[MFS LOGO](R)
INVESTMENT MANAGEMENT
MFS(R) SPECIAL
VALUE TRUST
ANNUAL REPORT o OCTOBER 31, 2002
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 6
Results of Shareholder Meetings ........................................... 9
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 18
Notes to Financial Statements ............................................. 22
Independent Auditors' Report .............................................. 29
Trustees and Officers ..................................................... 31
MFS(R) PRIVACY POLICY
At MFS(R), we are committed to protecting your privacy.
On behalf of the MFS Family of Funds(R), the MFS(R) Institutional Trusts, the
Vertex(SM) Funds, Massachusetts Financial Services Company, and certain
affiliates(1) (collectively, "MFS," "we," "us" or "our"), this privacy policy
outlines certain of our policies designed to maintain the privacy of your
nonpublic personal information.
Nonpublic personal information includes much of the information you provide to
us and the related information about you and your transactions involving your
MFS investment product or service. Examples of nonpublic personal information
include the information you provide on new account applications for MFS
investment products or services, your share balance or transactional history,
and the fact that you are a customer of MFS.
We may collect nonpublic personal information about you from the following
sources:
o information we receive from you on applications or other forms
o information about your transactions with us, our affiliates, or
others, and
o information we receive from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may disclose all of
the information we collect, as described above, to companies that perform
marketing services on our behalf or to other financial institutions with whom
we have joint marketing arrangements.
We restrict access to nonpublic personal information about you to personnel
who are necessary or appropriate to provide products or services to you. We
maintain physical, electronic, and procedural safeguards that comply with
federal regulations to guard your nonpublic personal information.
Our privacy policy applies only to individual MFS investors who have a direct
relationship with us. If you own MFS products or receive MFS investment
services in the name of a third-party broker-dealer, bank, investment adviser
or other financial service provider, that third-party's privacy policies may
apply to you and our privacy policy may not.
If you have any questions with respect to MFS' privacy policy, please call
1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time.
(1) MFS Institutional Advisors, Inc., Vertex Investment Management, Inc., MFS
Original Research Advisors, LLC, MFS Original Research Partners, LLC,
MFS(R) Heritage Trust Company(SM), and MFS Fund Distributors, Inc.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
As I write this in mid-November, the Dow Jones Industrial Average has just
recorded its second-best October ever(1) -- a hopeful sign in what has been a
bad year for investors in stocks and corporate bonds. Other types of bonds
that have had a great run so far in 2002 have demonstrated the value of
diversification. In our view, signals on the future direction of the economy
and the market remain decidedly mixed.
A RELAY RACE
In mid-November, we could describe the state of the U.S. economy as a relay
race against time involving two runners: the consumer, whose spending has
fueled the beginning of a recovery, and corporate spending, which has yet to
contribute much to the recovery. The hope is that corporate spending kicks in
so that the consumer can pass the baton before running out of steam. But at
this point, the near-term direction of consumer spending or corporate spending
and profits is difficult to predict. The result is that the economy seems to
us to be in a holding pattern as we wait for clear signs that things are
improving.
REASONS FOR OPTIMISM
Optimists would point out that wages, according to the U.S. Labor Department,
have been rising over the past year. This, in combination with historically
low interest rates and inflation, may enable the consumer to keep spending.
Perhaps the next good signal of consumer sentiment will be the level of retail
sales over the holiday season -- which should become clear about the time this
letter reaches your mailbox.
In the corporate arena, our research indicates that business spending overall
has at least stopped falling and that corporate earnings and spending could
trend upward in 2003. A hopeful sign is that business spending in the third
quarter of 2002 eked out its first increase in two years, according to a
preliminary report from the U.S. Commerce Department.
Pessimists, however, would counter that the outlook for corporate profits
remains very murky, that corporations could resort to further layoffs if
profits languish, and that the situation with Iraq adds to market uncertainty.
They would also point out that consumer confidence dropped to a nine-year low
in October, according to the Conference Board. (Optimists, however, would
question the value of confidence readings that have dropped while consumer
spending has remained strong.)
STAYING THE COURSE
With the economy in a holding pattern and markets extremely volatile, we think
it's important to remember the familiar investment strategies that we believe
apply in any market: Think long term. Be diversified. See crises as
opportunities. That's how we'd describe our approach to this volatile
environment -- which we think plays to our strength as research-based, bottom-
up, long-term investors. We would also point out that history has shown that
the market and the economy have been cyclical; downturns have usually been
followed by upturns.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman
MFS Investment Management(R)
November 15, 2002
(1) Source: The Wall St. Journal, November 1, 2002. The Dow Jones Industrial
Average (DJIA) is a price-weighted average of 30 blue-chip stocks that are
generally the leaders in their industry. It is not possible to invest
directly in an index.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed
MANAGEMENT REVIEW AND OUTLOOK
[Photo of John F. Addeo]
John F. Addeo
Dear Shareholders,
For the 12 months ended October 31, 2002, the trust provided a total return of
-43.54% based on its beginning and ending stock market prices and assuming the
reinvestment of any dividend and capital gain distributions paid during the
period. The trust's total return based on its net asset value (NAV) was
-3.02%. During the same period, the trust's benchmark, the Lehman Brothers
High Yield Bond Index (the Lehman Index), returned -5.49%. The Lehman Index
includes all fixed-income securities having a maximum quality rating from
Moody's Investors Service of "Ba1", a minimum amount outstanding of $150
million, and at least one year to maturity. Defaulted bonds are excluded from
the index.
The aftermath of September 11, 2001 negatively influenced markets last fall.
Deteriorating economic conditions, accounting scandals, a record number of
high-yield bonds that missed making interest and principal payments, and a
possible war with Iraq contributed to the market's continued decline in 2002.
Announcements of lower-than-expected corporate earnings were punished severely
by steep stock price declines and affected not only the stock of the reporting
company, but often its entire industry. Although these factors certainly
influenced the fund's market price performance, it was the announcement of a
change in the fund's dividend that had the greatest impact on the fund's stock
market price. In January 2002, the trust changed its annual distribution rate
from 11%, based on its initial offering price of $15 per share, to 10%, based
on its average daily net asset value. That announcement caused the market
price to decline and has continued to affect the fund's stock market price.
Despite market conditions and the change in dividend rate, the fund's net
asset value return, which reflects the value of the fund's underlying
securities, was better than that of its benchmark.
STRENGTH FROM BROADCASTING, ENERGY, AND MEXICAN AND RUSSIAN DEBT
The fund's NAV performance benefited from its fixed-income holdings in the
broadcasting and energy industries, exceptionally strong performance from our
holdings in Mexican and Russian debt, and our avoidance of utilities.
Broadcasting firms benefited from a rise in advertising revenues. Energy
prices increased as concerns about a possible conflict with Iraq mounted.
Economic and political reforms in Mexico and Russia have had a positive impact
on their debt. In fact, Mexican bonds, which are considered to be emerging
market quality, have been priced more in line with bonds issued by developed
countries such as the United States. Russia has become more politically stable
and privatization has appeared to be working, especially in the oil industry.
Selected stocks added to the fund's performance, including Nextel, Chesapeake
Energy, and Cooper Cameron. Nextel preferred stock was one of our most
successful holdings. Nextel experienced good cash flows and saw revenues rise.
The company has a large and loyal base of business subscribers who enjoy the
cost savings provided by its popular two-way messaging service. Chesapeake, a
natural gas producer, turned in strong results for the fund as did Cooper
Cameron, a manufacturer of oil and gas pressure control equipment.
WEAKNESS FROM EMERGING MARKET DEBT, HIGH YIELD, AND SELECTED STOCKS
Our positions in emerging market debt (except Mexico and Russia), our high-
yield bond holdings in the telecommunications and cable industries, and mixed
performance in the equity market caused the fund's NAV performance to suffer.
Despite good results earlier in the period, emerging market bonds have
underperformed at the end of the period. Even though the fund had very little
direct exposure to Brazil, the economic and political uncertainty in that
country hurt our holdings throughout Latin America. Charter Communications and
Adelphia were the worst performers among our corporate bond holdings because
of accounting problems at both cable companies.
The stock portion of the fund's portfolio reflected weak stock returns in
general; however, the fund's focus on value stocks (those that sell well below
what their financial statements may indicate is their real worth) helped to
prop up performance somewhat during the broad market declines the past year.
Specific issues hurt fund performance. Examples include Owens Illinois, whose
pending asbestos claims worry investors (even though those claims are covered
for the most part by the firm's insurance), and Calpine, an energy producer
with too much generating capacity for the current level of demand. Atlantis
Plastics, a plastic products manufacturer, also performed poorly as a result
of industry overcapacity, raw material price increases, and overall economic
weakness.
INCOME AND APPRECIATION POTENTIAL FROM 2002'S DECLINES
We have made a number of shifts in portfolio holdings to maintain both the
fund's 10% income objective and its capital appreciation potential. Although
past performance is no guarantee of future results, we believe the high-yield
market may be attractive long term because there is a historically high
difference in yield between high-yield bonds and U.S. Treasuries (the
principal value and interest on Treasury securities are guaranteed by the U.S.
government if held to maturity). In our view, that potential income may help
cushion potential near-term volatility. In addition, we have seen signs that
the rate at which companies fail to make interest or principal payments
appears to have stabilized.
We are searching for value among fallen technology and telecommunications
securities, two of the hardest hit industries in the past year. We believe
that many good companies that don't have accounting problems were taken down
by a few of their more aggressive competitors. We also feel that many BB-rated
collateralized mortgage-backed securities are stronger than their credit
ratings or prices indicate. In addition to offering attractive yields, these
bonds offer good capital appreciation potential, in our view.
We are generally optimistic about the future of the high-yield sector and the
stock market, although we expect continued volatility over the near term. We
will continue to seek out opportunities that offer compelling yields supported
by strong business fundamentals.
Respectfully,
/s/ John F. Addeo
John F. Addeo
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as state on the
cover. These views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
The portfolio is actively managed, and current holdings may be different.
It is not possible to invest directly in an index.
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PORTFOLIO MANAGER'S PROFILE
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JOHN F. ADDEO, CFA, IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R)
(MFS(R)) AND PORTFOLIO MANAGER OF THE HIGH-YIELD BOND PORTFOLIOS OF OUR
MUTUAL FUNDS 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.
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.
ALL PORTFOLIO MANAGERS AT MFS ARE SUPPORTED BY AN INVESTMENT STAFF OF OVER
160 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A GLOBAL, ISSUER-
ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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ADDRESS CHANGE
Please use our new mailing address, effective immediately:
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
OBJECTIVE: To maintain an annual distribution rate of 10% based on
its average daily net asset value (NAV), while seeking opportunities for
capital appreciation.
NEW YORK STOCK EXCHANGE SYMBOL: MFV
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PERFORMANCE SUMMARY
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(For the year ended October 31, 2002)
NET ASSET VALUE PER SHARE
October 31, 2001 $ 8.63
October 31, 2002 $ 7.50
NEW YORK STOCK EXCHANGE PRICE
October 31, 2001 $14.30
November 26, 2001 (high)* $15.80
October 10, 2002 (low)* $ 6.74
October 31, 2002 $ 7.25
*For the period November 1, 2001, through October 31, 2002.
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.
RISK CONSIDERATIONS
The portfolio may invest in derivative securities which may include futures
and options. These types of instruments can increase price fluctuation.
Investments in lower-rated securities may provide greater returns but may have
greater-than-average risk.
As a nondiversified portfolio, the portfolio invests in a limited number of
companies and may have more risk because a change in one security's value may
have a more significant effect on the portfolio's net asset value. An
investment in the portfolio is not a complete investment program.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
The trust's shares may trade at a discount to net asset value. Shareholders do
not have the right to cause the trust to repurchase their shares at net asset
value. The trust's shares also may trade at a premium to their net asset
value. When trust shares trade at a premium, buyers pay more than the asset
value underlying trust shares, and shares purchased at a premium would receive
less than the amount paid for them in the event of the trust's liquidation.
The trust's monthly distributions may include a return of capital to
shareholders. Distributions that are treated for federal income tax purposes
as a return of capital will reduce each shareholder's basis in his or her
shares and, to the extent the distribution exceeds such basis, will be treated
as gain to the shareholder from a sale of shares. Returns of shareholder
capital have the effect of reducing the trust's assets and increasing the
trust's expense ratio.
The trust's target annual distribution rate is calculated based on the trust's
average daily net asset value, not a fixed share price, and the trust's
dividend amount will fluctuate with changes in the trust's average daily net
asset value.
These risks may increase share price volatility. Please see the prospectus for
details.
NUMBER OF SHAREHOLDERS
As of October 31, 2002, our records indicate that there are 747 registered
shareholders and approximately 5,500 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the Trust, please write or
call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
MFS offers a Dividend Reinvestment and Cash Purchase Plan that allows you to
reinvest either all of the distributions paid by the trust or only the long-
term capital gains. Purchases are made at the market price unless that price
exceeds the net asset value (the shares are trading at a premium). If the
shares are trading at a premium, purchases will be made at a discounted price
of either the net asset value or 95% of the market price, whichever is
greater. Twice each year you can also buy shares. Investments of $100 or more
can be made in January and July on the 15th of the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee,
you can ask the firm or nominee to participate in the plan on your behalf.
If the nominee does not offer the plan, you may wish to request that your
shares be re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. The automatic
reinvestment of distributions does not relieve you of any income tax that may
be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please have
available the name of the trust and your account and Social Security numbers.
For certain types of registrations, such as corporate accounts, instructions
must be submitted in writing. Please call for additional details. When you
withdraw, you can receive the value of the reinvested shares in one of two ways:
a check for the value of the full and fractional shares, or a certificate for
the full shares and a check for the fractional shares.
RESULTS OF SHAREHOLDER MEETINGS (Unaudited)
At the annual meeting of shareholders of MFS Special Value Trust, which was
held on October 1, 2002, the following actions were taken:
ITEM 1. Trustees of the trust were elected as follows:
NUMBER OF SHARES
------------------------------------
NOMINEE FOR WITHHOLD AUTHORITY
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William R. Gutow 5,905,773.675 245,349.175
J. Atwood Ives 5,899,664.675 251,458.175
Abby M. O'Neill 5,889,361.675 261,761.175
Jeffrey L. Shames 5,904,368.675 246,754.175
ITEM 2. The ratification of the election of Ernst & Young LLP as the
independent public accountants to be employed by the trust for the
fiscal year ending October 31, 2002.
NUMBER OF SHARES
-----------------------------------------------------
Affirmative 5,997,000.214
Against 69,901.932
Abstain 84,220.704
PORTFOLIO OF INVESTMENTS -- October 31, 2002
Bonds - 61.5%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Bonds - 48.9%
Advertising & Broadcasting - 3.8%
Acme Television LLC, 10.875s, 2004 $ 110 $ 108,900
CD Radio, Inc., 14.5s, 2009** 900 351,000
Chancellor Media Corp., 8.125s, 2007 190 197,600
Echostar DBS Corp., 9.375s, 2009 500 500,000
Emmis Communications Corp., 0s to 2006, 12.5s to 2011 593 466,987
Primedia, Inc., 8.875s, 2011 325 276,250
-----------
$ 1,900,737
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Aerospace - 1.0%
Transdigm, Inc., 10.375s, 2008 $ 500 $ 505,000
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Apparel & Manufacturers - 0.2%
Westpoint Stevens, Inc., 7.875s, 2008 $ 325 $ 87,750
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Automotive - 2.4%
Collins & Aikman Products Co., 11.5s, 2006 $ 225 $ 186,188
Collins & Aikman Products Co., 10.75s, 2011 350 323,750
Delco Remy International, Inc., 11s, 2009 225 119,250
Hayes Lemmerz International, Inc., 11.875s, 2006##** 780 382,200
Metaldyne Corp., 11s, 2012## 115 89,700
Venture Holdings Trust, 11s, 2007** 375 82,500
Venture Holdings Trust, 12s, 2009** 150 4,500
-----------
$ 1,188,088
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Basic Industry - 0.5%
Thermadyne Manufacturing/Capital Corp., 9.875s, 2008** $ 985 $ 265,950
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Broadcast & Cable TV - 3.2%
Adelphia Communications Corp., 10.25s, 2011** $ 750 $ 251,250
Charter Communications Holdings, 8.625s, 2009 365 156,950
Charter Communications Holdings, 0s to 2004, 9.92s to 2011 1,000 310,000
CSC Holdings, Inc., 8.125s, 2009 210 174,300
FrontierVision Holding LP, 11.875s, 2007** 300 145,500
Insight Midwest, 9.75s, 2009 300 255,000
Mediacom Broadband LLC, 11s, 2013 275 237,875
NTL Communications Corp., 0s to 2003, 12.375s to 2008** 1,400 77,000
-----------
$ 1,607,875
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Building - 1.7%
Dex Media East LLC, 12.125s, 2012 $ 150 $ 150,000
Formica Corp., 10.875s, 2009** 850 221,000
MMI Products, Inc., 11.25s, 2007 500 481,875
-----------
$ 852,875
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Business Services - 1.6%
General Binding Corp., 9.375s, 2008 $ 1,000 $ 785,000
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Chemicals - 2.1%
Huntsman ICI Holdings, 10.125s, 2009 $ 750 $ 585,000
Pioneer Americas LLC, 5.298s, 2006 56 37,275
Sovereign Specialty Chemicals, 11.875s, 2010 320 296,000
Sterling Chemicals, Inc., 11.25s, 2007** 1,000 140,000
Sterling Chemicals, Inc., 13.5s, 2008** 1,100 0
-----------
$ 1,058,275
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Consumer Goods & Services - 2.4%
American Safety Razor Co., 9.875s, 2005 $ 500 $ 425,625
Revlon Products Corp., 12s, 2005 100 87,500
Samsonite Corp., 10.75s, 2008 550 412,500
Sealy Mattress Co., 9.875s, 2007 275 250,250
-----------
$ 1,175,875
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Containers - 2.1%
Consolidated Container Co., 10.125s, 2009 $ 565 $ 339,000
Pliant Corp., 13s, 2010 525 409,500
Silgan Holdings, Inc., 9s, 2009## 275 286,000
-----------
$ 1,034,500
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Corporate Asset-Backed - 7.1%
Anthracite CDO I Ltd., 6s, 2037## $ 450 $ 331,312
DLJ Mortgage Acceptance Corp., 8s, 2003+ 803 730,228
GMAC Commercial Mortgage Security, Inc., 6.02s, 2033 250 221,094
Morgan Stanley Capital I, Inc., 7.723s, 2039 600 409,921
Morgan Stanley Capital I, Inc., 7.723s, 2039 1,070 1,009,706
Nationslink Funding Corp., 5s, 2009 1,000 838,600
-----------
$ 3,540,861
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Electronics - 0.6%
On Semiconductor Corp., 12s, 2008## $ 500 $ 305,000
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Energy - Independent - 3.2%
Belden & Blake Corp., 9.875s, 2007 $ 740 $ 610,500
Continental Resources, Inc., 10.25s, 2008 750 652,500
Mission Resources Corp., 10.875s, 2007 500 300,000
-----------
$ 1,563,000
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Entertainment - 0.2%
AOL Time Warner, Inc., 6.875s, 2012 $ 120 $ 118,547
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Food & Non Alcoholic Beverage Products - 0.5%
Burns Philp Capital Property Ltd., 9.75s, 2012## $ 250 $ 245,000
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Forest & Paper Products - 3.0%
Buckeye Technologies, Inc., 8s, 2010 $ 350 $ 245,000
Riverwood International Corp., 10.875s, 2008 1,000 1,015,000
U.S. Timberlands, 9.625s, 2007 395 233,050
-----------
$ 1,493,050
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Gaming & Lodging - 1.6%
Hollywood Park, Inc., 9.5s, 2007 $ 275 $ 233,750
Host Marriott LP, 9.5s, 2007 275 275,000
Resorts International Hotel & Casino, 11.5s, 2009 350 287,000
-----------
$ 795,750
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Industrial - 0.5%
United Rentals North America, Inc., 10.75s, 2008 $ 250 $ 235,000
------------------------------------------------------------------------------------------------------------
Insurance - Property & Casualty - 0.6%
Williams Scotsman, Inc., 9.875s, 2007 $ 350 $ 281,750
------------------------------------------------------------------------------------------------------------
Machinery & Tools - 1.3%
Numatics, Inc., 9.625s, 2008 $ 500 $ 210,000
Terex Corp., 9.25s, 2011 500 430,000
-----------
$ 640,000
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Metals & Mining - 0.4%
Doe Run Resources Corp., 11.25s, 2005** $ 750 $ 150,000
Kaiser Aluminum & Chemical Corp., 12.75s, 2003** 465 48,825
-----------
$ 198,825
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Oil Services - 0.5%
Dresser, Inc., 9.375s, 2011## $ 285 $ 267,900
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Oils - 0.3%
Tesoro Petroleum Corp., 9.625s, 2012 $ 310 $ 158,100
------------------------------------------------------------------------------------------------------------
Pollution Control - 1.2%
Allied Waste North America, Inc., 10s, 2009 $ 625 $ 600,000
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Steel - 0.3%
Kaiser Aluminum & Chemical Corp., 9.875s, 2049** $ 200 $ 123,000
------------------------------------------------------------------------------------------------------------
Stores - 2.3%
Finlay Enterprises, Inc., 9s, 2008 $ 495 $ 440,550
Gap, Inc., 10.55s, 2008 500 507,500
PCA LLC, 11.875s, 2009## 180 179,100
-----------
$ 1,127,150
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Supermarkets - 0.7%
Fleming Cos., Inc., 10.625s, 2007 $ 375 $ 238,125
Fleming Cos., Inc., 9.25s, 2010 125 102,500
-----------
$340,625
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Telecommunications - Wireless - 2.8%
Alamosa Holdings, Inc., 0s to 2005, 12.875s to 2010 $ 750 $ 112,500
AT&T Wireless Services, Inc., 7.875s, 2011 125 108,750
Crown Castle International Corp., 0s to 2004, 10.375s to 2011 955 592,660
Nextel Communications, Inc., 0s to 2003, 9.95s to 2008 650 550,875
-----------
$ 1,364,785
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Telecommunications - Wireline - 0.3%
Sprint Capital Corp., 6.125s, 2008 $ 175 $ 137,534
------------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.5%
PSEG Power LLC, 7.75s, 2011 $ 124 $ 111,600
PSEG Power LLC, 8.625s, 2031 146 122,640
-----------
$ 234,240
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Total U.S. Bonds $24,232,042
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Foreign Bonds - 12.6%
Belgium - 0.2%
Tele 1 Europe B.V., 13s, 2009 (Telecom - Wireline)** $ 1,000 $ 120,000
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Brazil - 0.7%
Federal Republic of Brazil, 8s, 2014 $ 139 $ 80,881
Federal Republic of Brazil, 8.875s, 2024 305 142,587
Federal Republic of Brazil, 10.125s, 2027 90 45,450
Federal Republic of Brazil, 12.25s, 2030 150 87,000
-----------
$ 355,918
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Canada - 0.8%
Hurricane Hydrocarbons Ltd., 12s, 2006 (Oils) CAD 260 $ 263,900
PCI Chemicals Canada Co., 10s, 2008 (Chemicals) $ 167 113,493
-----------
$ 377,393
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Chile - 0.5%
Empresa Electric Guacolda S.A., 7.95s, 2003
(Utilities - Electric)## $ 250 $ 225,974
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Colombia - 0.5%
Republic of Colombia, 10s, 2012 $ 259 $ 233,747
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Germany
Callahan Nordrhein Westfallen, 14s, 2010 (Broadcast &
Cable TV)** $ 500 $ 15,000
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Greece - 0.8%
Fage Dairy Industries S.A., 9s, 2007 (Food and Non Alcoholic
Beverage Products) $ 400 $ 382,000
------------------------------------------------------------------------------------------------------------
Luxembourg - 1.0%
PTC International Finance II S.A., 11.25s, 2009 (Finance) $ 500 $ 502,500
------------------------------------------------------------------------------------------------------------
Mexico - 0.4%
Corp. Durango S.A. de C.V., 13.125s, 2006 (Forest &
Paper Products)## $ 87 $ 55,680
Corp. Durango S.A. de C.V., 13.75s, 2009 (Forest &
Paper Products) 258 157,380
-----------
$ 213,060
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Norway - 0.8%
Ocean Rig Norway As, 10.25s, 2008 (Oil Services) $ 440 $ 382,800
------------------------------------------------------------------------------------------------------------
Russia - 4.6%
Kaztransoil Co., 8.5s, 2006 (Oil Services)## $ 70 $71,925
Ministry of Finance Russia, 12.75s, 2028 1,546 1,994,340
Russian Federation, 3s, 2006 40 34,700
Tyumen Oil, 11s, 2007 (Oil Services)## 200 203,350
-----------
$ 2,304,315
------------------------------------------------------------------------------------------------------------
Singapore - 0.5%
Flextronics International Ltd., 9.875s, 2010 (Electronics) $ 225 $ 234,000
------------------------------------------------------------------------------------------------------------
South Korea - 0.4%
Hanvit Bank, 12.75s, 2010 (Banks and Credit Cos.)## KRW 190 $ 223,710
------------------------------------------------------------------------------------------------------------
United Kingdom - 1.4%
Dolphin Telecom PLC, 0s to 2003, 11.5s to 2008 (Telecom -
Wireless)** $ 750 $ 75
Euramax International PLC, 11.25s, 2006 (Metals & Mining) 450 461,250
Jazztel PLC, 14s, 2009 (Telecom - Wireline)** 785 54,950
Ono Finance PLC, 13s, 2009 (Broadcast & Cable TV) 745 163,900
-----------
$ 680,175
------------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 6,250,592
------------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $43,369,125) $30,482,634
------------------------------------------------------------------------------------------------------------
Stocks - 27.7%
------------------------------------------------------------------------------------------------------------
SHARES
------------------------------------------------------------------------------------------------------------
U.S. Stocks - 24.5%
Banks & Credit Cos. - 1.7%
FleetBoston Financial Corp. 37,000 $ 865,430
------------------------------------------------------------------------------------------------------------
Business Machines - 1.3%
Motorola, Inc. 69,890 $ 640,891
------------------------------------------------------------------------------------------------------------
Computer Software - 2.1%
Oracle Corp.* 100,620 $ 1,025,318
------------------------------------------------------------------------------------------------------------
Containers - 2.3%
Atlantis Plastics, Inc.* 116,550 $ 419,580
Owens Illinois, Inc.* 60,800 728,992
-----------
$ 1,148,572
------------------------------------------------------------------------------------------------------------
Entertainment - 2.4%
Argosy Gaming Corp.* 5,425 $ 108,554
Comcast Corp., "A"* 30,400 699,504
Cumulus Media, Inc.* 21,000 359,940
-----------
$ 1,167,998
------------------------------------------------------------------------------------------------------------
Gaming & Lodging - 0.4%
Pinnacle Entertainment, Inc.* 23,675 $ 176,379
------------------------------------------------------------------------------------------------------------
Internet
Anacomp, Inc.* 30 $ 690
------------------------------------------------------------------------------------------------------------
Machinery & Tools
Thermadyne Holdings Corp.** 7,554 $ 2,644
------------------------------------------------------------------------------------------------------------
Metals & Mining - 2.1%
Alcoa, Inc. 27,140 $ 598,709
Commonwealth Industries, Inc. 39,700 244,949
Metal Management, Inc.** 46,753 187,012
-----------
$ 1,030,670
------------------------------------------------------------------------------------------------------------
Oil Services - 3.8%
BJ Services Co.* 13,700 $ 415,521
Cooper Cameron Corp.* 10,730 500,233
Global SantaFe Corp. 29,530 705,767
Noble Drilling Corp.* 8,190 264,701
-----------
$ 1,886,222
------------------------------------------------------------------------------------------------------------
Oils - 1.4%
Chesapeake Energy Corp.* 100,500 $ 701,490
------------------------------------------------------------------------------------------------------------
Printing & Publishing
Golden Books Family Entertainment, Inc.* 53,266 $ 1,065
------------------------------------------------------------------------------------------------------------
Real Estate
Atlantic Gulf Communities Corp.+* 250 $ 0
------------------------------------------------------------------------------------------------------------
Stores - 1.6%
Sears, Roebuck & Co. 31,240 $ 820,362
------------------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 2.9%
Adelphia Business Solutions* 40,000 $ 1,400
AT&T Wireless Services, Inc.* 212,670 1,461,043
-----------
$ 1,462,443
------------------------------------------------------------------------------------------------------------
Utilities - Electric - 2.2%
Calpine Corp.* 255,060 $ 510,120
El Paso Electric Co.* 800 8,744
NiSource, Inc. 33,800 558,376
-----------
$ 1,077,240
------------------------------------------------------------------------------------------------------------
Utilities - Telephone - 0.3%
Nextel Communications, Inc., 11.125s 15 $ 169,200
------------------------------------------------------------------------------------------------------------
Total U.S. Stocks $12,176,614
------------------------------------------------------------------------------------------------------------
Foreign Stocks - 3.2%
Bermuda - 2.5%
Tyco International Ltd. (Conglomerates) 87,740 $ 1,268,720
------------------------------------------------------------------------------------------------------------
Canada - 0.4%
Acetex Corp. (Chemicals)* 48,000 $93,870
International Utility Structures, Inc. (Utilities - Electric)* 254,700 89,821
-----------
$ 183,691
------------------------------------------------------------------------------------------------------------
Netherlands - 0.3%
Completel Europe N.V. (Telecom - Wireline)(+)** 11,741 $ 62,512
Completel Europe N.V., Preferred, (Telecom - Wireline)(+)** 117 74,403
-----------
$ 136,915
------------------------------------------------------------------------------------------------------------
Sweden
Song Networks Holding AB (Telecom - Wireline)* 17,612 $ 1,249
------------------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 1,590,575
------------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $20,265,541) $13,767,189
------------------------------------------------------------------------------------------------------------
Preferred Stocks - 4.1%
------------------------------------------------------------------------------------------------------------
Advertising & Broadcasting - 1.5%
Paxon Communications Corp., 13.25s 155 $ 759,500
------------------------------------------------------------------------------------------------------------
Broadcast & Cable TV - 0.8%
CSC Holdings, Inc., 11.125s* 6,500 $ 370,500
------------------------------------------------------------------------------------------------------------
Consumer Goods & Services
Renaissance Cosmetics, Inc., 14s* 1,266 $ 0
------------------------------------------------------------------------------------------------------------
Telecommunications - Wireline - 1.8%
Global Crossings Holdings Ltd., 10.5s 10,525 $ 5,263
Nextel Communications, Inc., 11.125s 1,144 898,040
-----------
$ 903,303
------------------------------------------------------------------------------------------------------------
Total Preferred Stocks (Identified Cost, $4,478,255) $ 2,033,303
------------------------------------------------------------------------------------------------------------
Convertible Bond - 0.9%
------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
------------------------------------------------------------------------------------------------------------
United Kingdom - 0.9%
Business Services - 0.9%
Colt Telecom Group PLC, 2s, 2006 (Identified Cost, $718,590) $ 1,000 $ 434,632
------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock - 0.1%
------------------------------------------------------------------------------------------------------------
SHARES
------------------------------------------------------------------------------------------------------------
Energy - 0.1%
NRG Energy, Inc., 6.5s* (Identified Cost, $439,848) 14,307 $ 54,510
------------------------------------------------------------------------------------------------------------
Warrants
------------------------------------------------------------------------------------------------------------
U.S. Warrants
Anacomp, Inc. (Internet)* 5,841 $ 350
Metricom, Inc. (Telecom - Wireline)* 775 0
Renaissance Cosmetics, Inc. (Consumer Goods & Services)* 1,024 0
Sirius Satellite Radio, Inc. (Entertainment)##* 2,700 27
------------------------------------------------------------------------------------------------------------
Total U.S. Warrants $ 377
------------------------------------------------------------------------------------------------------------
Foreign Warrant
Ono Finance PLC (Broadcast & Cable TV)* 1,000 $ 10
------------------------------------------------------------------------------------------------------------
Total Warrants (Identified Cost, $408,696) $ 387
------------------------------------------------------------------------------------------------------------
Repurchase Agreement - 5.0%
------------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
(000 OMITTED)
------------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 10/31/02, due 11/01/02, total to be
received $2,490,131 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account),
at Cost $ 2,490 $ 2,490,000
------------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $72,170,055) $49,262,655
Other Assets, Less Liabilities - 0.7% 359,696
------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $49,622,351
------------------------------------------------------------------------------------------------------------
*Non-income producing security.
**Non-income producing security in default.
##SEC Rule 144A restriction.
+Restricted security.
(+)Security valued by or at the direction of the Trustees.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
CAD = Canadian Dollars KRW = Korean Wong
See notes to financial statements.
Financial Statements
Statement of Assets and Liabilities
----------------------------------------------------------------------------------------------------
OCTOBER 31, 2002
----------------------------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $72,170,055) $49,262,655
Investment of cash collateral for securities loaned, at identified cost and value 3,607,067
Cash 51,098
Receivable for investments sold 1,316,239
Interest and dividends receivable 850,120
Other assets 1,109
-----------
Total assets $55,088,288
-----------
Liabilities:
Payable to dividend disbursing agent $38,613
Payable for forward foreign currency exchange contracts subject to master netting
agreements 19,262
Payable for investments purchased 1,469,059
Collateral for securities loaned, at value 3,607,067
Payable to affiliates
Management fee 1,338
Transfer and dividend disbursing agent fee 1,433
Accrued expenses and other liabilities 329,165
-----------
Total liabilities $ 5,465,937
-----------
Net assets $49,622,351
===========
Net assets consist of:
Paid-in capital $74,887,683
Unrealized depreciation on investments and translation of assets and
liabilities in foreign currencies (22,926,278)
Accumulated net realized loss on investments and foreign currency transactions (1,521,277)
Accumulated distributions in excess of net investment income (817,777)
-----------
Total $49,622,351
===========
Shares of beneficial interest outstanding 6,620,146
=========
Net asset value per share (net assets / shares of beneficial interest outstanding) $7.50
=====
See notes to financial statements.
Financial Statements -- continued
Statement of Operations
----------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2002
----------------------------------------------------------------------------------------------------
Net investment income (loss):
Income -
Interest $ 5,193,604
Dividends 498,871
-----------
Total investment income $ 5,692,475
-----------
Expenses -
Management fee $ 565,340
Trustees' compensation 79,296
Administrative fee 5,406
Investor communications expense 66,818
Transfer and dividend disbursing agent fee 17,095
Custodian fee 26,675
Printing 35,665
Postage 4,559
Auditing fees 35,174
Legal fees 13,566
Miscellaneous 15,164
-----------
Total expenses $ 864,758
Fees paid indirectly (25,121)
-----------
Net expenses $ 839,637
-----------
Net investment income $ 4,852,838
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 22,574
Written option transactions 3,243
Foreign currency transactions (123,511)
Net realized loss on investments and foreign currency transactions $ (97,694)
-----------
Change in unrealized depreciation -
Investments $(5,856,291)
Translation of assets and liabilities in foreign currencies (45,571)
-----------
Net unrealized loss on investments and foreign currency translation $(5,901,862)
-----------
Net realized and unrealized loss on investments and foreign currency $(5,999,556)
-----------
Decrease in net assets from operations $(1,146,718)
===========
See notes to financial statements.
Financial Statements -- continued
Statement of Changes in Net Assets
------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2002 2001
------------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 4,852,838 $ 5,008,656
Net realized loss on investments and foreign
currency transactions (97,694) (1,415,632)
Net unrealized loss on investments and foreign
currency translation (5,901,862) (12,932,523)
----------- -----------
Decrease in net assets from operations $(1,146,718) $ (9,339,499)
----------- -----------
Distributions declared to shareholders -
From net investment income $(4,852,712) $ (5,008,656)
In excess of net investment income (1,609,046) (418,575)
From paid-in capital -- (5,328,929)
----------- -------------
Total distributions declared to shareholders $(6,461,758) $(10,756,160)
----------- ------------
Net increase in net assets from trust share transactions $632,359 $ 1,148,652
----------- ------------
Total decrease in net assets $(6,976,117) $(18,947,007)
Net assets:
At beginning of period 56,598,468 75,545,475
----------- ------------
At end of period (including accumulated distributions in excess
of net investment income of $817,777 and $494,276,
respectively) $49,622,351 $ 56,598,468
=========== ============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.63 $11.67 $14.34 $13.76 $15.03
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.74 $ 0.77 $ 1.01 $ 0.57 $ 0.04
Net realized and unrealized gain (loss) on
investments and foreign currency (0.89) (2.16) (1.53) 1.66 1.01
------ ------ ------ ------ ------
Total from investment operations $(0.15) $(1.39) $(0.52) $2.23 $ 1.05
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.74) $(0.77) $(1.01) $(0.57) $(0.04)
From net realized gain on investments and foreign
currency transactions -- -- (0.95) (1.00) (2.28)
In excess of net investment income (0.24) (0.06) (0.01) (0.08) --
From paid-in capital -- (0.82) (0.18) -- --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.98) $(1.65) $(2.15) $(1.65) $(2.32)
------ ------ ------ ------ ------
Net asset value - end of period $ 7.50 $ 8.63 $11.67 $14.34 $13.76
------ ------ ------ ------ ------
Per share market value - end of period $7.250 $14.300 $13.750 $16.750 $16.750
====== ======= ======= ======= =======
Total return (43.54)% 16.99% (4.33)% 11.08% 0.26%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.56% 1.53% 1.35% 1.23% 1.10%
Net investment income(S) 8.76% 7.49% 7.46% 3.79% 0.26%
Portfolio turnover 137% 49% 32% 137% 85%
Net assets at end of period (000 Omitted) 49,622 $56,598 $75,545 $91,603 $86,937
(S) As required, effective November 1, 2001, the trust adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium and accreting discount on all debt securities. The effect of this change
for the year ended October 31, 2002 was to increase net investment income per share by $0.02, decrease net realized and
unrealized gains and losses per share by $0.02, and increase the ratio of net investment income to average net assets by
0.49%. Per share, ratios, and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this
change in presentation.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from certain expense offset arrangements.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Special Value Trust (the trust) is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended,
as a non-diversified, closed-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The trust
can invest in high-yield securities rated below investment grade. Investments
in high-yield securities involve greater degrees of credit and market risk
than investments in higher-rated securities and tend to be more sensitive to
economic conditions. The trust can invest in foreign securities. Investments
in foreign securities are vulnerable to the effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward foreign
currency exchange contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data, without exclusive reliance upon exchange or over-the-counter
prices. Equity securities listed on securities exchanges or reported through
the NASDAQ system are reported at market value using last sale prices.
Unlisted equity securities or listed equity securities for which last sale
prices are not available are reported at market value using last quoted bid
prices. Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Options listed on commodities
exchanges are reported at market value using closing settlement prices. Over-
the-counter options on securities are valued by brokers. Over-the-counter
currency options are valued through the use of a pricing model which takes
into account foreign currency exchange spot and forward rates, implied
volatility, and short-term repurchase rates. Securities for which there are no
such quotations or valuations are valued in good faith at the direction of the
Trustees.
Repurchase Agreements - The trust may enter into repurchase agreements with
institutions that the trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The trust
requires that the securities collateral in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the trust to
obtain those securities in the event of a default under the repurchase
agreement. The trust monitors, on a daily basis, the value of the collateral
to ensure that its value, including accrued interest, is greater than amounts
owed to the trust under each such repurchase agreement. The trust, along with
other affiliated entities of Massachusetts Financial Services Company (MFS),
may utilize a joint trading account for the purpose of entering into one or
more repurchase agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Deferred Trustee Compensation - Under a Deferred Compensation Plan (the Plan)
independent Trustees may elect to defer receipt of all or a portion of their
annual compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the trust or other MFS trusts selected
by the Trustee. Deferred amounts represent an unsecured obligation of the
trust until distributed in accordance with the Plan.
Written Options - The trust may write call or put options in exchange for a
premium. The premium is initially recorded as a liability, which is
subsequently adjusted to the current value of the option contract. When a
written option expires, the trust realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the trust. The trust, as writer of an
option, may have no control over whether the underlying securities may be sold
(call) or purchased (put) and, as a result, bears the market risk of an
unfavorable change in the price of the securities underlying the written
option. In general, written call options may serve as a partial hedge against
decreases in value in the underlying securities to the extent of the premium
received. Written options may also be used as part of an income producing
strategy reflecting the view of the trust's management on the direction of
interest rates.
Security Loans - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash in an amount at least equal to the market
value of the securities loaned. State Street provides the trust with
indemnification against Borrower default. The trust bears the risk of loss
with respect to the investment of cash collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
At October 31, 2002, the value of securities loaned was $3,370,714. These loans
were collateralized by cash of $3,607,067 which was invested in the following
short-term obligation:
IDENTIFIED COST
SHARES AND VALUE
--------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio 3,607,067 $3,607,067
Forward Foreign Currency Exchange Contracts - The trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties
to meet the terms of their contracts and from unanticipated movements in the
value of a foreign currency relative to the U.S. dollar. The trust may enter
into forward foreign currency exchange contracts for hedging purposes as well
as for non-hedging purposes. For hedging purposes, the trust may enter into
contracts to deliver or receive foreign currency it will receive from or
require for its normal investment activities. The trust may also use contracts
in a manner intended to protect foreign currency-denominated securities from
declines in value due to unfavorable exchange rate movements. For non-hedging
purposes, the trust may enter into contracts with the intent of changing the
relative exposure of the trust's portfolio of securities to different
currencies to take advantage of anticipated changes. The forward foreign
currency exchange contracts are adjusted by the daily exchange rate of the
underlying currency and any gains or losses are recorded as unrealized until
the contract settlement date. On contract settlement date, the gains or losses
are recorded as realized gains or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with generally accepted accounting principles. Dividends received
in cash are recorded on the ex-dividend date. Dividend and interest payments
received in additional securities are recorded on the ex-dividend or ex-
interest date in an amount equal to the value of the security on such date.
Legal fees and other related expenses incurred to preserve and protect the
value of a security owned are added to the cost of the security; other legal
fees are expensed. Capital infusions made directly to the security issuer,
which are generally non-recurring, incurred to protect or enhance the value of
high-yield debt securities, are reported as additions to the cost basis of the
security. Costs that are incurred to negotiate the terms or conditions of
capital infusions or that are expected to result in a plan of reorganization
are reported as realized losses. Ongoing costs incurred to protect or enhance
an investment, or costs incurred to pursue other claims or legal actions, are
expensed.
Fees Paid Indirectly - The trust's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the trust. During the period, the trust's custodian fees were reduced by
$22,043 under this arrangement. The trust has entered into a directed
brokerage agreement, under which the broker will credit the trust a portion of
the commissions generated, to offset certain expenses of the trust. For the
period, the trust's custodian fees were reduced by $3,078 under this
agreement. These amounts are shown as a reduction of total expenses on the
Statement of Operations.
Tax Matters and Distributions - The trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The trust
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, derivatives, defaulted bonds, capital
losses, and amortization and accretion on debt securities.
The tax character of distributions paid for the years ended October 31, 2002
and October 31, 2001 were as follows:
OCTOBER 31, 2002 OCTOBER 31, 2001
--------------------------------------------------------------------------------
Distributions declared from:
Ordinary income $6,461,758 $ 5,427,231
Tax Return of capital -- 5,328,929
---------- -----------
Total distributions declared $6,461,758 $10,756,160
========== ===========
During the year ended October 31, 2002, accumulated distributions in excess of
net investment income decreased by $1,285,419, accumulated net realized loss
on investments and foreign currency transactions decreased by $180,555, and
paid-in capital decreased by $1,465,974, primarily due to differences between
book and tax accounting for foreign currency transactions, defaulted bonds and
amortization and accretion on debt securities. At October 31, 2002,
accumulated distributions in excess of net investment income and accumulated
distributions in excess of net realized gain on investments and foreign
currency transactions under book accounting were different from tax accounting
due to temporary differences in accounting for foreign currency transactions,
capital losses, defaulted bonds and amortization and accretion on debt
securities. This change had no effect on the net assets or net asset value per
share.
As of October 31, 2002, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Capital loss carryforward $ (151,293)
Unrealized loss (22,729,932)
Other temporary differences (2,384,107)
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on October 31, 2009.
(3) Transactions with Affiliates
Investment Adviser - The trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities.
The management fee is computed daily and paid monthly at an annual rate of
0.68% of the trust's average daily net assets and 3.40% of investment income.
The trust pays the compensation of the Independent Trustees in the form of
both a retainer and attendance fees and pays no compensation directly to its
Trustees who are officers of the investment adviser, or to officers of the
trust, all of whom receive remuneration for their services to the trust from
MFS. Certain officers and Trustees of the trust are officers or directors of
MFS and MFS Service Center, Inc. (MFSC). On January 1, 2002, the Trustees
terminated the Independent Trustee unfunded defined benefit plan for active
Trustees and converted it to an unfunded retirement benefit deferral plan for
active Trustees. Under the new plan, the unfunded pension liability was
converted into an equivalent value of notional shares of the trust that will
fluctuate with the performance of the trust. Included in Trustees'
compensation is a net decrease of $9,594 as a result of the change in the
trust's pension liability under this plan and a pension expense of $8,346 for
inactive trustees, for the year ended October 31, 2002. Also included in
Trustees' compensation is a one-time plan settlement expense of $2,123 and a
one-time plan transition expense of $39,976.
Administrator - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder communications,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the trust pays MFS an administrative fee
at the following annual percentages of the trust's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
Transfer Agent - MFSC acts as registrar and dividend disbursing agent for the
Trust. The agreement provides that the Trust will pay MFSC an account
maintenance fee of no more than $9.00 and a dividend services fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of-pocket expenses.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
-----------------------------------------------------------------------------
U.S. government securities $ -- $ 6,126,438
----------- -----------
Investments (non-U.S. government securities) $71,247,158 $69,599,619
----------- -----------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $ 71,992,971
------------
Gross unrealized depreciation $(24,950,031)
Gross unrealized appreciation 2,219,715
------------
Net unrealized depreciation $(22,730,316)
============
(5) Shares of Beneficial InterestThe trust's Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest. The Trustees have authorized 6,620,146.062 full and
fractional shares of beneficial interest. Transactions in trust shares were as
follows:
YEAR ENDED OCTOBER 31, 2002 YEAR ENDED OCTOBER 31, 2001
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------
Shares issued to shareholders in
reinvestment of distributions 63,689 $632,359 82,629 $1,148,652
------ -------- ------ ----------
(6) Line of Credit
The trust and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. A commitment fee of $482 which is based on the average daily unused
portion of the line of credit is included in interest expense. The trust had no
significant borrowings during the year.
(7) Financial Instruments
The trust trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the trust has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts - At October 31, 2002, forward
foreign currency purchases and sales under master netting agreements amounted to
a net payable of $19,262 with DB Clearing Services.
At October 31, 2002, the trust had sufficient cash and/or securities to cover
any commitments under these contracts.
(8) Restricted Securities
The trust may invest not more than 20% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At October 31, 2002,
the trust owned the following restricted securities, excluding securities issued
under Rule 144A, constituting 1.47% of net assets which may not be publicly sold
without registration under the Securities Act of 1933. The trust does not have
the right to demand that such securities be registered. The value of these
securities is determined by valuations furnished by dealers or by a pricing
service, or if not available, in good faith at the direction of the Trustees.
DESCRIPTION ACQUISITION AMOUNT COST VALUE
----------------------------------------------------------------------------------------------------------
Atlantic Gulf Communities Corp. 9/25/95 250 $ -- $ --
DLJ Mortgage Acceptance Corp., 8s, 2003 4/6/01 803,000 484,738 730,228
--------
$730,228
--------
9) Change in Accounting Principle
As required, effective November 1, 2001 the fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies and began amortizing
premium and accreting discount on all debt securities. The cumulative effect of
this accounting change had no impact on total net assets of the fund, but
resulted in a $99,487 increase in cost of securities and a corresponding $99,487
increase in net unrealized depreciation, based on securities held by the fund on
November 1, 2001.
The effect of this change for the year ended October 31, 2002, was to increase
net investment income by $142,315, increase net unrealized depreciation by
$143,850, and decrease net realized losses by $1,535. The Statement of Changes
in Net Assets and Financial Highlights for prior periods have not been restated
to reflect this change in presentation.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of MFS Special Value Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Special Value Trust (the Trust), including the portfolio of investments, as of
October 31, 2002, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of October 31, 2002,
by correspondence with the custodian and brokers or by other appropriate
auditing procedures where replies from brokers were not received. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
MFS Special Value Trust at October 31, 2002, the results of its operations for
the year then ended, the changes in its net assets for each of the two years
in the period then ended, and its financial highlights for each of the five
years in the period then ended, in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Boston, Massachusetts
December 6, 2002
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FEDERAL TAX INFORMATION (Unaudited)
--------------------------------------------------------------------------------
IN JANUARY 2003, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 2002.
FOR THE YEAR ENDED OCTOBER 31, 2002, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS RECEIVED DEDUCTION FOR
CORPORATIONS IS 8.41%.
--------------------------------------------------------------------------------
MFS(R) SPECIAL VALUE TRUST
The following tables present certain information regarding the Trustees and
officers of the Trust, including their principal occupations, which, unless
specific dates are shown, are of more than five years' duration, although the
titles may not have been the same throughout.
NAME, AGE, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION, AND OTHER DIRECTORSHIPS(1)
TRUSTEES
JEFFREY L. SHAMES* (born 06/02/55) Trustee, ABBY M. O'NEILL (born 04/27/28) Trustee
Chairman Private investor; Rockefeller Financial Services,
Massachusetts Financial Services Company, Chairman Inc. (investment advisers), Chairman and Chief
Executive Officer
JOHN W. BALLEN* (born 09/12/59) Trustee and
President LAWRENCE T. PERERA (born 06/23/35) Trustee
Massachusetts Financial Services Company, Chief Hemenway & Barnes (attorneys), Partner
Executive Officer and Director
WILLIAM J. POORVU (born 04/10/35) Trustee
KEVIN J. PARKE* (born 12/14/59) Trustee Private investor; Harvard University Graduate
Massachusetts Financial Services Company, Chief School of Business Administration, Class of 1961,
Investment Officer, President and Director Adjunct Professor in Entrepreneurship Emeritus;
CBL & Associates Properties, Inc. (real estate
LAWRENCE H. COHN, M.D. (born 03/11/37) Trustee investment trust), Director
Brigham and Women's Hospital, Chief of Cardiac
Surgery; Harvard Medical School, Professor of J. DALE SHERRATT (born 09/23/38) Trustee
Surgery Insight Resources, Inc. (acquisition planning
specialists), President; Wellfleet Investments
THE HON. SIR J. DAVID GIBBONS, KBE (born 06/15/27) (investor in health care companies), Managing
Trustee General Partner (since 1993); Cambridge
Edmund Gibbons Limited (diversified holding Nutraceuticals (professional nutritional
company), Chief Executive Officer; Colonial products), Chief Executive Officer (until May
Insurance Company Ltd., Director and Chairman; 2001); Paragon Trade Brands, Inc. (disposable
Bank of Butterfield, Chairman (until 1997) consumer products), Director
WILLIAM R. GUTOW (born 09/27/41) Trustee ELAINE R. SMITH (born 04/25/46) Trustee
Private investor and real estate consultant; Independent health care industry consultant
Capitol Entertainment Management Company (video
franchise), Vice Chairman WARD SMITH (born 09/13/30) Trustee
Private investor; Sundstrand Corporation
J. ATWOOD IVES (born 05/01/36) Trustee (manufacturer of highly engineered products for
Private investor; KeySpan Corporation (energy industrial and aerospace applications), Director
related services), Director; Eastern Enterprises (until June 1999)
(diversified services company), Chairman, Trustee
and Chief Executive Officer (until November 2000)
(1) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
* "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the 1940
Act) which is the principal federal law governing investment companies like the Trust. The address of MFS is
500 Boylston Street, Boston, Massachusetts 02116.
OFFICERS
JEFFREY L. SHAMES (born 06/02/55) Trustee, RICHARD M. HISEY (born 08/29/58) Treasurer
Chairman Massachusetts Financial Services Company, Senior
Massachusetts Financial Services Company, Chairman Vice President (since July 2002); The Bank of New
York, Senior Vice President (September 2000 to
JOHN W. BALLEN (born 9/12/59) Trustee and July 2002); Lexington Global Asset Managers, Inc.,
President Executive Vice President and General Manager
Massachusetts Financial Services Company, Chief (prior to September 2000)
Executive Officer and Director
ELLEN MOYNIHAN (born 11/13/57) Assistant Treasurer
JAMES R. BORDEWICK, JR. (born 03/06/59) Assistant Massachusetts Financial Services Company, Vice
Secretary and Assistant Clerk President
Massachusetts Financial Services Company, Senior
Vice President and Associate General Counsel JAMES O. YOST (born 06/12/60) Assistant Treasurer
Massachusetts Financial Services Company, Senior
STEPHEN E. CAVAN (born 11/06/53) Secretary and Vice President
Clerk
Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Secretary
ROBERT R. FLAHERTY (born 09/18/63) Assistant
Treasurer
Massachusetts Financial Services Company, Vice
President (since August 2000); UAM Fund Services,
Senior Vice President (prior to August 2000)
The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are elected for
fixed terms. The Board of Trustees currently is divided into three classes, each having a term of three years.
Each year the term of one class expires. Each Trustee's term of office expires on the date of the third annual
meeting following the election to office of the Trustee's class. Each Trustee will serve until next elected or
his or her earlier death, resignation, retirement or removal.
Messrs. Shames, Cohn, Gibbons, Sherratt and Smith, and Ms. O'Neil have served in their capacity as Trustee of
the Trust continuously since originally elected or appointed. Messrs. Ballen, Gutow, Ives, Perera and Poorvu,
and Ms. Smith were elected by shareholders and have served as Trustees of the Trust since January 1, 2002. Mr.
Parke has served as Trustee of the Trust since January 1, 2002.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 117 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request, by calling 1-800-225-2606.
INVESTMENT ADVISER TRANSFER AGENT, REGISTRAR AND DIVIDEND DISBURSING
Massachusetts Financial Services Company AGENT
500 Boylston Street State Street Bank and Trust Company c/o MFS
Boston, MA 02116-3741 Service Center, Inc. P.O. Box 55024 Boston, MA
02205-8016 1-800-637-2304
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
John F. Addeo+
CUSTODIANS
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, NY 10081
AUDITORS
Ernst & Young LLP
+ MFS Investment Management
MFS(R) SPECIAL VALUE TRUST ------------------
PRSRT STD
[MFS LOGO](R) U.S. POSTAGE
INVESTMENT MANAGEMENT PAID
MFS
500 Boylston Street ------------------
Boston, MA 02116-3741
(C) 2002 MFS Investment Management(R).
500 Boylston Street, Boston, MA 02116. MSVCE-2 12/02 13M