds' proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The trust will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The trust's Form N-Q may be reviewed and copied at the: Public Reference Room Securities and Exchange Commission 100 F Street, NE, Room 1580 Washington, D.C. 20549 Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-551-5850. The trust's Form N-Q is available on the EDGAR database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address. A shareholder can also obtain the quarterly portfolio holdings report at mfs.com. 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: MFS Service Center, Inc. P.O. Box 55024 Boston, MA 02205-5024 NUMBER OF SHAREHOLDERS As of May 31, 2006, our records indicate that there are 3,811 registered shareholders and approximately 32,596 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: MFS Service Center, Inc. P.O. Box 55024 Boston, MA 02205-5024 1-800-637-2304 M F S(SM) INVESTMENT MANAGEMENT(R) (C)2006 MFS Investment Management(R) 500 Boylston Street, Boston, MA 02116. MCR-SEM-07/06 43M ITEM 2. CODE OF ETHICS. The Registrant has not amended any provision in its Code of Ethics (the "Code") that relates to any element of the Code's definition enumerated in paragraph (b) of Item 2 of this Form N-CSR. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Not applicable for semi-annual reports. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Not applicable for semi-annual reports. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable for semi-annual reports. ITEM 6. SCHEDULE OF INVESTMENTS A schedule of investments for each series of the Registrant is included as part of the report to shareholders of such series under Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable for semi-annual reports. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. Not applicable because the portfolio manager(s) of the Registrant did not change from those set forth in the Registrant's most recent annual Form N-CSR. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS. ============================================================================================================= MFS CHARTER INCOME TRUST -------------------------------------------------------------------------------------------------------------
(D) (C) MAXIMUM NUMBER TOTAL NUMBER OF (OR APPROXIMATE (B) SHARES PURCHASED AS DOLLAR VALUE) OF (A) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS OR BE PURCHASED UNDER PERIOD SHARES PURCHASED PER SHARE PROGRAMS THE PLANS OR PROGRAMS ------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------- 12/1/05 - 12/31/05 103,600 $8.46 103,600 4,628,124 ------------------------------------------------------------------------------------------------------------- 1/1/06 - 1/31/06 100,400 $8.67 100,400 4,527,724 ------------------------------------------------------------------------------------------------------------- 2/1/06 - 2/28/06 84,300 $8.60 84,300 4,443,424 ------------------------------------------------------------------------------------------------------------- 3/1/06 - 3/31/06 161,800 $8.47 161,800 5,438,754 ------------------------------------------------------------------------------------------------------------- 4/1/06 - 4/30/06 73,100 $8.32 73,100 5,365,654 ------------------------------------------------------------------------------------------------------------- 5/1/06 - 5/31/06 131,900 $8.37 131,900 5,233,754 ------------------------------------------------------------------------------------------------------------- Total 655,100 $8.48 665,100 -------------------------------------------------------------------------------------------------------------
Note: The Board of Trustees approves procedures to repurchase Fund shares annually. The notification to shareholders of the program is included in 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 Fund shares that may be repurchased 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 Fund shares available for repurchase for the March 1, 2006 plan year are 5,600,554. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant's Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) as conducted within 90 days of the filing date of this 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 of the period covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit. (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. (b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed "filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. NOTICE A copy of the Amended and Restated Declaration of Trust of the Registrant is on file with the Secretary of State of the Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) MFS CHARTER INCOME TRUST ------------------------------------------------------------------ By (Signature and Title)* MARIA F. DWYER ----------------------------------------------------- Maria F. Dwyer, President Date: July 21, 2006 ------------- 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: July 21, 2006 ------------- By (Signature and Title)* TRACY ATKINSON ----------------------------------------------------- Tracy Atkinson, Treasurer (Principal Financial Officer and Accounting Officer) Date: July 21, 2006 ------------- * Print name and title of each signing officer under his or her signature.