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 811-3327
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MFS SERIES TRUST XIII
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
Susan S. Newton
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: February 28
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Date of reporting period: August 31, 2006
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ITEM 1. REPORTS TO STOCKHOLDERS.
M F S(R)
INVESTMENT MANAGEMENT
[graphic omitted]
SEMIANNUAL REPORT
MFS(R) GOVERNMENT SECURITIES FUND
LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 2
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EXPENSE TABLE 3
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PORTFOLIO OF INVESTMENTS 5
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STATEMENT OF ASSETS AND LIABILITIES 9
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STATEMENT OF OPERATIONS 12
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STATEMENTS OF CHANGES IN NET ASSETS 13
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FINANCIAL HIGHLIGHTS 14
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NOTES TO FINANCIAL STATEMENTS 24
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BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 36
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PROXY VOTING POLICIES AND INFORMATION 40
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QUARTERLY PORTFOLIO DISCLOSURE 40
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CONTACT INFORMATION BACK COVER
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Fund objective: Seeks current income and preservation of capital.
THE REPORT IS PREPARED FOR THE GENERAL INFORMATION OF SHAREHOLDERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
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NOT FDIC INSURED o MAY LOSE VALUE o
NO BANK OR CREDIT UNION GUARANTEE o NOT A DEPOSIT o
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR
NCUA/NCUSIF
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8/31/06
MFG-SEM
LETTER FROM THE CEO
[Photo of Robert J. Manning]
Dear Shareholders:
The story is as old as the tortoise and the hare, but we believe it is still
relevant today -- "slow and steady" is the way to go when it comes to investing.
While financial markets will naturally ebb and flow over time, investors who
remain committed to a long-term investment strategy are more likely to achieve
their goals than those who consistently chase short-term performance.
The first half of 2006 brought a high degree of fluctuation in markets
around the globe as varying economic factors pulled markets in opposite
directions. The global economy, for example, continued to grow at its fastest
pace in three decades -- spurred by increased international trade, good job
growth, and wage increases. At the same time, central banks around the world
raised interest rates in sync in a collaborative attempt to curb inflation.
While this was a positive development in some regions, in other cases, economic
and market gains were tempered.
What does all of this mean to you as an investor? If you're focused on the
long term, these global developments become part of a longer cycle instead of
one-time events that can have a significant impact on your portfolio.
At MFS(R), our investment management process -- honed over 80 years --
combines a unique teamwork approach with an unwavering focus on helping you
realize your long-term financial goals. We believe in a three-pronged investment
strategy:
o ALLOCATE holdings across the major asset classes -- including stocks,
bonds, and cash.
o DIVERSIFY within each class to take advantage of different market segments
and investing styles.
o REBALANCE assets regularly to maintain a desired asset allocation.
Of course, these strategies cannot guarantee a profit or protect against a
loss. Investing and planning for the long term 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)
October 13, 2006
The opinions expressed in this letter are subject to change, may not be relied
upon for investment advice, and no forecasts can be guaranteed.
PORTFOLIO COMPOSITION
PORTFOLIO STRUCTURE (i)
Bonds 96.5%
Cash & Other Net Assets 3.5%
FIXED INCOME SECTORS (i)
Mortgage-Backed Securities 50.5%
------------------------------------------------
U.S. Government Agencies 37.1%
------------------------------------------------
U.S. Treasury Securities 8.9%
------------------------------------------------
CREDIT QUALITY OF BONDS (r)
AAA 99.2%
------------------------------------------------
Not Rated 0.8%
------------------------------------------------
PORTFOLIO FACTS
Average Duration (d) 4.3
------------------------------------------------
Average Life (m) 6.8 yrs.
------------------------------------------------
Average Maturity (m) 14.4 yrs.
------------------------------------------------
Average Credit Quality of Rated
Securities (Long Term) (a) AAA
------------------------------------------------
Average Credit Quality of Rated
Securities (Short Term) (a) A-1
------------------------------------------------
(a) The average credit quality of rated securities is based upon a market
weighted average of portfolio holdings that are rated by public rating
agencies.
(d) Duration is a measure of how much a bond's price is likely to fluctuate with
general changes in interest rates, e.g., if rates rise 1.00%, a bond with a
5-year duration is likely to lose about 5.00% of its value.
(i) For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
(m) The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which have
been pre-refunded or pre-paid to an earlier date or which have a mandatory
put date prior to the stated maturity. The average life shown takes into
account these earlier dates.
(r) Each security is assigned a rating from Moody's Investors Service. If not
rated by Moody's, the rating will be that assigned by Standard & Poor's.
Likewise, if not assigned a rating by Standard & Poor's, it will be based on
the rating assigned by Fitch, Inc. For those portfolios that hold a security
which is not rated by any of the three agencies, the security is considered
Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed
securities, if any, are included in a "AAA"-rating category. Percentages are
based on the total market value of investments as of 8/31/06.
Percentages are based on net assets as of 8/31/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
EXPENSE TABLE
Fund expenses borne by the shareholders during the period,
March 1, 2006 through August 31, 2006.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1) fees;
and other fund expenses. This example is intended to help you understand your
ongoing costs (in dollars) of investing in the fund and to compare these costs
with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period March 1, 2006 through August 31, 2006.
ACTUAL EXPENSES
The first line for each share class in the following table provides information
about actual account values and actual expenses. You may use the information in
this line, together with the amount you invested, to estimate the expenses that
you paid over the period. Simply divide your account value by $1,000 (for
example, an $8,600 account value divided by $1,000 = 8.6), then multiply the
result by the number in the first line under the heading entitled "Expenses Paid
During Period" to estimate the expenses you paid on your account during this
period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the following table provides information
about hypothetical account values and hypothetical expenses based on the fund's
actual expense ratio and an assumed rate of return of 5% per year before
expenses, which is not the fund's actual return. The hypothetical account values
and expenses may not be used to estimate the actual ending account balance or
expenses you paid for the period. You may use this information to compare the
ongoing costs of investing in the fund and other funds. To do so, compare this
5% hypothetical example with the 5% hypothetical examples that appear in the
shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not help
you determine the relative total costs of owning different funds. In addition,
if these transactional costs were included, your costs would have been higher.
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Expenses
Paid During
Annualized Beginning Ending Period (p)
Share Expense Account Value Account Value 3/01/06-
Class Ratio 3/01/06 8/31/06 8/31/06
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Actual 0.80% $1,000.00 $1,015.40 $4.06
A ----------------------------------------------------------------------
Hypothetical (h) 0.80% $1,000.00 $1,021.17 $4.08
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Actual 1.55% $1,000.00 $1,011.60 $7.86
B ----------------------------------------------------------------------
Hypothetical (h) 1.55% $1,000.00 $1,017.39 $7.88
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Actual 1.55% $1,000.00 $1,011.60 $7.86
C ----------------------------------------------------------------------
Hypothetical (h) 1.55% $1,000.00 $1,017.39 $7.88
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Actual 0.55% $1,000.00 $1,016.60 $2.80
I ----------------------------------------------------------------------
Hypothetical (h) 0.55% $1,000.00 $1,022.43 $2.80
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Actual 1.05% $1,000.00 $1,014.10 $5.33
R ----------------------------------------------------------------------
Hypothetical (h) 1.05% $1,000.00 $1,019.91 $5.35
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Actual 1.65% $1,000.00 $1,011.10 $8.36
R1 ----------------------------------------------------------------------
Hypothetical (h) 1.65% $1,000.00 $1,016.89 $8.39
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Actual 1.29% $1,000.00 $1,012.80 $6.54
R2 ----------------------------------------------------------------------
Hypothetical (h) 1.29% $1,000.00 $1,018.70 $6.56
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Actual 1.20% $1,000.00 $1,012.30 $6.09
R3 ----------------------------------------------------------------------
Hypothetical (h) 1.20% $1,000.00 $1,019.16 $6.11
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Actual 0.95% $1,000.00 $1,013.60 $4.82
R4 ----------------------------------------------------------------------
Hypothetical (h) 0.95% $1,000.00 $1,020.42 $4.84
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Actual 0.65% $1,000.00 $1,016.10 $3.30
R5 ----------------------------------------------------------------------
Hypothetical (h) 0.65% $1,000.00 $1,021.93 $3.31
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Actual 1.15% $1,000.00 $1,013.60 $5.84
529A ----------------------------------------------------------------------
Hypothetical (h) 1.15% $1,000.00 $1,019.41 $5.85
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Actual 1.80% $1,000.00 $1,009.20 $9.12
529B ----------------------------------------------------------------------
Hypothetical (h) 1.80% $1,000.00 $1,016.13 $9.15
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Actual 1.80% $1,000.00 $1,010.30 $9.12
529C ----------------------------------------------------------------------
Hypothetical (h) 1.80% $1,000.00 $1,016.13 $9.15
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(h) 5% class return per year before expenses.
(p) Expenses paid is equal to each class' annualized expense ratio, as shown
above, multiplied by the average account value over the period, multiplied
by the number of days in the period, divided by the number of days in the
year. Expenses paid do not include any applicable sales charges (loads) or
redemption fees. If these transaction costs had been included, your costs
would have been higher.
PORTFOLIO OF INVESTMENTS
8/31/06 (unaudited)
The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Bonds - 99.0%
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ISSUER SHARES/PAR VALUE ($)
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Agency - Other - 6.8%
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Financing Corp., 10.7%, 2017 $ 14,360,000 $ 21,104,720
Financing Corp., 9.4%, 2018 11,750,000 16,057,879
Financing Corp., 9.8%, 2018 14,975,000 21,016,784
Financing Corp., 10.35%, 2018 15,165,000 22,128,343
Financing Corp., STRIPS, 0%, 2017 18,780,000 10,600,878
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$ 90,908,604
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Mortgage Backed - 50.2%
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Fannie Mae, 4.374%, 2013 $ 2,602,236 $ 2,475,276
Fannie Mae, 4.45%, 2014 3,174,049 3,027,595
Fannie Mae, 4.5%, 2019 58,423,676 56,201,308
Fannie Mae, 4.519%, 2014 4,365,524 4,169,798
Fannie Mae, 4.543%, 2013 1,487,430 1,430,244
Fannie Mae, 4.56%, 2015 2,395,143 2,287,625
Fannie Mae, 4.6%, 2014 1,855,562 1,784,440
Fannie Mae, 4.62%, 2015 3,423,098 3,284,262
Fannie Mae, 4.65%, 2013 3,640,426 3,507,125
Fannie Mae, 4.665%, 2015 1,616,228 1,554,028
Fannie Mae, 4.667%, 2014 9,357,108 9,016,602
Fannie Mae, 4.69%, 2015 1,317,313 1,269,017
Fannie Mae, 4.7%, 2015 1,854,102 1,786,589
Fannie Mae, 4.73%, 2012 2,842,972 2,766,836
Fannie Mae, 4.74%, 2015 1,810,000 1,743,922
Fannie Mae, 4.77%, 2014 1,600,457 1,548,685
Fannie Mae, 4.786%, 2012 840,370 819,789
Fannie Mae, 4.79%, 2012 11,265,251 10,926,565
Fannie Mae, 4.8%, 2013 1,306,876 1,275,874
Fannie Mae, 4.815%, 2015 1,968,000 1,904,061
Fannie Mae, 4.82%, 2014 - 2015 6,694,285 6,490,990
Fannie Mae, 4.845%, 2013 3,854,233 3,759,052
Fannie Mae, 4.847%, 2014 10,447,692 10,165,748
Fannie Mae, 4.85%, 2015 1,470,955 1,431,131
Fannie Mae, 4.87%, 2015 1,404,535 1,367,486
Fannie Mae, 4.871%, 2014 5,798,675 5,663,573
Fannie Mae, 4.88%, 2020 1,403,530 1,379,110
Fannie Mae, 4.89%, 2015 1,299,814 1,267,647
Fannie Mae, 4.92%, 2014 1,488,059 1,467,249
Fannie Mae, 4.925%, 2015 5,171,900 5,046,823
Fannie Mae, 4.996%, 2017 4,960,773 4,867,559
Fannie Mae, 5%, 2013 - 2027 44,831,039 44,133,765
Fannie Mae, 5.06%, 2013 1,539,477 1,518,703
Fannie Mae, 5.1%, 2014 2,011,491 1,981,786
Fannie Mae, 5.37%, 2013 1,991,910 1,996,968
Fannie Mae, 5.423%, 2016 3,020,715 3,042,855
Fannie Mae, 5.48%, 2015 2,578,305 2,610,692
Fannie Mae, 5.5%, 2017 - 2035 214,943,486 211,922,999
Fannie Mae, 6%, 2017 - 2034 52,486,506 52,744,945
Fannie Mae, 6.5%, 2016 - 2036 31,732,465 32,280,693
Fannie Mae, 7.007%, 2007 908,248 912,940
Fannie Mae, 7.5%, 2024 - 2031 782,511 811,916
Freddie Mac, 4.375%, 2015 8,979,730 8,726,047
Freddie Mac, 4.5%, 2013 - 2015 9,540,956 9,436,186
Freddie Mac, 5%, 2016 - 2025 42,438,621 42,138,105
Freddie Mac, 5.5%, 2025 - 2035 49,817,791 49,012,865
Freddie Mac, 6%, 2017 - 2035 22,765,989 22,889,020
Freddie Mac, 6.5%, 2016 1,604,512 1,633,132
Ginnie Mae, 5.5%, 2033 - 2034 31,152,942 30,885,873
--------------
$ 674,365,499
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U.S. Government Agencies - 29.8%
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Aid-Egypt, 4.45%, 2015 $ 7,118,000 $ 6,804,795
Aid-Israel, 0%, 2021 - 2024 23,298,000 9,679,898
Aid-Israel, 5.5%, 2023 16,567,000 17,035,448
Empresa Energetica Cornito Ltd., 6.07%, 2010 6,608,000 6,694,697
Fannie Mae, 3.125%, 2007 35,000,000 34,108,795
Fannie Mae, 4.25%, 2007 30,000,000 29,671,500
Fannie Mae, 4.5%, 2008 15,000,000 14,830,680
Fannie Mae, 4.625%, 2013 3,286,000 3,197,403
Fannie Mae, 5.5%, 2011 77,391,000 78,832,020
Farmer Mac, 5.5%, 2011 (a) 11,110,000 11,285,282
Federal Home Loan Bank, 4.5%, 2007 8,450,000 8,401,818
Federal Home Loan Bank, 4.625%, 2008 34,255,000 34,021,552
Freddie Mac, 4.2%, 2007 12,065,000 11,923,055
Freddie Mac, 4.875%, 2013 2,121,000 2,093,622
Freddie Mac, 5.05%, 2015 13,957,000 13,820,808
Overseas Private Investment Corp., 0%, 2007 7,049,331 7,296,058
Small Business Administration, 4.34%, 2024 4,070,075 3,851,505
Small Business Administration, 4.72%, 2024 6,919,577 6,694,657
Small Business Administration, 4.76%, 2025 8,353,275 8,049,754
Small Business Administration, 4.77%, 2024 6,038,310 5,859,744
Small Business Administration, 4.86%, 2024 - 2025 9,425,523 9,168,123
Small Business Administration, 4.87%, 2024 5,549,552 5,400,606
Small Business Administration, 4.88%, 2024 3,459,479 3,370,381
Small Business Administration, 4.89%, 2023 6,991,496 6,837,066
Small Business Administration, 4.98%, 2023 2,758,255 2,711,884
Small Business Administration, 4.99%, 2024 5,035,331 4,942,333
Small Business Administration, 5.11%, 2025 4,921,121 4,854,094
Small Business Administration, 5.18%, 2024 6,929,336 6,878,281
Small Business Administration, 5.19%, 2024 4,429,120 4,396,224
Small Business Administration, 5.52%, 2024 4,236,591 4,273,344
Small Business Administration, 6.07%, 2022 3,502,017 3,597,161
Small Business Administration, 6.34%, 2021 3,936,899 4,068,567
Small Business Administration, 6.35%, 2021 3,351,644 3,463,645
Small Business Administration, 6.44%, 2021 3,379,685 3,500,555
Small Business Administration, 6.625%, 2021 3,477,801 3,628,085
Small Business Administration, 8.625%, 2011 155,113 161,695
Small Business Administration, 8.8%, 2011 157,264 163,901
Small Business Administration, 9.05%, 2009 43,633 45,010
Small Business Administration, 9.1%, 2009 17,131 17,596
Small Business Administration, 9.25%, 2010 44,697 46,639
Small Business Administration, 9.3%, 2010 126,455 132,057
Small Business Administration, 9.5%, 2010 91,493 95,165
Small Business Administration, 9.65%, 2010 131,873 137,581
Small Business Administration, 9.7%, 2010 84,147 87,858
Small Business Administration, 9.9%, 2008 30,020 30,718
Small Business Administration, 10.05%, 2008 - 2009 7,201 7,423
U.S. Department of Housing & Urban Development, 6.36%, 2016 7,000,000 7,221,277
U.S. Department of Housing & Urban Development, 6.59%, 2016 6,599,000 6,726,202
--------------
$ 400,116,562
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U.S. Treasury Obligations - 12.2%
- ----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.875%, 2025 $ 1,307,000 $ 1,613,124
U.S. Treasury Bonds, 6%, 2026 32,933,000 37,196,276
U.S. Treasury Bonds, 5.25%, 2028 1,139,000 1,187,319
U.S. Treasury Bonds, 6.25%, 2030 6,166,000 7,302,375
U.S. Treasury Bonds, 4.5%, 2036 16,366,000 15,403,221
U.S. Treasury Notes, 5.5%, 2008 16,147,000 16,296,489
U.S. Treasury Notes, 6%, 2009 4,566,000 4,726,344
U.S. Treasury Notes, 6.5%, 2010 (f) 65,997,000 69,704,183
U.S. Treasury Notes, TIPS, 3.875%, 2009 10,263,148 10,604,715
--------------
$ 164,034,046
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TOTAL BONDS (IDENTIFIED COST, $1,349,438,108) $1,329,424,711
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Repurchase Agreements - 0.7%
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Merrill Lynch & Co., 5.28%, dated 8/31/06, total to be
received $9,519,396 (secured by various U S. Treasury and
Federal Agency obligations and Mortgage Backed Securities in a
jointly traded account), at Cost $ 9,518,000 $ 9,518,000
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TOTAL INVESTMENTS (IDENTIFIED COST, $1,358,956,108) (k) $1,338,942,711
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Other Assets, Less Liabilities - 0.3% 4,180,199
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NET ASSETS - 100.0% $1,343,122,910
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(a) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These
securities may be sold in the ordinary course of business in transactions exempt from
registration, normally to qualified institutional buyers. At period end, the aggregate value of
these securities was $11,285,282, representing 0.8% of net assets.
(f) All or a portion of the security has been segregated as collateral for an open futures contract.
(k) As of August 31, 2006, the fund held securities fair valued in accordance with the policies
adopted by the Board of Trustees, aggregating $1,316,053,744 and 98.29% of market value. All of
these security values were provided by an independent pricing service using an evaluated bid.
FUTURES CONTRACTS OUTSTANDING AT AUGUST 31, 2006:
UNREALIZED
EXPIRATION APPRECIATION
DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION)
U.S. Treasury Bond (Short) 224 $24,878,000 Sep-06 $(56,784)
U.S. Treasury Note 5 yr (Long) 175 18,394,141 Dec-06 45,872
U.S. Treasury Note 10 yr (Short) 356 38,225,500 Dec-06 (76,340)
- ----------------------------------------------------------------------------------------------------
$(87,252)
At August 31, 2006, the fund had sufficient cash and/or securities to cover any commitments under
these derivative contracts.
The following abbreviations are used in this report and are defined:
STRIPS Separate Trading of Registered Interest and Principal of Securities
TIPS Treasury Inflation Protected Security
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 8/31/06 (unaudited)
This statement represents your fund's balance sheet, which details the assets and liabilities
comprising the total value of the fund.
ASSETS
- --------------------------------------------------------------------------------------------------------
Investments, at value (identified cost, $1,358,956,108) $1,338,942,711
Cash 27,697
Receivable for fund shares sold 812,492
Interest receivable 10,732,588
Receivable from investment adviser 13,653
Other assets 7,168
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Total assets $1,350,536,309
- --------------------------------------------------------------------------------------------------------
LIABILITIES
- --------------------------------------------------------------------------------------------------------
Distributions payable $930,805
Payable for daily variation margin on open futures contracts 133,094
Payable for investments purchased 1,482,055
Payable for fund shares reacquired 4,241,678
Payable to affiliates
Management fee 22,036
Shareholder servicing costs 41,016
Distribution and service fees 20,545
Administrative services fee 1,317
Program manager fees 13
Retirement plan administration and services fees 85
Payable for independent trustees' compensation 131,052
Accrued expenses and other liabilities 409,703
- --------------------------------------------------------------------------------------------------------
Total liabilities $7,413,399
- --------------------------------------------------------------------------------------------------------
Net assets $1,343,122,910
- --------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
- --------------------------------------------------------------------------------------------------------
Paid-in capital $1,437,064,480
Unrealized appreciation (depreciation) on investments (20,100,649)
Accumulated net realized gain (loss) on investments (72,542,609)
Accumulated distributions in excess of net investment income (1,298,312)
- --------------------------------------------------------------------------------------------------------
Net assets $1,343,122,910
- --------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 142,880,055
- --------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) -- continued
Class A shares
- --------------------------------------------------------------------------------------------------------
Net assets $759,893,024
- --------------------------------------------------------------------------------------------------------
Shares outstanding 80,820,843
- --------------------------------------------------------------------------------------------------------
Net asset value per share $9.40
- --------------------------------------------------------------------------------------------------------
Offering price per share (100/95.25Xnet asset value per share) $9.87
- --------------------------------------------------------------------------------------------------------
Class B shares
- --------------------------------------------------------------------------------------------------------
Net assets $145,408,967
- --------------------------------------------------------------------------------------------------------
Shares outstanding 15,488,925
- --------------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.39
- --------------------------------------------------------------------------------------------------------
Class C shares
- --------------------------------------------------------------------------------------------------------
Net assets $30,158,449
- --------------------------------------------------------------------------------------------------------
Shares outstanding 3,199,018
- --------------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.43
- --------------------------------------------------------------------------------------------------------
Class I shares
- --------------------------------------------------------------------------------------------------------
Net assets $385,261,169
- --------------------------------------------------------------------------------------------------------
Shares outstanding 40,987,365
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.40
- --------------------------------------------------------------------------------------------------------
Class R shares
- --------------------------------------------------------------------------------------------------------
Net assets $12,013,063
- --------------------------------------------------------------------------------------------------------
Shares outstanding 1,278,655
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.40
- --------------------------------------------------------------------------------------------------------
Class R1 shares
- --------------------------------------------------------------------------------------------------------
Net assets $384,231
- --------------------------------------------------------------------------------------------------------
Shares outstanding 40,899
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.39
- --------------------------------------------------------------------------------------------------------
Class R2 shares
- --------------------------------------------------------------------------------------------------------
Net assets $786,012
- --------------------------------------------------------------------------------------------------------
Shares outstanding 83,698
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.39
- --------------------------------------------------------------------------------------------------------
Class R3 shares
- --------------------------------------------------------------------------------------------------------
Net assets $2,893,138
- --------------------------------------------------------------------------------------------------------
Shares outstanding 307,948
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.39
- --------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) -- continued
Class R4 shares
- --------------------------------------------------------------------------------------------------------
Net assets $5,346,953
- --------------------------------------------------------------------------------------------------------
Shares outstanding 568,618
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.40
- --------------------------------------------------------------------------------------------------------
Class R5 shares
- --------------------------------------------------------------------------------------------------------
Net assets $52,239
- --------------------------------------------------------------------------------------------------------
Shares outstanding 5,557
- --------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $9.40
- --------------------------------------------------------------------------------------------------------
Class 529A shares
- --------------------------------------------------------------------------------------------------------
Net assets $334,735
- --------------------------------------------------------------------------------------------------------
Shares outstanding 35,661
- --------------------------------------------------------------------------------------------------------
Net asset value per share $9.39
- --------------------------------------------------------------------------------------------------------
Offering price per share (100/95.25Xnet asset value per share) $9.86
- --------------------------------------------------------------------------------------------------------
Class 529B shares
- --------------------------------------------------------------------------------------------------------
Net assets $379,666
- --------------------------------------------------------------------------------------------------------
Shares outstanding 40,459
- --------------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.38
- --------------------------------------------------------------------------------------------------------
Class 529C shares
- --------------------------------------------------------------------------------------------------------
Net assets $211,264
- --------------------------------------------------------------------------------------------------------
Shares outstanding 22,409
- --------------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.43
- --------------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering prices of Class A and Class 529A shares are reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A, Class B, Class C, Class
529B, and Class 529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF OPERATIONS
Six months ended 8/31/06 (unaudited)
This statement describes how much your fund earned in investment income and accrued in expenses. It
also describes any gains and/or losses generated by fund operations.
NET INVESTMENT INCOME
- --------------------------------------------------------------------------------------------------------
Interest income $34,721,750
- --------------------------------------------------------------------------------------------------------
Expenses
Management fee $2,753,924
Distribution and service fees 1,985,880
Program manager fees 1,259
Shareholder servicing costs 1,118,484
Administrative services fee 120,529
Retirement plan administration and services fees 7,010
Independent trustees' compensation 20,258
Custodian fee 252,968
Shareholder communications 78,147
Auditing fees 25,269
Legal fees 15,993
Miscellaneous 161,754
- --------------------------------------------------------------------------------------------------------
Total expenses $6,541,475
- --------------------------------------------------------------------------------------------------------
Fees paid indirectly (56,324)
Reduction of expenses by investment adviser (762,917)
- --------------------------------------------------------------------------------------------------------
Net expenses $5,722,234
- --------------------------------------------------------------------------------------------------------
Net investment income $28,999,516
- --------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------------------------------------------------------------
Realized gain (loss) (identified cost basis)
Investment transactions $(2,136,230)
Futures contracts 341,867
- --------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments $(1,794,363)
- --------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
Investments $(7,676,874)
Futures contracts (20,347)
- --------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments $(7,697,221)
- --------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $(9,491,584)
- --------------------------------------------------------------------------------------------------------
Change in net assets from operations $19,507,932
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENTS OF CHANGES IN NET ASSETS
These statements describe the increases and/or decreases in net assets resulting from operations,
any distributions, and any shareholder transactions.
SIX MONTHS ENDED YEAR ENDED
8/31/06 2/28/06
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS
- ----------------------------------------------------------------------------------------------------------
Net investment income $28,999,516 $58,120,328
Net realized gain (loss) on investments (1,794,363) (4,878,236)
Net unrealized gain (loss) on investments (7,697,221) (21,107,783)
- ----------------------------------------------------------------------------------------------------------
Change in net assets from operations $19,507,932 $32,134,309
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DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- ----------------------------------------------------------------------------------------------------------
From net investment income
Class A $(17,757,098) $(36,730,768)
Class B (2,979,330) (6,947,250)
Class C (611,821) (1,420,773)
Class I (8,998,994) (13,967,234)
Class R (254,627) (436,665)
Class R1 (4,685) (4,121)
Class R2 (11,863) (6,328)
Class R3 (45,324) (35,810)
Class R4 (73,319) (22,606)
Class R5 (1,197) (2,004)
Class 529A (8,010) (15,171)
Class 529B (6,948) (13,373)
Class 529C (3,956) (8,730)
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Total distributions declared to shareholders $(30,757,172) $(59,610,833)
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Change in net assets from fund share transactions $(58,346,106) $(61,115,105)
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Redemption fees $-- $3,132
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Total change in net assets $(69,595,346) $(88,588,497)
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NET ASSETS
- ----------------------------------------------------------------------------------------------------------
At beginning of period 1,412,718,256 1,501,306,753
At end of period (including accumulated distributions
in excess of net investment income of $1,298,312 and
undistributed net investment income of $459,344) $1,343,122,910 $1,412,718,256
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund's financial performance for the semiannual period and
the past 5 fiscal years (or life of a particular share class, if shorter). Certain information reflects financial results for a
single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an
investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------------------------
CLASS A 8/31/06 2006 2005 2004 2003 2002
(UNAUDITED)
Net asset value, beginning of period $9.47 $9.65 $9.84 $10.03 $9.73 $9.71
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INCOME (LOSS) FROM
INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.20 $0.39 $0.36 $0.29 $0.39 $0.50
Net realized and unrealized gain
(loss) on investments (0.06) (0.17) (0.19) (0.08) 0.42 0.12
- ---------------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.14 $0.22 $0.17 $0.21 $0.81 $0.62
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LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
- ---------------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.21) $(0.40) $(0.36) $(0.40) $(0.51) $(0.60)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.40 $9.47 $9.65 $9.84 $10.03 $9.73
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Total return (%) (r)(t) 1.54(n) 2.28 1.81 2.19 8.54 6.59
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RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 0.91(a) 0.90 0.93 1.00 0.98 1.01
Expenses after expense reductions (f) 0.80(a) 0.80 0.83 0.95 0.93 0.96
Net investment income 4.25(a) 4.03 3.75 2.94 3.97 5.16
Portfolio turnover 7 73 126 143 134 116
Net assets at end of period (000 Omitted) $759,893 $826,001 $932,879 $803,974 $927,886 $622,606
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------------------------
CLASS B 8/31/06 2006 2005 2004 2003 2002
(UNAUDITED)
Net asset value, beginning of period $9.46 $9.64 $9.83 $10.02 $9.72 $9.69
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INCOME (LOSS) FROM
INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.16 $0.31 $0.29 $0.24 $0.33 $0.44
Net realized and unrealized gain
(loss) on investments (0.05) (0.16) (0.18) (0.09) 0.41 0.12
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Total from investment operations $0.11 $0.15 $0.11 $0.15 $0.74 $0.56
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LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
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From net investment income $(0.18) $(0.33) $(0.30) $(0.34) $(0.44) $(0.53)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.39 $9.46 $9.64 $9.83 $10.02 $9.72
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Total return (%) (r)(t) 1.16(n) 1.52 1.12 1.53 7.84 5.98
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RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.66(a) 1.65 1.62 1.64 1.63 1.66
Expenses after expense reductions (f) 1.55(a) 1.55 1.52 1.59 1.58 1.61
Net investment income 3.51(a) 3.27 3.03 2.42 3.32 4.52
Portfolio turnover 7 73 126 143 134 116
Net assets at end of period (000 Omitted) $145,409 $175,207 $233,734 $255,512 $408,553 $263,964
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------------------------
CLASS C 8/31/06 2006 2005 2004 2003 2002
(UNAUDITED)
Net asset value, beginning of period $9.50 $9.68 $9.87 $10.06 $9.76 $9.73
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INCOME (LOSS) FROM
INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.17 $0.32 $0.29 $0.25 $0.33 $0.44
Net realized and unrealized gain
(loss) on investments (0.06) (0.17) (0.18) (0.10) 0.41 0.12
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Total from investment operations $0.11 $0.15 $0.11 $0.15 $0.74 $0.56
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LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
- ---------------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.18) $(0.33) $(0.30) $(0.34) $(0.44) $(0.53)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.43 $9.50 $9.68 $9.87 $10.06 $9.76
- ---------------------------------------------------------------------------------------------------------------------------------
Total return (%) (r)(t) 1.16(n) 1.52 1.13 1.54 7.81 5.97
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RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.66(a) 1.65 1.62 1.64 1.63 1.66
Expenses after expense reductions (f) 1.55(a) 1.55 1.52 1.59 1.58 1.61
Net investment income 3.51(a) 3.27 2.95 2.47 3.32 4.51
Portfolio turnover 7 73 126 143 134 116
Net assets at end of period (000 Omitted) $30,158 $35,768 $44,692 $63,609 $110,096 $81,397
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------------------------
CLASS I 8/31/06 2006 2005 2004 2003 2002
(UNAUDITED)
Net asset value, beginning of period $9.47 $9.65 $9.84 $10.03 $9.73 $9.71
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INCOME (LOSS) FROM
INVESTMENT OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.21 $0.41 $0.39 $0.25 $0.33 $0.53
Net realized and unrealized
gain (loss) on investments (0.06) (0.17) (0.19) (0.00)(g)(w) 0.51 0.13
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Total from investment operations $0.15 $0.24 $0.20 $0.25 $0.84 $0.66
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LESS DISTRIBUTIONS
DECLARED TO SHAREHOLDERS
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From net investment income $(0.22) $(0.42) $(0.39) $(0.44) $(0.54) $(0.64)
- ---------------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.40 $9.47 $9.65 $9.84 $10.03 $9.73
- ---------------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.66(n) 2.54 2.14 2.55 8.92 6.99
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RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 0.66(a) 0.65 0.60 0.67 0.63 0.66
Expenses after expense reductions (f) 0.55(a) 0.55 0.50 0.62 0.58 0.61
Net investment income 4.49(a) 4.34 4.09 2.57 3.64 5.49
Portfolio turnover 7 73 126 143 134 116
Net assets at end of period (000 Omitted) $385,261 $359,623 $279,080 $168,124 $33,682 $1,797
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------
CLASS R 8/31/06 2006 2005 2004 2003(i)
(UNAUDITED)
Net asset value, beginning of period $9.47 $9.65 $9.84 $10.03 $10.03
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.19 $0.36 $0.34 $0.18 $0.16
Net realized and unrealized gain (loss)
on investments (0.06) (0.17) (0.18) 0.02(g) (0.08)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.13 $0.19 $0.16 $0.20 $0.08
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LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.20) $(0.37) $(0.35) $(0.39) $(0.08)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.40 $9.47 $9.65 $9.84 $10.03
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.41(n) 2.03 1.63 2.05 0.78(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.16(a) 1.15 1.11 1.19 1.13(a)
Expenses after expense reductions (f) 1.05(a) 1.05 1.01 1.14 1.08(a)
Net investment income 4.00(a) 3.76 3.64 1.87 3.04(a)
Portfolio turnover 7 73 126 143 134
Net assets at end of period (000 Omitted) $12,013 $11,751 $9,411 $6,188 $79
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SIX MONTHS YEAR ENDED
CLASS R1 ENDED 8/31/06 2/28/06(i)
(UNAUDITED)
Net asset value, beginning of period $9.46 $9.57
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INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.15 $0.29
Net realized and unrealized gain (loss) on investments (0.05) (0.12)(g)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.10 $0.17
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LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.17) $(0.28)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.39 $9.46
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.11(n) 1.82(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.86(a) 1.85(a)
Expenses after expense reductions (f) 1.65(a) 1.68(a)
Net investment income 3.39(a) 3.25(a)
Portfolio turnover 7 73
Net assets at end of period (000 Omitted) $384 $192
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED
CLASS R2 ENDED 8/31/06 2/28/06(i)
(UNAUDITED)
Net asset value, beginning of period $9.46 $9.57
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INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.17 $0.31
Net realized and unrealized gain (loss) on investments (0.05) (0.11)(g)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.12 $0.20
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LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.19) $(0.31)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.39 $9.46
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.28(n) 2.13(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.56(a) 1.55(a)
Expenses after expense reductions (f) 1.29(a) 1.34(a)
Net investment income 3.73(a) 3.60(a)
Portfolio turnover 7 73
Net assets at end of period (000 Omitted) $786 $358
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SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED -----------------------------------
CLASS R3 8/31/06 2006 2005 2004(i)
(UNAUDITED)
Net asset value, beginning of period $9.47 $9.65 $9.84 $9.69
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.18 $0.35 $0.38 $0.02
Net realized and unrealized gain (loss) on
investments (0.07) (0.18) (0.25) 0.23(g)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.11 $0.17 $0.13 $0.25
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.19) $(0.35) $(0.32) $(0.10)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.39 $9.47 $9.65 $9.84
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.23(n) 1.82 1.38 2.58(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.41(a) 1.40 1.36 1.42(a)
Expenses after expense reductions (f) 1.20(a) 1.24 1.26 1.37(a)
Net investment income 3.83(a) 3.64 3.99 0.72(a)
Portfolio turnover 7 73 126 143
Net assets at end of period (000 Omitted) $2,893 $1,392 $422 $41
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEAR ENDED
CLASS R4 NDED 8/31/06 2/28/06(i)
(UNAUDITED)
Net asset value, beginning of period $9.48 $9.58
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INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.20 $0.36
Net realized and unrealized gain (loss) on investments (0.08) (0.11)(g)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.12 $0.25
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.20) $(0.35)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.40 $9.48
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.36(n) 2.64(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.06(a) 1.05(a)
Expenses after expense reductions (f) 0.95(a) 0.95(a)
Net investment income 4.09(a) 4.02(a)
Portfolio turnover 7 73
Net assets at end of period (000 Omitted) $5,347 $1,305
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SIX MONTHS YEAR ENDED
CLASS R5 ENDED 8/31/06 2/28/06(i)
(UNAUDITED)
Net asset value, beginning of period $9.47 $9.58
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.21 $0.37
Net realized and unrealized gain (loss) on investments (0.06) (0.10)(g)
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.15 $0.27
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.22) $(0.38)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.40 $9.47
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r) 1.61(n) 2.81(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 0.76(a) 0.75(a)
Expenses after expense reductions (f) 0.65(a) 0.65(a)
Net investment income 4.40(a) 4.20(a)
Portfolio turnover 7 73
Net assets at end of period (000 Omitted) $52 $51
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------
CLASS 529A 8/31/06 2006 2005 2004 2003(i)
(UNAUDITED)
Net asset value, beginning of period $9.46 $9.64 $9.83 $10.02 $9.81
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.18 $0.35 $0.33 $0.26 $0.28
Net realized and unrealized gain (loss)
on investments (0.06) (0.17) (0.18) (0.07) 0.20
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.12 $0.18 $0.15 $0.19 $0.48
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.19) $(0.36) $(0.34) $(0.38) $(0.27)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.39 $9.46 $9.64 $9.83 $10.02
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r)(t) 1.36(n) 1.92 1.53 1.94 4.97(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.26(a) 1.25 1.21 1.25 1.23(a)
Expenses after expense reductions (f) 1.15(a) 1.15 1.11 1.20 1.18(a)
Net investment income 3.90(a) 3.68 3.47 2.69 3.05(a)
Portfolio turnover 7 73 126 143 134
Net assets at end of period (000 Omitted) $335 $401 $388 $332 $312
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SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------
CLASS 529B 8/31/06 2006 2005 2004 2003(i)
(UNAUDITED)
Net asset value, beginning of period $9.46 $9.64 $9.82 $10.01 $9.80
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.15 $0.29 $0.26 $0.20 $0.24
Net realized and unrealized gain (loss) on
investments (0.07) (0.17) (0.17) (0.08) 0.21
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.08 $0.12 $0.09 $0.12 $0.45
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.16) $(0.30) $(0.27) $(0.31) $(0.24)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.38 $9.46 $9.64 $9.82 $10.01
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r)(t) 0.92(n) 1.26 0.97 1.27 4.58(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.91(a) 1.90 1.87 1.90 1.88(a)
Expenses after expense reductions (f) 1.80(a) 1.80 1.77 1.85 1.83(a)
Net investment income 3.25(a) 3.03 2.71 2.07 2.53(a)
Portfolio turnover 7 73 126 143 134
Net assets at end of period (000 Omitted) $380 $435 $404 $524 $522
- -----------------------------------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
SIX MONTHS YEARS ENDED 2/28 AND 2/29
ENDED --------------------------------------------------
CLASS 529C 8/31/06 2006 2005 2004 2003(i)
(UNAUDITED)
Net asset value, beginning of period $9.50 $9.68 $9.87 $10.06 $9.84
- -----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income (d) $0.15 $0.29 $0.26 $0.22 $0.20
Net realized and unrealized gain (loss) on
investments (0.05) (0.17) (0.18) (0.10) 0.26
- -----------------------------------------------------------------------------------------------------------------------------
Total from investment operations $0.10 $0.12 $0.08 $0.12 $0.46
- -----------------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- -----------------------------------------------------------------------------------------------------------------------------
From net investment income $(0.17) $(0.30) $(0.27) $(0.31) $(0.24)
- -----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.43 $9.50 $9.68 $9.87 $10.06
- -----------------------------------------------------------------------------------------------------------------------------
Total return (%) (r)(t) 1.03(n) 1.27 0.88 1.28 4.66(n)
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
AND SUPPLEMENTAL DATA
- -----------------------------------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 1.91(a) 1.90 1.86 1.89 1.88(a)
Expenses after expense reductions (f) 1.80(a) 1.80 1.76 1.84 1.83(a)
Net investment income 3.26(a) 3.01 2.76 2.15 2.37(a)
Portfolio turnover 7 73 126 143 134
Net assets at end of period (000 Omitted) $211 $235 $297 $283 $383
- -----------------------------------------------------------------------------------------------------------------------------
Any redemption fees charged by the fund during the 2004 and 2005 fiscal years resulted in a per share impact of less than $0.01.
(a) Annualized.
(d) Per share data are based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly.
(g) The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the timing
of sales of fund shares and the amount of per share realized and unrealized gains and losses at such time.
(i) For the period from the class' inception, December 31, 2002 (Class R), July 31, 2002 (Classes 529A, 529B, and 529C), October
31, 2003 (Class R3) and April 1, 2005 (Classes R1, R2, R4, and R5) through the stated period end.
(n) Not annualized.
(r) Certain expenses have been reduced without which performance would have been lower.
(t) Total returns do not include any applicable sales charges.
(w) Per share amount was less than $0.01.
SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) BUSINESS AND ORGANIZATION
MFS Government Securities Fund (the fund) is a series of MFS Series Trust XIII
(the trust). The trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-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.
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. Short-term instruments with a maturity at issuance of 60
days or less may be valued at amortized cost, which approximates market value.
Futures contracts are generally valued at last posted settlement price as
reported by an independent pricing service on the market on which they are
primarily traded. Futures contracts for which there were no trades that day for
a particular position are generally valued at the closing bid quotation as
reported by an independent pricing service on the market on which they are
primarily traded. 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 Board of Trustees has delegated primary
responsibility for determining or causing to be determined the value of the
fund'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 fund'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 fund'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 fund's net asset value
may differ from quoted or published prices for the same investments.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The fund requires that the
securities collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the fund to obtain those securities
in the event of a default under the repurchase agreement. The fund 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 fund under each such
repurchase agreement. The fund, 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 fund invests in inflation-adjusted debt
securities issued by the U.S. Treasury. The fund 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.
DERIVATIVE RISK - The fund 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 fund 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 purchased options and futures contracts.
FUTURES CONTRACTS - The fund 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 fund 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 fund 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 fund. Upon entering into such contracts, the fund bears
the risk of interest or exchange rates or securities prices moving unexpectedly,
in which case, the fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
SHORT TERM FEES - For purchases made on or after July 1, 2004 and before April
1, 2005, the fund charged a 2% redemption fee (which was retained by the fund)
on proceeds from Class A, Class B, Class C, and Class I shares redeemed or
exchanged within 5 business days following their acquisition (either by purchase
or exchange). Effective April 1, 2005, the fund no longer charges a redemption
fee. See the fund's prospectus for details. Any redemption fees charged are
accounted for as an addition to paid-in-capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the
trade date. Some securities may be purchased on a "when-issued" or "forward
delivery" basis, which means that the securities will be delivered to the fund
at a future date, usually beyond customary settlement time. Interest income is
recorded on the accrual basis. All premium and discount is amortized or accreted
for financial statement purposes in accordance with U.S. generally accepted
accounting principles. All discount is accreted for tax reporting purposes as
required by federal income tax regulations.
The fund may enter into "TBA" (to be announced) purchase commitments to purchase
securities for a fixed unit price at a future date. Although the unit price has
been established, the principal value has not been finalized. However, the
principal amount of the commitments will not fluctuate more than 0.01%. The fund
holds, and maintains until settlement date, cash or high-grade debt obligations
in an amount sufficient to meet the purchase price, or the fund may enter into
offsetting contracts for the forward sale of other securities it owns. Income on
the securities will not be earned until settlement date. TBA purchase
commitments may be considered securities in themselves, and involve a risk of
loss if the value of the security to be purchased declines prior to settlement
date, which is in addition to the risk of decline in the value of the fund's
other assets. Unsettled TBA purchase commitments are valued at the current
market value of the underlying securities.
The fund may enter into "TBA" (to be announced) sale commitments to hedge its
portfolio positions or to sell mortgage-backed securities it owns under delayed
delivery arrangements. Proceeds of TBA sale commitments are not received until
the contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by the
fund. This amount, for the six months ended August 31, 2006, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund intends to qualify as a regulated
investment company, as defined under Subchapter M of the Internal Revenue Code,
and to distribute all of its taxable income, including realized capital gains.
Accordingly, no provision for federal income tax is required in the financial
statements. Foreign taxes, if any, have been accrued by the fund 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 expiration of capital loss
carryforwards and amortization and accretion of debt securities.
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:
2/28/06 2/28/05
Ordinary income (including any short-term
capital gains) $59,610,833 $48,761,052
The federal tax cost and the tax basis components of distributable earnings were
as follows:
AS OF 8/31/06
Cost of investments $1,369,509,124
---------------------------------------------------------------------
Gross appreciation $4,039,593
Gross depreciation (34,606,006)
---------------------------------------------------------------------
Net unrealized appreciation (depreciation) $(30,566,413)
AS OF 2/28/06
Undistributed ordinary income $5,576,677
Capital loss carryforwards (59,308,939)
Post-October capital loss deferral (2,471,227)
Other temporary differences (5,117,333)
Net unrealized appreciation (depreciation) (21,371,508)
As of February 28, 2006, the fund had capital loss carryforwards available to
offset future realized gains. Such losses expire as follows:
2/28/07 $(5,253,445)
2/29/08 (15,270,459)
2/28/09 (3,477,230)
2/28/11 (11,527,172)
2/29/12 (5,729,829)
2/28/13 (11,095,767)
2/28/14 (6,955,037)
---------------------------------------------------------------------
$(59,308,939)
The availability of a portion of the capital loss carryforwards, which were
acquired on November 19, 2004 in connection with the MFS Government Mortgage
Fund merger, may be limited in a given year.
In June 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (the "Interpretation") was issued, and is effective for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax years as
of the effective date. This Interpretation prescribes a minimum threshold for
financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return, and requires certain expanded disclosures.
Management has recently begun to evaluate the application of the Interpretation
to the fund, and has not at this time determined the impact, if any, resulting
from the adoption of this Interpretation on the fund's financial statements.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses. Class B and Class 529B shares will convert to Class A and Class 529A
shares, respectively, approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
management and related administrative services and facilities to the fund. The
management fee is computed daily and paid monthly at an annual rate of 0.40% of
the fund's average daily net assets.
As part of a settlement agreement with the New York Attorney General concerning
market timing and related matters, MFS has agreed to reduce the management fee
to 0.30% of the fund's average daily net assets for the period March 1, 2004
through February 28, 2009. For the six months ended August 31, 2006, this waiver
amounted to $688,481 and is reflected as a reduction of total expenses in the
Statement of Operations.
The management fee incurred for the six months ended August 31, 2006 was
equivalent to an annual effective rate of 0.30% of the fund's average daily net
assets.
The investment adviser has agreed in writing to pay a portion of the fund's
operating expenses, exclusive of management, distribution and service,
retirement plan administration and services, program manager, and certain other
fees and expenses, such that operating expenses do not exceed 0.25% annually of
the fund's average daily net assets. This written agreement will continue
through June 30, 2007 unless changed or rescinded by the fund's Board of
Trustees. For the six months ended August 31, 2006, this reduction amounted to
$68,608 and is reflected as a reduction of total expenses in the Statement of
Operations.
DISTRIBUTOR - MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of
MFS, as distributor, received $15,502 and $65 for the six months ended August
31, 2006, as its portion of the initial sales charge on sales of Class A and
Class 529A shares of the fund, respectively.
The Board of Trustees has adopted a distribution plan for certain class shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940.
The fund's distribution plan provides that the fund will pay MFD for services
provided by MFD and financial intermediaries in connection with the distribution
and servicing of certain share classes. One component of the plan is a
distribution fee paid to MFD and another component of the plan is a service fee
paid to MFD. MFD may subsequently pay all, or a portion, of the distribution
and/or service fees to financial intermediaries.
Distribution Fee Plan Table:
TOTAL ANNUAL DISTRIBUTION
DISTRIBUTION SERVICE DISTRIBUTION EFFECTIVE AND SERVICE
FEE RATE FEE RATE PLAN(d) RATE(e) FEE
Class A 0.10% 0.25% 0.35% 0.25% $985,023
Class B 0.75% 0.25% 1.00% 1.00% 792,429
Class C 0.75% 0.25% 1.00% 1.00% 162,711
Class R 0.25% 0.25% 0.50% 0.50% 29,870
Class R1 0.50% 0.25% 0.75% 0.75% 952
Class R2 0.25% 0.25% 0.50% 0.50% 1,468
Class R3 0.25% 0.25% 0.50% 0.50% 5,476
Class R4 -- 0.25% 0.25% 0.25% 4,168
Class 529A 0.25% 0.25% 0.50% 0.35% 675
Class 529B 0.75% 0.25% 1.00% 1.00% 1,979
Class 529C 0.75% 0.25% 1.00% 1.00% 1,129
- ----------------------------------------------------------------------------------------------------------------
Total distribution and service fees $1,985,880
(d) In accordance with the distribution plan for certain classes, the fund pays distribution and/or service fees
up to these annual percentage rates of each class' average daily net assets.
(e) The annual effective rates represent actual fees incurred under the distribution plan for the six months ended
August 31, 2006 based on each class' average daily net assets. Payment of the 0.10% annual Class A
distribution fee is not yet in effect and will be implemented on such date as the fund's Board of Trustees may
determine. 0.10% of the Class 529A distribution fee is currently being paid by the fund. Payment of the
remaining 0.15% of the Class 529A distribution fee is not yet in effect and will be implemented on such date
as the fund's Board of Trustees may determine.
Certain Class A, Class C and Class 529C shares are subject to a contingent
deferred sales charge in the event of a shareholder redemption within 12 months
of purchase. Class B and Class 529B shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within six years of
purchase. All contingent deferred sales charges are paid to MFD and during the
six months ended August 31, 2006, were as follows:
AMOUNT
Class A $3,159
Class B $197,976
Class C $2,417
Class 529B $53
Class 529C $--
The fund has entered into and may from time to time enter into contracts with
program managers and other parties which administer the tuition programs through
which an investment in the fund's 529 share classes is made. The fund has
entered into an agreement with MFD pursuant to which MFD receives an annual fee
of up to 0.35% of the average daily net assets attributable to each 529 share
class. The fee is based on average daily net assets and is currently established
at 0.25% annually of average daily net assets of the fund's 529 share classes.
The fee may only be increased with the approval of the Board of Trustees who
oversees the fund. The services provided by MFD, or a third party with which MFD
contracts, include recordkeeping and tax reporting and account services, as well
as services designed to maintain the program's compliance with the Internal
Revenue Code and other regulatory requirements. Program manager fees for the six
months ended August 31, 2006, were as follows:
AMOUNT
Class 529A $482
Class 529B 495
Class 529C 282
----------------------------------------
Total Program Manager Fees $1,259
SHAREHOLDER SERVICING AGENT - MFS Service Center, Inc. (MFSC), a wholly-owned
subsidiary of MFS, receives a fee from the fund for its services as shareholder
servicing agent calculated as a percentage of the average net assets of the fund
as determined periodically under the supervision of the fund's Board of
Trustees. For the six months ended August 31, 2006, the fee was $674,532, which
equated to 0.0980% annually of the fund's average daily net assets. MFSC also
receives payment from the fund for out-of-pocket and sub-accounting expenses
paid by MFSC on behalf of the fund. For the six months ended August 31, 2006,
these costs amounted to $198,121. The fund may also pay shareholder servicing
related costs to non-related parties.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to the fund. Under
an administrative services agreement, the fund partially reimburses MFS the
costs incurred to provide these services. The 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 fund's annual fixed amount was $10,000. Effective April 1,
2006, the fund's annual fixed amount is $17,500.
The administrative services fee incurred for the six months ended August 31,
2006 was equivalent to an annual effective rate of 0.0175% of the fund's average
daily net assets.
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain retirement plan
administration and services with respect to certain shares. These services
include various administrative, recordkeeping, and communication/educational
services with respect to the retirement plans which invest in these shares, and
may be provided directly by MFS or by a third party. MFS may subsequently pay
all, or a portion, of the retirement plan administration and services fee to
affiliated or unaffiliated third parties. For the six months ended August 31,
2006, the fund paid MFS an annual retirement plan administration and services
fee up to the following annual percentage rates of each class' average daily net
assets:
ANNUAL
EFFECTIVE TOTAL
FEE RATE RATE(g) AMOUNT
Class R1 0.45% 0.35% $571
Class R2 0.40% 0.25% 1,174
Class R3 0.25% 0.15% 2,738
Class R4 0.15% 0.15% 2,501
Class R5 0.10% 0.10% 26
- --------------------------------------------------------------------------------
Total Retirement Plan Administration and Services Fees $7,010
(g) Effective October 1, 2005, MFS has agreed in writing to waive a portion of
the retirement plan administration and services fee equal to 0.10% for
Class R1 shares, 0.15% for Class R2 shares, and 0.10% for Class R3 shares.
This agreement will continue until at least September 30, 2008. For the six
months ended August 31, 2006, this waiver amounted to $1,662 and is
reflected as a reduction of total expenses in the Statement of Operations.
TRUSTEES' AND OFFICERS' COMPENSATION - The fund pays compensation to Independent
Trustees in the form of a retainer, attendance fees, and additional compensation
to Board and Committee chairpersons. The fund does not pay compensation directly
to Trustees or officers of the fund who are also officers of the investment
adviser, all of whom receive remuneration for their services to the fund from
MFS. Certain officers and Trustees of the fund are officers or directors of MFS,
MFD, and MFSC. The fund has an unfunded, defined benefit plan for certain
retired Independent Trustees which resulted in a pension expense of $3,880. The
fund also has an unfunded retirement benefit deferral plan for certain
Independent Trustees which resulted in an expense of $268. Both amounts are
included in Independent trustees' compensation for the six months ended August
31, 2006. The deferred liability for retirement benefits payable to certain
Trustees under both plans amounted to $130,233 at August 31, 2006, and is
included in payable for independent trustees' compensation.
OTHER - This fund 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 August 31, 2006, the fee paid to Tarantino LLC was $4,284.
MFS has agreed to reimburse the fund for a portion of the payments made by the
funds to Tarantino LLC in the amount of $4,166 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 $88,760,671 $147,330,851
- --------------------------------------------------------------------------------
Investments (non-U.S. government securities) $11,068,115 $631,000
- --------------------------------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
fund shares were as follows:
SIX MONTHS ENDED YEAR ENDED
8/31/06 2/28/06(i)
SHARES AMOUNT SHARES AMOUNT
Shares sold
Class A 6,411,530 $59,749,686 10,611,681 $101,911,884
Class B 852,102 7,901,512 1,753,090 16,845,100
Class C 227,835 2,130,228 956,545 9,240,885
Class I 3,076,138 28,692,057 7,664,900 73,401,210
Class R 248,696 2,318,944 565,418 5,426,802
Class R1 39,042 363,301 29,826 286,568
Class R2 60,196 558,360 37,327 356,858
Class R3 212,538 1,972,078 153,972 1,475,492
Class R4 497,885 4,626,588 158,071 1,517,633
Class R5 -- -- 5,219 50,000
Class 529A 2,056 19,037 5,299 50,939
Class 529B 691 6,400 3,450 33,038
Class 529C 335 3,130 2,987 28,608
- -----------------------------------------------------------------------------------------------------------
11,629,044 $108,341,321 21,947,785 $210,625,017
Shares issued to shareholders in
reinvestment of distributions
Class A 1,355,855 $12,615,724 2,780,579 $26,662,325
Class B 259,915 2,414,787 583,318 5,586,303
Class C 50,761 473,552 115,199 1,108,064
Class I 967,327 8,998,833 1,458,711 13,966,752
Class R 23,947 222,662 42,681 408,808
Class R1 484 4,503 420 4,004
Class R2 1,272 11,823 665 6,326
Class R3 4,846 45,046 3,685 35,165
Class R4 7,822 72,820 2,366 22,498
Class R5 129 1,197 209 2,004
Class 529A 858 7,963 1,584 15,157
Class 529B 738 6,855 1,398 13,369
Class 529C 424 3,951 905 8,703
- -----------------------------------------------------------------------------------------------------------
2,674,378 $24,879,716 4,991,720 $47,839,478
Shares reacquired
Class A (14,136,490) $(131,650,884) (22,830,344) $(218,822,611)
Class B (4,145,268) (38,548,910) (8,058,578) (77,182,632)
Class C (844,931) (7,887,532) (1,922,572) (18,495,932)
Class I (1,027,309) (9,570,461) (85,757) (823,643)
Class R (235,278) (2,184,007) (342,272) (3,275,075)
Class R1 (18,879) (176,331) (9,994) (95,027)
Class R2 (15,644) (145,096) (118) (1,126)
Class R3 (56,453) (523,364) (54,407) (520,088)
Class R4 (74,793) (697,769) (22,733) (215,873)
Class 529A (9,613) (89,023) (4,795) (45,919)
Class 529B (6,927) (64,664) (799) (7,708)
Class 529C (3,121) (29,102) (9,788) (93,966)
- -----------------------------------------------------------------------------------------------------------
(20,574,706) $(191,567,143) (33,342,157) $(319,579,600)
Net change
Class A (6,369,105) $(59,285,474) (9,438,084) $(90,248,402)
Class B (3,033,251) (28,232,611) (5,722,170) (54,751,229)
Class C (566,335) (5,283,752) (850,828) (8,146,983)
Class I 3,016,156 28,120,429 9,037,854 86,544,319
Class R 37,365 357,599 265,827 2,560,535
Class R1 20,647 191,473 20,252 195,545
Class R2 45,824 425,087 37,874 362,058
Class R3 160,931 1,493,760 103,250 990,569
Class R4 430,914 4,001,639 137,704 1,324,258
Class R5 129 1,197 5,428 52,004
Class 529A (6,699) (62,023) 2,088 20,177
Class 529B (5,498) (51,409) 4,049 38,699
Class 529C (2,362) (22,021) (5,896) (56,655)
- -----------------------------------------------------------------------------------------------------------
(6,271,284) $(58,346,106) (6,402,652) $(61,115,105)
(i) For the period from the class' inception, April 1, 2005 (Classes R1, R2, R4, and R5), through the stated
period end.
The fund is one of several mutual funds in which the MFS funds-of-funds may
invest. The MFS funds-of-funds do not invest in the underlying MFS funds for the
purpose of exercising management or control. At the end of the period, the MFS
Conservative Allocation Fund, the MFS Moderate Allocation Fund and the MFS
Growth Allocation Fund were the owners of record of approximately 5%, 15% and 9%
respectively, of the value of outstanding voting shares. In addition, the MFS
Lifetime 2010 Fund, the MFS Lifetime 2020 Fund, the MFS Lifetime 2030 Fund and
the MFS Lifetime Retirement Income Fund were each owners of record of less than
1% of the value of outstanding voting shares.
(6) LINE OF CREDIT
The fund 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 fund 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, generally at a rate equal to the Federal Reserve funds rate plus
0.35%. In addition, a commitment fee, based on the average daily, unused portion
of the committed line of credit, is allocated among the participating funds at
the end of each calendar quarter. For the six months ended August 31, 2006, the
fund commitment fee and interest expense were $4,395 and $0, respectively, and
are included in miscellaneous expense on the Statement of Operations.
BOARD REVIEW OF INVESTMENT
ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of Trustees
and a majority of the non-interested ("independent") Trustees, voting
separately, annually approve the continuation of the Fund's investment advisory
agreement with MFS. The Trustees consider matters bearing on the Fund and its
advisory arrangements at their meetings throughout the year, including a review
of performance data at each regular meeting. In addition, the independent
Trustees met several times over the course of three months beginning in May and
ending in July, 2006 ("contract review meetings") for the specific purpose of
considering whether to approve the continuation of the investment advisory
agreement for the Fund and the other investment companies that the Board
oversees (the "MFS Funds"). The independent Trustees were assisted in their
evaluation of the Fund's investment advisory agreement by independent legal
counsel, from whom they received separate legal advice and with whom they met
separately from MFS during various contract review meetings. The independent
Trustees were also assisted in this process by the MFS Funds' Independent Chief
Compliance Officer, a full-time senior officer appointed by and reporting to the
independent Trustees.
In connection with their deliberations regarding the continuation of the
investment advisory agreement, the Trustees, including the independent Trustees,
considered such information and factors as they believed, in light of the legal
advice furnished to them and their own business judgment, to be relevant. The
investment advisory agreement for the Fund was considered separately, although
the Trustees also took into account the common interests of all MFS Funds in
their review. As described below, the Trustees considered the nature, quality,
and extent of the various investment advisory, administrative, and shareholder
services performed by MFS under the existing investment advisory agreement and
other arrangements with the Fund.
In connection with their contract review meetings, the Trustees received and
relied upon materials which included, among other items: (i) information
provided by Lipper Inc. on the investment performance of the Fund for various
time periods ended December 31, 2005 and the investment performance of a group
of funds with substantially similar investment classifications/objectives (the
"Lipper performance universe"), as well as the investment performance of a group
of funds identified by objective criteria suggested by MFS ("MFS peer funds"),
(ii) information provided by Lipper Inc. on the Fund's advisory fees and other
expenses and the advisory fees and other expenses of comparable funds identified
by Lipper (the "Lipper expense group"), as well as the advisory fees and other
expenses of MFS peer funds, (iii) information provided by MFS on the advisory
fees of comparable portfolios of other clients of MFS, including institutional
separate accounts and other clients, (iv) information as to whether and to what
extent applicable expense waivers, reimbursements or fee "breakpoints" are
observed for the Fund, (v) information regarding MFS' financial results and
financial condition, including MFS' and certain of its affiliates' estimated
profitability from services performed for the Fund and the MFS Funds as a whole,
(vi) MFS' views regarding the outlook for the mutual fund industry and the
strategic business plans of MFS, (vii) descriptions of various functions
performed by MFS for the Funds, such as compliance monitoring and portfolio
trading practices, and (viii) information regarding the overall organization of
MFS, including information about MFS' senior management and other personnel
providing investment advisory, administrative and other services to the Fund and
the other MFS Funds. The comparative performance, fee and expense information
prepared and provided by Lipper Inc. was not independently verified and the
independent Trustees did not independently verify any information provided to
them by MFS.
The Trustees' conclusion as to the continuation of the investment advisory
agreement was based on a comprehensive consideration of all information provided
to the Trustees and not the result of any single factor. Some of the factors
that figured particularly in the Trustees' deliberations are described below,
although individual Trustees may have evaluated the information presented
differently from one another, giving different weights to various factors. It is
also important to recognize that the fee arrangements for the Fund and other MFS
Funds are the result of years of review and discussion between the independent
Trustees and MFS, that certain aspects of such arrangements may receive greater
scrutiny in some years than others, and that the Trustees' conclusions may be
based, in part, on their consideration of these same arrangements during the
course of the year and in prior years.
Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the
Fund's total return investment performance as well as the performance of peer
groups of funds over various time periods. The Trustees placed particular
emphasis on the total return performance of the Fund's Class A shares in
comparison to the performance of funds in its Lipper performance universe over
the three-year period ended December 31, 2005, which the Trustees believed was a
long enough period to reflect differing market conditions. The Fund's
performance was in the 3rd quintile relative to the other funds in the universe
for this three-year period (the 1st quintile being the best performers and the
5th quintile being the worst performers). The total return performance of the
Fund's Class A shares was in the 2nd quintile for the one-year period and the
3rd quintile for the five-year period ended December 31, 2005 relative to the
Lipper performance universe. Because of the passage of time, these performance
results may differ from the performance results for more recent periods,
including those shown elsewhere in this report.
In the course of their deliberations, the Trustees took into account information
provided by MFS in connection with the contract review meetings, as well as
during investment review meetings conducted with portfolio management personnel
during the course of the year regarding the Fund's performance. After reviewing
these and related factors, the Trustees concluded, within the context of their
overall conclusions regarding the investment advisory agreement, that they were
satisfied with MFS' responses and efforts relating to investment performance.
In assessing the reasonableness of the Fund's advisory fee, the Trustees
considered, among other information, the Fund's advisory fee and the total
expense ratio of the Fund's Class A shares as a percentage of average net assets
and the advisory fee and total expense ratios of peer groups of funds based on
information provided by Lipper Inc. and MFS. The Trustees considered that there
is an advisory fee reduction in effect for the Fund through February 28, 2009 as
part of MFS' settlement with the New York Attorney General concerning market
timing and related matters and that MFS has agreed in writing to observe an
expense limitation for the Fund. The Trustees also considered that, according to
the Lipper data, the Fund's effective advisory fee rate (taking into account the
advisory fee reduction and expense limitation) and total expense ratio were each
lower than the Lipper expense group median.
The Trustees also considered the advisory fees charged by MFS to institutional
accounts. In comparing these fees, the Trustees considered information provided
by MFS as to the generally broader scope of services provided by MFS to the Fund
in comparison to institutional accounts, the higher demands placed on MFS'
investment personnel and trading infrastructure as a result of the daily cash
in-flows and out-flows of the Fund, and the impact on MFS and expenses
associated with the more extensive regulatory regime to which the Fund is
subject in comparison to institutional accounts.
The Trustees also considered whether the Fund is likely to benefit from any
economies of scale in the management of the Fund in the event of growth in
assets of the Fund. They noted that the Fund's advisory fee rate schedule is not
currently subject to any breakpoints. Taking into account the advisory fee
reduction and the expense limitation described above, the Trustees determined
not to recommend any advisory fee breakpoints for the Fund at this time.
The Trustees also considered information prepared by MFS relating to MFS' costs
and profits with respect to the Fund, the MFS Funds considered as a group, and
other investment companies and accounts advised by MFS, as well as MFS'
methodologies used to determine and allocate its costs to the MFS Funds, the
Fund and other accounts and products for purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees
concluded, within the context of their overall conclusions regarding the
investment advisory agreement, that the advisory fees charged to the Fund
represent reasonable compensation in light of the services being provided by MFS
to the Fund.
In addition, the Trustees considered MFS' resources and related efforts to
continue to retain, attract and motivate capable personnel to serve the Fund.
The Trustees also considered current and developing conditions in the financial
services industry, including the entry into the industry of large and
well-capitalized companies which are spending, and appear to be prepared to
continue to spend, substantial sums to engage personnel and to provide services
to competing investment companies. In this regard, the Trustees also considered
the financial resources of MFS and its ultimate parent, Sun Life Financial Inc.
The Trustees also considered the advantages and possible disadvantages to the
Fund of having an adviser which also serves other investment companies as well
as other accounts.
The Trustees also considered the nature, quality, cost, and extent of
administrative, transfer agency, and distribution services provided to the Fund
by MFS and its affiliates under agreements and plans other than the investment
advisory agreement, including any 12b-1 fees the Fund pays to MFS Fund
Distributors, Inc., an affiliate of MFS. The Trustees also considered the
nature, extent and quality of certain other services MFS performs or arranges
for on the Fund's behalf, which may include securities lending programs,
directed expense payment programs, class action recovery programs, and MFS'
interaction with third-party service providers, principally custodians and
sub-custodians. The Trustees concluded that the various non-advisory services
provided by MFS and its affiliates on behalf of the Funds were satisfactory.
The Trustees also considered benefits to MFS from the use of the Fund's
portfolio brokerage commissions, if applicable, to pay for investment research
(excluding third-party research, for which MFS pays directly) and various other
factors. Additionally, the Trustees considered so-called "fall-out benefits" to
MFS such as reputational value derived from serving as investment manager to the
Fund.
Based on their evaluation of factors that they deemed to be material, including
those factors described above, the Board of Trustees, including a majority of
the independent Trustees, concluded that the Fund's investment advisory
agreement with MFS should be continued for an additional one-year period,
commencing August 1, 2006.
A discussion regarding the Board's most recent review and renewal of the Fund's
investment advisory agreement will be available on or before November 1, 2006 by
clicking on the fund's name under "Select a fund" on the MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the Proxy Voting section of mfs.com or by visiting the SEC's Web site at
http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the Securities
and Exchange Commission (the Commission) for the first and third quarters of
each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed and copied at
the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-551-5850. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet Web site at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
CONTACT US
WEB SITE MAILING ADDRESS
mfs.com MFS Service Center, Inc.
P.O. Box 55824
MFS TALK Boston, MA
1-800-637-8255 02205-5824
24 hours a day
OVERNIGHT MAIL
ACCOUNT SERVICE AND MFS Service Center, Inc.
LITERATURE 500 Boylston Street
Boston, MA 02116-3741
SHAREHOLDERS
1-800-225-2606
8 a.m. to 8 p.m. ET
INVESTMENT PROFESSIONALS
1-800-343-2829
8 a.m. to 8 p.m. ET
RETIREMENT PLAN SERVICES
1-800-637-1255
8 a.m. to 8 p.m. ET
- -------------------------------------------------------------------------------
Go paperless with eDELIVERY: Arrange to have MFS send prospectuses, reports,
and proxies directly to your e-mail inbox. You'll get timely information and
less clutter in your mailbox (not to mention help your fund save printing and
postage costs).
SIGN UP: If your account is registered with us, simply go to mfs.com, log in to
your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or a retirement
plan, MFS TALK, MFS Access, and eDelivery may not be available to you.
- -------------------------------------------------------------------------------
M F S(R)
INVESTMENT MANAGEMENT
M F S(R)
INVESTMENT MANAGEMENT
[graphic omitted]
SEMIANNUAL REPORT
MFS(R) DIVERSIFIED INCOME FUND
LETTER FROM THE CEO 1
- ----------------------------------------------------------
PORTFOLIO COMPOSITION 2
- ----------------------------------------------------------
EXPENSE TABLE 3
- ----------------------------------------------------------
PORTFOLIO OF INVESTMENTS 5
- ----------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES 16
- ----------------------------------------------------------
STATEMENT OF OPERATIONS 18
- ----------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS 19
- ----------------------------------------------------------
FINANCIAL HIGHLIGHTS 20
- ----------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS 23
- ----------------------------------------------------------
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 30
- ----------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION 34
- ----------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE 34
- ----------------------------------------------------------
CONTACT INFORMATION BACK COVER
- ----------------------------------------------------------
Fund objective: Seeks income consistent with the prudent employment of
capital. Its secondary objective seeks capital appreciation.
THE REPORT IS PREPARED FOR THE GENERAL INFORMATION OF SHAREHOLDERS. IT IS
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
- -------------------------------------------------------------------------------
NOT FDIC INSURED o MAY LOSE VALUE o
NO BANK OR CREDIT UNION GUARANTEE o NOT A DEPOSIT o
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR
NCUA/NCUSIF
- -------------------------------------------------------------------------------
8/31/06
DIF-SEM
LETTER FROM THE CEO
[Photo of Robert J. Manning]
Dear Shareholders:
The story is as old as the tortoise and the hare, but we believe it is
still relevant today -- "slow and steady" is the way to go when it comes to
investing. While financial markets will naturally ebb and flow over time,
investors who remain committed to a long-term investment strategy are more
likely to achieve their goals than those who consistently chase short-term
performance.
The first half of 2006 brought a high degree of fluctuation in markets
around the globe as varying economic factors pulled markets in opposite
directions. The global economy, for example, continued to grow at its fastest
pace in three decades -- spurred by increased international trade, good job
growth, and wage increases. At the same time, central banks around the world
raised interest rates in sync in a collaborative attempt to curb inflation.
While this was a positive development in some regions, in other cases,
economic and market gains were tempered.
What does all of this mean to you as an investor? If you're focused on the
long term, these global developments become part of a longer cycle instead of
one-time events that can have a significant impact on your portfolio.
At MFS(R), our investment management process -- honed over 80 years --
combines a unique teamwork approach with an unwavering focus on helping you
realize your long-term financial goals. We believe in a three-pronged
investment strategy:
o ALLOCATE holdings across the major asset classes -- including stocks,
bonds, and cash.
o DIVERSIFY within each class to take advantage of different market
segments and investing styles.
o REBALANCE assets regularly to maintain a desired asset allocation.
Of course, these strategies cannot guarantee a profit or protect against a
loss. Investing and planning for the long term 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)
October 13, 2006
The opinions expressed in this letter are subject to change, may not be relied
upon for investment advice, and no forecasts can be guaranteed.
PORTFOLIO COMPOSITION
PORTFOLIO STRUCTURE (i)
Bonds 46.1%
Common Stocks 36.2%
Cash & Other Net Assets 17.7%
TOP TEN HOLDINGS (i)
Fannie Mae, 5.5%, 2036 3.8%
------------------------------------------------
U.S. Treasury Notes, 6.5%, 2010 1.9%
------------------------------------------------
U.S. Treasury Bonds, 9.25%, 2016 1.7%
------------------------------------------------
Exxon Mobil Corp. 1.6%
------------------------------------------------
Bank of America Corp. 1.2%
------------------------------------------------
Gazprom OAO, 9.625%, 2013 1.2%
------------------------------------------------
Citigroup, Inc. 1.2%
------------------------------------------------
U.S. Treasury Notes, 5.5%, 2008 1.1%
------------------------------------------------
Citizens Communications Co., 9.25%, 2011 1.1%
------------------------------------------------
Nalco Co., 8.875%, 2013 1.0%
------------------------------------------------
EQUITY SECTORS
Financial Services 20.5%
------------------------------------------------
Utilities & Communications 3.3%
------------------------------------------------
Energy 3.0%
------------------------------------------------
Health Care 1.5%
------------------------------------------------
Consumer Staples 1.3%
------------------------------------------------
Technology 1.1%
------------------------------------------------
Industrial Goods & Services 1.1%
------------------------------------------------
Basic Materials 1.0%
------------------------------------------------
Leisure 1.0%
------------------------------------------------
Retailing 0.9%
------------------------------------------------
Autos & Housing 0.8%
------------------------------------------------
Special Products & Services 0.6%
------------------------------------------------
Transportation 0.1%
------------------------------------------------
FIXED INCOME SECTORS (i)
High Yield Corporates 23.5%
------------------------------------------------
Emerging Market Debt 12.0%
------------------------------------------------
U.S. Treasury Securities 5.5%
------------------------------------------------
Mortgage-Backed Securities 3.8%
------------------------------------------------
U.S. Government Agencies 1.3%
------------------------------------------------
(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.
Percentages are based on net assets as of 8/31/06, unless otherwise noted.
The portfolio is actively managed and current holdings may be different.
EXPENSE TABLE
Fund expenses borne by the shareholders during the period,
May 26, 2006 through August 31, 2006.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and (2)
ongoing costs, including management fees; distribution and service (12b-1)
fees; and other fund expenses. This example is intended to help you understand
your ongoing costs (in dollars) of investing in the fund and to compare these
costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period May 26, 2006 through August 31, 2006.
ACTUAL EXPENSES
The first line for each share class in the following table provides
information about actual account values and actual expenses. You may use the
information in this line, together with the amount you invested, to estimate
the expenses that you paid over the period. Simply divide your account value
by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then
multiply the result by the number in the first line under the heading entitled
"Expenses Paid During Period" to estimate the expenses you paid on your
account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the following table provides
information about hypothetical account values and hypothetical expenses based
on the fund's actual expense ratio and an assumed rate of return of 5% per
year before expenses, which is not the fund's actual return. The hypothetical
account values and expenses may not be used to estimate the actual ending
account balance or expenses you paid for the period. You may use this
information to compare the ongoing costs of investing in the fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have
been higher.
- -------------------------------------------------------------------------------
Expenses
Paid During
Annualized Beginning Ending Period(p)
Share Expense Account Value Account Value 5/26/06-
Class Ratio 5/26/06 8/31/06 8/31/06
- --------------------------------------------------------------------------------
Actual 0.95% $1,000.00 $1,039.40 $2.60
A -----------------------------------------------------------------------
Hypothetical (h) 0.95% $1,000.00 $1,010.87 $2.56
- --------------------------------------------------------------------------------
Actual 1.65% $1,000.00 $1,037.60 $4.51
C -----------------------------------------------------------------------
Hypothetical (h) 1.65% $1,000.00 $1,008.99 $4.45
- --------------------------------------------------------------------------------
Actual 0.65% $1,000.00 $1,040.10 $1.78
I -----------------------------------------------------------------------
Hypothetical (h) 0.65% $1,000.00 $1,011.68 $1.76
- --------------------------------------------------------------------------------
(h) 5% class return per year before expenses.
(p) Expenses paid is equal to each class' annualized expense ratio, as shown
above, multiplied by the average account value over the period, multiplied
by the number of days in the period, divided by the number of days in the
year. Expenses paid do not include any applicable sales charges (loads) or
redemption fees. If these transaction costs had been included, your costs
would have been higher.
PORTFOLIO OF INVESTMENTS
8/31/06 (unaudited)
The Portfolio of Investments is a complete list of all securities owned by your fund.
It is categorized by broad-based asset classes.
Bonds - 45.4%
- ---------------------------------------------------------------------------------------------------------
ISSUER SHARES/PAR VALUE ($)
- ---------------------------------------------------------------------------------------------------------
Automotive - 2.3%
- ---------------------------------------------------------------------------------------------------------
Ford Motor Credit Co., 9.75%, 2010 (a) $ 15,000 $ 15,527
Ford Motor Credit Co., 7%, 2013 128,000 119,462
General Motors Acceptance Corp., 6.875%, 2011 40,000 39,395
General Motors Acceptance Corp., 6.75%, 2014 135,000 129,423
Goodyear Tire & Rubber Co., 9%, 2015 250,000 250,625
Lear Corp., 5.75%, 2014 80,000 64,400
-------------
$ 618,832
- ---------------------------------------------------------------------------------------------------------
Broadcasting - 1.5%
- ---------------------------------------------------------------------------------------------------------
Barrington Broadcasting Group, 10.5%, 2014 (z) $ 30,000 $ 29,400
Intelsat Subsidiary Holding Co. Ltd., 8.625%, 2015 250,000 252,500
Young Broadcasting, Inc., 10%, 2011 125,000 115,625
-------------
$ 397,525
- ---------------------------------------------------------------------------------------------------------
Building - 0.2%
- ---------------------------------------------------------------------------------------------------------
Nortek Holdings, Inc., 8.5%, 2014 $ 45,000 $ 41,850
- ---------------------------------------------------------------------------------------------------------
Business Services - 1.0%
- ---------------------------------------------------------------------------------------------------------
Xerox Corp., 7.625%, 2013 $ 250,000 $ 258,437
- ---------------------------------------------------------------------------------------------------------
Cable TV - 0.8%
- ---------------------------------------------------------------------------------------------------------
CCH I Holdings LLC, 11%, 2015 $ 125,000 $ 110,938
CCH II Holdings LLC, 10.25%, 2010 30,000 30,375
Grupo Televisa S.A., 8.5%, 2032 22,000 26,507
Mediacom LLC, 9.5%, 2013 55,000 56,513
-------------
$ 224,333
- ---------------------------------------------------------------------------------------------------------
Chemicals - 1.0%
- ---------------------------------------------------------------------------------------------------------
Nalco Co., 8.875%, 2013 $ 250,000 $ 257,500
- ---------------------------------------------------------------------------------------------------------
Consumer Goods & Services - 0.2%
- ---------------------------------------------------------------------------------------------------------
Service Corp. International, 8%, 2017 (a) $ 35,000 $ 33,512
Simmons Co., 7.875%, 2014 10,000 9,650
-------------
$ 43,162
- ---------------------------------------------------------------------------------------------------------
Containers - 0.3%
- ---------------------------------------------------------------------------------------------------------
Graham Packaging Co. LP, 9.875%, 2014 $ 40,000 $ 38,500
Owens-Brockway Glass Container, Inc., 8.25%, 2013 50,000 50,625
-------------
$ 89,125
- ---------------------------------------------------------------------------------------------------------
Defense Electronics - 0.4%
- ---------------------------------------------------------------------------------------------------------
L-3 Communications Holdings, Inc., 6.125%, 2014 $ 100,000 $ 96,000
- ---------------------------------------------------------------------------------------------------------
Emerging Market Quasi-Sovereign - 3.2%
- ---------------------------------------------------------------------------------------------------------
Gaz Capital S.A., 8.625%, 2034 $ 120,000 $ 149,280
Gazprom International S.A., 7.201%, 2020 56,000 58,660
Gazprom OAO, 9.625%, 2013 250,000 295,313
Pemex Project Funding Master Trust, 8.625%, 2022 100,000 120,500
Pemex Project Funding Master Trust, 6.625%, 2035 240,000 235,680
-------------
$ 859,433
- ---------------------------------------------------------------------------------------------------------
Emerging Market Sovereign - 7.8%
- ---------------------------------------------------------------------------------------------------------
Arab Republic of Egypt, 8.75%, 2011 $ 20,000 $ 22,300
Banque Centrale de Tunisie, 7.375%, 2012 25,000 26,750
Federative Republic of Brazil, 8%, 2018 43,000 47,214
Federative Republic of Brazil, 8.25%, 2034 180,000 207,000
Federative Republic of Brazil, 11%, 2040 102,000 133,263
Republic of Argentina, 8.28%, 2033 152,412 149,897
Republic of Argentina, FRN, 5.59%, 2012 164,250 152,445
Republic of Colombia, 8.125%, 2024 25,000 27,500
Republic of Colombia, 10.375%, 2033 20,000 27,100
Republic of Colombia, FRN, 7.2163%, 2015 100,000 102,750
Republic of Croatia, FRN, 6.375%, 2010 72,727 73,091
Republic of El Salvador, 7.65%, 2035 (a) 75,000 78,563
Republic of Indonesia, 7.25%, 2015 100,000 103,500
Republic of Panama, 9.375%, 2029 80,000 101,400
Republic of Peru, 5% to 2007, FRN to 2017 44,620 43,504
Republic of Philippines, 9.375%, 2017 60,000 70,050
Republic of Philippines, 9.5%, 2030 20,000 24,400
Republic of Philippines, 7.75%, 2031 100,000 103,250
Republic of South Africa, 7.375%, 2012 20,000 21,500
Republic of South Africa, 8.5%, 2017 30,000 35,962
Republic of Turkey, 11.5%, 2012 16,000 19,380
Republic of Turkey, 7.25%, 2015 20,000 20,325
Republic of Turkey, 8%, 2034 85,000 88,931
Republic of Uruguay, 7.5%, 2015 80,000 82,800
Republic of Venezuela, 8.5%, 2014 100,000 111,650
Republic of Venezuela, 9.25%, 2027 50,000 62,150
Republic of Venezuela, 9.375%, 2034 80,000 100,800
United Mexican States, 6.625%, 2015 25,000 26,525
-------------
$ 2,064,000
- ---------------------------------------------------------------------------------------------------------
Energy - Independent - 1.2%
- ---------------------------------------------------------------------------------------------------------
Chesapeake Energy Corp., 7.5%, 2014 $ 250,000 $ 251,875
Quicksilver Resources, Inc., 7.125%, 2016 60,000 57,300
-------------
$ 309,175
- ---------------------------------------------------------------------------------------------------------
Energy - Integrated - 0.1%
- ---------------------------------------------------------------------------------------------------------
TNK-BP Finance S.A., 7.5%, 2016 (a) $ 14,000 $ 14,530
- ---------------------------------------------------------------------------------------------------------
Entertainment - 0.6%
- ---------------------------------------------------------------------------------------------------------
AMC Entertainment, Inc., 9.5%, 2011 $ 150,000 $ 149,625
- ---------------------------------------------------------------------------------------------------------
Food & Beverages - 0.1%
- ---------------------------------------------------------------------------------------------------------
Chaoda Modern Agriculture Holdings, 7.75%, 2010 (a) $ 25,000 $ 23,750
- ---------------------------------------------------------------------------------------------------------
Forest & Paper Products - 1.3%
- ---------------------------------------------------------------------------------------------------------
Buckeye Technologies, Inc., 8%, 2010 $ 200,000 $ 188,000
Graphic Packaging International Corp., 9.5%, 2013 70,000 70,350
Jefferson Smurfit Corp., 8.25%, 2012 50,000 47,375
Verso Paper Holdings LLC, 11.375%, 2016 (a) 45,000 44,550
-------------
$ 350,275
- ---------------------------------------------------------------------------------------------------------
Gaming & Lodging - 1.9%
- ---------------------------------------------------------------------------------------------------------
Majestic Star Casino LLC, 9.75%, 2011 $ 40,000 $ 39,100
MGM Mirage, Inc., 6.75%, 2013 (a) 250,000 241,250
Station Casinos, Inc., 6.5%, 2014 145,000 135,213
Trump Entertainment Resorts Holdings, Inc., 8.5%, 2015 90,000 87,075
-------------
$ 502,638
- ---------------------------------------------------------------------------------------------------------
Industrial - 1.3%
- ---------------------------------------------------------------------------------------------------------
Blount, Inc., 8.875%, 2012 $ 40,000 $ 40,050
Education Management LLC, 8.75%, 2014 (a) 250,000 247,500
RBS Global & Rexnord Corp., 9.5%, 2014 (z) 50,000 50,250
RBS Global & Rexnord Corp., 11.75%, 2016 (a) 5,000 5,150
-------------
$ 342,950
- ---------------------------------------------------------------------------------------------------------
Machinery & Tools - 0.9%
- ---------------------------------------------------------------------------------------------------------
Case New Holland, Inc., 7.125%, 2014 $ 250,000 $ 246,875
- ---------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 2.0%
- ---------------------------------------------------------------------------------------------------------
HCA, Inc., 8.75%, 2010 $ 15,000 $ 15,113
HCA, Inc., 6.375%, 2015 305,000 242,475
HealthSouth Corp., 10.75%, 2016 (a) 150,000 153,375
Select Medical Corp., 7.625%, 2015 65,000 56,225
Vanguard Health Holding II, 9%, 2014 70,000 67,900
-------------
$ 535,088
- ---------------------------------------------------------------------------------------------------------
Metals & Mining - 0.2%
- ---------------------------------------------------------------------------------------------------------
Peabody Energy Corp., "B", 6.875%, 2013 $ 50,000 $ 49,500
- ---------------------------------------------------------------------------------------------------------
Mortgage Backed - 3.8%
- ---------------------------------------------------------------------------------------------------------
Fannie Mae, 5.5%, 2036 $ 1,019,466 $ 1,000,971
- ---------------------------------------------------------------------------------------------------------
Natural Gas - Pipeline - 0.1%
- ---------------------------------------------------------------------------------------------------------
El Paso Performance-Linked, 7.75%, 2011 (a) $ 30,000 $ 30,562
- ---------------------------------------------------------------------------------------------------------
Network & Telecom - 1.5%
- ---------------------------------------------------------------------------------------------------------
Cincinnati Bell, Inc., 8.375%, 2014 $ 55,000 $ 55,206
Citizens Communications Co., 9.25%, 2011 250,000 273,438
Time Warner Telecom Holdings, Inc., 9.25%, 2014 35,000 36,400
Windstream Corp., 8.625%, 2016 (a) 40,000 42,300
-------------
$ 407,344
- ---------------------------------------------------------------------------------------------------------
Oil Services - 0.9%
- ---------------------------------------------------------------------------------------------------------
Basic Energy Services, Inc., 7.125%, 2016 (a) $ 250,000 $ 239,375
- ---------------------------------------------------------------------------------------------------------
Other Banks & Diversified Financials - 0.6%
- ---------------------------------------------------------------------------------------------------------
HSBK Europe B.V., 7.75%, 2013 $ 100,000 $ 102,000
VTB Capital S.A., 7.5%, 2011 54,000 57,297
-------------
$ 159,297
- ---------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.8%
- ---------------------------------------------------------------------------------------------------------
Dex Media, Inc., 0% to 2008, 9% to 2013 $ 250,000 $ 208,125
- ---------------------------------------------------------------------------------------------------------
Retailers - 0.4%
- ---------------------------------------------------------------------------------------------------------
Jean Coutu Group (PJC), Inc., 8.5%, 2014 $ 55,000 $ 52,456
Neiman Marcus Group, Inc., 10.375%, 2015 50,000 53,500
-------------
$ 105,956
- ---------------------------------------------------------------------------------------------------------
Steel - 0.1%
- ---------------------------------------------------------------------------------------------------------
FMG Finance Ltd., 10.625%, 2016 (z) $ 35,000 $ 34,825
PNA Group, Inc., 10.75%, 2016 (z) 5,000 5,100
-------------
$ 39,925
- ---------------------------------------------------------------------------------------------------------
Telecommunications - Wireless - 0.2%
- ---------------------------------------------------------------------------------------------------------
Rogers Wireless, Inc., 6.375%, 2014 $ 50,000 $ 49,000
- ---------------------------------------------------------------------------------------------------------
Transportation - Services - 0.2%
- ---------------------------------------------------------------------------------------------------------
Hertz Corp., 8.875%, 2014 (a) $ 50,000 $ 51,875
- ---------------------------------------------------------------------------------------------------------
U.S. Government Agencies - 1.3%
- ---------------------------------------------------------------------------------------------------------
Fannie Mae, 5.125%, 2011 $ 152,000 $ 152,542
Freddie Mac, 5.125%, 2008 200,000 200,097
-------------
$ 352,639
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 5.5%
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 9.25%, 2016 $ 338,000 $ 452,326
U.S. Treasury Bonds, 6%, 2026 118,000 133,275
U.S. Treasury Bonds, 5.375%, 2031 46,000 48,940
U.S. Treasury Notes, 5.5%, 2008 300,000 302,777
U.S. Treasury Notes, 6.5%, 2010 485,000 512,243
-------------
$ 1,449,561
- ---------------------------------------------------------------------------------------------------------
Utilities - Electric Power - 1.7%
- ---------------------------------------------------------------------------------------------------------
Midwest Generation LLC, 8.75%, 2034 $ 90,000 $ 95,850
Mirant North American LLC, 7.375%, 2013 135,000 133,650
NRG Energy, Inc., 7.375%, 2016 185,000 182,225
Reliant Energy, Inc., 6.75%, 2014 50,000 47,125
-------------
$ 458,850
- ---------------------------------------------------------------------------------------------------------
TOTAL BONDS (IDENTIFIED COST, $11,953,482) $ 12,028,083
- ---------------------------------------------------------------------------------------------------------
Common Stocks - 36.2%
- ---------------------------------------------------------------------------------------------------------
Aerospace - 0.2%
- ---------------------------------------------------------------------------------------------------------
Lockheed Martin Corp. 790 $ 65,254
- ---------------------------------------------------------------------------------------------------------
Automotive - 0.1%
- ---------------------------------------------------------------------------------------------------------
General Motors Corp. 480 $ 14,006
- ---------------------------------------------------------------------------------------------------------
Broadcasting - 0.1%
- ---------------------------------------------------------------------------------------------------------
News Corp., "A" 1,340 $ 25,500
Walt Disney Co. 430 12,749
-------------
$ 38,249
- ---------------------------------------------------------------------------------------------------------
Brokerage & Asset Managers - 1.1%
- ---------------------------------------------------------------------------------------------------------
Goldman Sachs Group, Inc. 840 $ 124,866
Lehman Brothers Holdings, Inc. 230 14,676
Morgan Stanley 2,280 150,001
-------------
$ 289,543
- ---------------------------------------------------------------------------------------------------------
Chemicals - 0.7%
- ---------------------------------------------------------------------------------------------------------
3M Co. 1,020 $ 73,134
Dow Chemical Co. 440 16,777
E.I. du Pont de Nemours & Co. 2,230 89,133
Rohm & Haas Co. 410 18,081
-------------
$ 197,125
- ---------------------------------------------------------------------------------------------------------
Computer Software - 0.2%
- ---------------------------------------------------------------------------------------------------------
MicroStrategy, Inc., "A" (n) 680 $ 62,016
- ---------------------------------------------------------------------------------------------------------
Computer Software - Systems - 0.7%
- ---------------------------------------------------------------------------------------------------------
Hewlett-Packard Co. 1,990 $ 72,754
International Business Machines Corp. 1,070 86,638
Rackable Systems, Inc. (n) 1,040 28,870
-------------
$ 188,262
- ---------------------------------------------------------------------------------------------------------
Construction - 0.6%
- ---------------------------------------------------------------------------------------------------------
D.R. Horton, Inc. 3,270 $ 71,711
Sherwin-Williams Co. 1,860 96,050
-------------
$ 167,761
- ---------------------------------------------------------------------------------------------------------
Containers - 0.2%
- ---------------------------------------------------------------------------------------------------------
Temple-Inland, Inc. 980 $ 43,630
- ---------------------------------------------------------------------------------------------------------
Electrical Equipment - 0.4%
- ---------------------------------------------------------------------------------------------------------
General Electric Co. 2,730 $ 92,984
Rockwell Automation, Inc. 310 17,478
-------------
$ 110,462
- ---------------------------------------------------------------------------------------------------------
Electronics - 0.1%
- ---------------------------------------------------------------------------------------------------------
SanDisk Corp. (n) 670 $ 39,476
- ---------------------------------------------------------------------------------------------------------
Energy - Integrated - 2.9%
- ---------------------------------------------------------------------------------------------------------
Chevron Corp. 3,410 $ 219,604
ConocoPhillips 380 24,103
Exxon Mobil Corp. 6,270 424,291
Hess Corp. 2,200 100,716
-------------
$ 768,714
- ---------------------------------------------------------------------------------------------------------
Entertainment - 0.2%
- ---------------------------------------------------------------------------------------------------------
Warner Music Group Corp. 2,100 $ 52,374
- ---------------------------------------------------------------------------------------------------------
Food & Beverages - 0.3%
- ---------------------------------------------------------------------------------------------------------
Kellogg Co. 1,060 $ 53,742
PepsiCo, Inc. 310 20,237
-------------
$ 73,979
- ---------------------------------------------------------------------------------------------------------
Food & Drug Stores - 0.1%
- ---------------------------------------------------------------------------------------------------------
Kroger Co. 790 $ 18,810
- ---------------------------------------------------------------------------------------------------------
Furniture & Appliances - 0.1%
- ---------------------------------------------------------------------------------------------------------
Tupperware Brands Corp. 1,790 $ 32,238
- ---------------------------------------------------------------------------------------------------------
Gaming & Lodging - 0.5%
- ---------------------------------------------------------------------------------------------------------
Harrah's Entertainment, Inc. 280 $ 17,461
Hilton Hotels Corp. 2,706 68,922
International Game Technology 610 23,595
Penn National Gaming, Inc. (n) 340 11,261
-------------
$ 121,239
- ---------------------------------------------------------------------------------------------------------
Insurance - 1.9%
- ---------------------------------------------------------------------------------------------------------
Ace Ltd. 2,140 $ 115,260
Allstate Corp. 2,080 120,515
Hartford Financial Services Group, Inc. 1,070 91,870
MetLife, Inc. 980 53,929
St. Paul Travelers Cos., Inc. 2,510 110,189
-------------
$ 491,763
- ---------------------------------------------------------------------------------------------------------
Machinery & Tools - 0.5%
- ---------------------------------------------------------------------------------------------------------
Cummins, Inc. 730 $ 83,819
Eaton Corp. 570 37,905
-------------
$ 121,724
- ---------------------------------------------------------------------------------------------------------
Major Banks - 1.7%
- ---------------------------------------------------------------------------------------------------------
Bank of America Corp. 6,140 $ 316,026
PNC Financial Services Group, Inc. 1,480 104,769
Regions Financial Corp. 590 21,234
-------------
$ 442,029
- ---------------------------------------------------------------------------------------------------------
Medical & Health Technology & Services - 0.2%
- ---------------------------------------------------------------------------------------------------------
Manor Care, Inc. 920 $ 48,024
McKesson Corp. 310 15,748
-------------
$ 63,772
- ---------------------------------------------------------------------------------------------------------
Metals & Mining - 0.1%
- ---------------------------------------------------------------------------------------------------------
Olin Corp. 880 $ 13,226
Southern Copper Corp. 180 16,618
-------------
$ 29,844
- ---------------------------------------------------------------------------------------------------------
Oil Services - 0.1%
- ---------------------------------------------------------------------------------------------------------
Smith International, Inc. 520 $ 21,824
- ---------------------------------------------------------------------------------------------------------
Other Banks & Diversified Financials - 4.0%
- ---------------------------------------------------------------------------------------------------------
AmSouth Bancorporation 3,310 $ 94,832
Citigroup, Inc. 6,190 305,477
Countrywide Financial Corp. 2,780 93,964
Fannie Mae 2,250 118,463
Freddie Mac 310 19,716
IndyMac Bancorp, Inc. 1,010 39,491
JPMorgan Chase & Co. 3,800 173,508
New York Community Bancorp, Inc. 13,410 220,058
-------------
$ 1,065,509
- ---------------------------------------------------------------------------------------------------------
Personal Computers & Peripherals - 0.1%
- ---------------------------------------------------------------------------------------------------------
Nuance Communications, Inc. (n) 4,710 $ 36,974
- ---------------------------------------------------------------------------------------------------------
Pharmaceuticals - 1.3%
- ---------------------------------------------------------------------------------------------------------
Eli Lilly & Co. 230 $ 12,864
Johnson & Johnson 1,600 103,456
Merck & Co., Inc. 4,360 176,798
Wyeth 1,190 57,953
-------------
$ 351,071
- ---------------------------------------------------------------------------------------------------------
Printing & Publishing - 0.1%
- ---------------------------------------------------------------------------------------------------------
R. R. Donnelley & Sons Co. 490 $ 15,886
- ---------------------------------------------------------------------------------------------------------
Railroad & Shipping - 0.1%
- ---------------------------------------------------------------------------------------------------------
Overseas Shipholding Group, Inc. 280 $ 18,676
- ---------------------------------------------------------------------------------------------------------
Real Estate - 12.4%
- ---------------------------------------------------------------------------------------------------------
Alexandria Real Estate Equities, Inc., REIT 1,474 $ 144,481
Archstone-Smith Trust, REIT 2,873 152,786
AvalonBay Communities, Inc., REIT 927 112,167
BRE Properties, Inc., "A", REIT 3,105 183,474
CapitalSource, Inc., REIT 7,297 177,317
Developers Diversified Realty Corp., REIT 2,499 135,196
EastGroup Properties, Inc., REIT 2,258 115,181
Equity Office Properties Trust, REIT 3,945 146,320
Equity Residential, REIT 2,160 107,719
General Growth Properties, Inc., REIT 1,493 67,678
Highwoods Properties, Inc., REIT 3,646 137,600
Host Hotels & Resorts, Inc., REIT 4,829 108,846
iStar Financial, Inc., REIT 2,943 123,371
Kimco Realty Corp., REIT 3,681 152,946
Macerich Co., REIT 2,027 151,336
Medical Properties Trust, Inc., REIT 12,150 162,688
Pennsylvania Real Estate Investment Trust, REIT 2,549 107,874
ProLogis, REIT 2,405 135,786
Public Storage, Inc., REIT 1,202 104,153
Reckson Associates Realty Corp., REIT 3,193 136,628
Regency Centers Corp., REIT 1,709 114,964
Simon Property Group, Inc., REIT 1,935 164,069
SL Green Realty Corp., REIT 1,410 157,300
Vornado Realty Trust, REIT 1,676 177,505
-------------
$ 3,277,385
- ---------------------------------------------------------------------------------------------------------
Restaurants - 0.1%
- ---------------------------------------------------------------------------------------------------------
YUM! Brands, Inc. 300 $ 14,664
- ---------------------------------------------------------------------------------------------------------
Specialty Stores - 0.8%
- ---------------------------------------------------------------------------------------------------------
Aeropostale, Inc. (n) 2,030 $ 51,562
Limited Brands, Inc. 3,120 80,278
Rent-A-Center, Inc. (n) 3,050 82,655
-------------
$ 214,495
- ---------------------------------------------------------------------------------------------------------
Telephone Services - 1.5%
- ---------------------------------------------------------------------------------------------------------
AT&T, Inc. 3,430 $ 106,776
Citizens Communications Co. 5,520 76,121
Verizon Communications, Inc. 5,380 189,268
Windstream Corp. 1,130 14,916
-------------
$ 387,081
- ---------------------------------------------------------------------------------------------------------
Tobacco - 1.0%
- ---------------------------------------------------------------------------------------------------------
Altria Group, Inc. 2,280 $ 190,448
Loews Corp. 1,460 83,600
-------------
$ 274,048
- ---------------------------------------------------------------------------------------------------------
Utilities - Electric Power - 1.8%
- ---------------------------------------------------------------------------------------------------------
Dominion Resources, Inc. 1,480 $ 118,237
Duke Energy Corp. 3,500 105,000
FirstEnergy Corp. 1,860 106,132
FPL Group, Inc. 830 36,894
TXU Corp. 1,520 100,639
-------------
$ 466,902
- ---------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (IDENTIFIED COST, $9,313,946) $ 9,576,785
- ---------------------------------------------------------------------------------------------------------
Short-term Obligations - 12.5% (y)
- ---------------------------------------------------------------------------------------------------------
Abbey National North America LLC, 5.28%, due 9/01/06 $ 918,000 $ 918,000
General Electric Co., 5.27%, due 9/01/06 553,000 553,000
Societe Generale Time Deposit, 5.29%, due 9/01/06 918,000 918,000
UBS Financial Delaware LLC, 5.26%, due 9/01/06 918,000 918,000
- ---------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM OBLIGATIONS, AT AMORTIZED COST AND VALUE $ 3,307,000
- ---------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (IDENTIFIED COST, $24,574,428) (k) $ 24,911,868
- ---------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 5.9% 1,573,090
- ---------------------------------------------------------------------------------------------------------
NET ASSETS - 100.0% $ 26,484,958
- ---------------------------------------------------------------------------------------------------------
(a) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities
may be sold in the ordinary course of business in transactions exempt from registration, normally to
qualified institutional buyers. At period end, the aggregate value of these securities was $1,221,819,
representing 4.6% of net assets.
(k) As of August 31, 2006, the fund held securities fair valued in accordance with the policies adopted by
the Board of Trustees, aggregating $11,875,643 and 47.67% of market value. An independent pricing
service provided an evaluated bid for 46.08% of the market value.
(n) Non-income producing security.
(y) The rate shown represents an annualized yield at time of purchase.
(z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal
restrictions on resale. These securities generally may be resold in transactions exempt from
registration or to the public if the securities are subsequently registered. Disposal of these
securities may involve time-consuming negotiations and prompt sale at an acceptable price may be
difficult. The fund holds the following restricted securities:
CURRENT
ACQUISITION ACQUISITION MARKET TOTAL % OF
RESTRICTED SECURITIES DATE COST VALUE NET ASSETS
Barrington Broadcasting Group, 10.5%, 2014 8/03/06 $30,000 $ 29,400
FMG Finance Ltd., 10.625%, 2016 8/11/06 35,000 34,825
PNA Group, Inc., 10.75%, 2016 8/04/06 5,000 5,100
RBS Global & Rexnord Corp., 9.5%, 2014 8/07/06 50,250 50,250
- ---------------------------------------------------------------------------------------------------------------
Total Restricted Securities $119,575 0.5%
The following abbreviations are used in this report and are defined:
FRN Floating Rate Note. The interest rate is the rate in effect as of period end.
REIT Real Estate Investment Trust
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF ASSETS AND LIABILITIES
At 8/31/06 (unaudited)
This statement represents your fund's balance sheet, which details the assets and liabilities comprising the
total value of the fund.
ASSETS
- ------------------------------------------------------------------------------------------------------
Investments, at value (identified cost, $24,574,428) $24,911,868
Cash 87,656
Receivable for fund shares sold 5,308,718
Interest and dividends receivable 214,595
Receivable from investment adviser 16,748
- ------------------------------------------------------------------------------------------------------
Total assets $30,539,585
- ------------------------------------------------------------------------------------------------------
LIABILITIES
- ------------------------------------------------------------------------------------------------------
Distributions payable $8,996
Payable for investments purchased 3,999,959
Payable for fund shares reacquired 4,400
Payable to affiliates
Management fee 779
Shareholder servicing costs 2,630
Distribution and service fees 491
Administrative services fee 96
Accrued expenses and other liabilities 37,276
- ------------------------------------------------------------------------------------------------------
Total liabilities $4,054,627
- ------------------------------------------------------------------------------------------------------
Net assets $26,484,958
- ------------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
- ------------------------------------------------------------------------------------------------------
Paid-in capital $26,166,552
Unrealized appreciation (depreciation) on investments and
translation of assets and liabilities in foreign currencies 337,440
Accumulated net realized gain (loss) on investments 1,315
Accumulated distributions in excess of net investment income (20,349)
- ------------------------------------------------------------------------------------------------------
Net assets $26,484,958
- ------------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 2,576,672
- ------------------------------------------------------------------------------------------------------
Statment of Assets and Liabilities (unaudited) - continued
Class A shares
- ------------------------------------------------------------------------------------------------------
Net assets $20,861,794
Shares outstanding 2,029,479
- ------------------------------------------------------------------------------------------------------
Net asset value per share $10.28
- ------------------------------------------------------------------------------------------------------
Offering price per share (100/95.25Xnet asset value per share) $10.79
- ------------------------------------------------------------------------------------------------------
Class C shares
- ------------------------------------------------------------------------------------------------------
Net assets $4,072,054
Shares outstanding 396,291
- ------------------------------------------------------------------------------------------------------
Net asset value and offering price per share $10.28
- ------------------------------------------------------------------------------------------------------
Class I shares
- ------------------------------------------------------------------------------------------------------
Net assets $1,551,110
Shares outstanding 150,902
- ------------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price per share $10.28
- ------------------------------------------------------------------------------------------------------
On sales of $50,000 or more, the offering price of Class A shares is reduced. A contingent deferred sales
charge may be imposed on redemptions of Class A and Class C shares.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT OF OPERATIONS
Period ended 8/31/06 (c) (unaudited)
This statement describes how much your fund earned in investment income andaccrued in expenses.
It also describes any gains and/or losses generated by fund operations.
NET INVESTMENT INCOME
- -------------------------------------------------------------------------------------------------------
Income
Interest $127,051
Dividends 44,118
Foreign taxes withheld (490)
- -------------------------------------------------------------------------------------------------------
Total investment income $170,679
- -------------------------------------------------------------------------------------------------------
Expenses
Management fee $19,878
Distribution and service fees 10,791
Shareholder servicing costs 8,003
Administrative services fee 4,699
Custodian fee 7,920
Shareholder communications 10,794
Auditing fees 10,032
Legal fees 537
Registration fees 9,039
Miscellaneous 2,038
- -------------------------------------------------------------------------------------------------------
Total expenses $83,731
- -------------------------------------------------------------------------------------------------------
Fees paid indirectly (1,338)
Reduction of expenses by investment adviser (52,802)
- -------------------------------------------------------------------------------------------------------
Net expenses $29,591
- -------------------------------------------------------------------------------------------------------
Net investment income $141,088
- -------------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- -------------------------------------------------------------------------------------------------------
Realized gain (loss) (identified cost basis) on investment
transactions $1,315
- -------------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation) on investments $337,440
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $338,755
- -------------------------------------------------------------------------------------------------------
Change in net assets from operations $479,843
- -------------------------------------------------------------------------------------------------------
(c) For the period from the commencement of the fund's investment operations, May 26, 2006, through
the stated period end.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
STATEMENT 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.
PERIOD ENDED
8/31/06(c)
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS
- ------------------------------------------------------------------------------------------------------
Net investment income $141,088
Net realized gain (loss) on investments 1,315
Net unrealized gain (loss) on investments 337,440
- ------------------------------------------------------------------------------------------------------
Change in net assets from operations $479,843
- ------------------------------------------------------------------------------------------------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- ------------------------------------------------------------------------------------------------------
From net investment income
Class A $(128,759)
Class C (18,387)
Class I (14,291)
- ------------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(161,437)
- ------------------------------------------------------------------------------------------------------
Change in net assets from fund share transactions $26,166,552
- ------------------------------------------------------------------------------------------------------
Total change in net assets $26,484,958
- ------------------------------------------------------------------------------------------------------
NET ASSETS
- ------------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions in
excess of net investment income of $20,349) $26,484,958
- ------------------------------------------------------------------------------------------------------
(c) For the period from the commencement of the fund's investment operations, May 26, 2006, through
the stated period end.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the fund's financial performance
for the semiannual period and the past 5 fiscal years (or life of a particular class, if shorter).
Certain information reflects financial results for a single fund share. The total returns in the
table represent the rate by which an investor would have earned (or lost) on an investment in the
fund share class (assuming reinvestment of all distributions) held for the entire period.
PERIOD ENDED
CLASS A 8/31/06(c)
(UNAUDITED)
Net asset value, beginning of period $10.00
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income (d) $0.11
Net realized and unrealized gain (loss) on investments and foreign currency 0.28
- ------------------------------------------------------------------------------------------------
Total from investment operations $0.39
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- ------------------------------------------------------------------------------------------------
From net investment income $(0.11)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $10.28
- ------------------------------------------------------------------------------------------------
Total return (%) (r)(s)(t) 3.94(n)
- ------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 2.67(a)
Expenses after expense reductions (f) 0.95(a)
Net investment income 4.64(a)
Portfolio turnover 20
Net assets at end of period (000 Omitted) $20,862
- ------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS C 8/31/06(c)
(UNAUDITED)
Net asset value, beginning of period $10.00
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income (d) $0.09
Net realized and unrealized gain (loss) on investments and foreign currency 0.28
- ------------------------------------------------------------------------------------------------
Total from investment operations $0.37
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- ------------------------------------------------------------------------------------------------
From net investment income $(0.09)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $10.28
- ------------------------------------------------------------------------------------------------
Total return (%) (r)(s)(t) 3.76(n)
- ------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 3.30(a)
Expenses after expense reductions (f) 1.65(a)
Net investment income 3.93(a)
Portfolio turnover 20
Net assets at end of period (000 Omitted) $4,072
- ------------------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
PERIOD ENDED
CLASS I 8/31/06(c)
(UNAUDITED)
Net asset value, beginning of period $10.00
- ------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------------------------------
Net investment income (d) $0.13
Net realized and unrealized gain (loss) on investments and foreign currency 0.27
- ------------------------------------------------------------------------------------------------
Total from investment operations $0.40
- ------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
- ------------------------------------------------------------------------------------------------
From net investment income $(0.12)
- ------------------------------------------------------------------------------------------------
Net asset value, end of period $10.28
- ------------------------------------------------------------------------------------------------
Total return (%) (r)(s) 4.01(n)
- ------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA
- ------------------------------------------------------------------------------------------------
Expenses before expense reductions (f) 2.40(a)
Expenses after expense reductions (f) 0.65(a)
Net investment income 4.94(a)
Portfolio turnover 20
Net assets at end of period (000 Omitted) $1,551
- ------------------------------------------------------------------------------------------------
(a) Annualized.
(c) For the period from the commencement of the fund's investment operations, May 26, 2006, through
the stated period end.
(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 fund may receive proceeds from litigation settlements, without which
performance would be lower.
(t) Total returns do not include any applicable sales charges.
SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) BUSINESS AND ORGANIZATION
MFS Diversified Income Fund (the fund) is a series of MFS Series Trust XIII
(the trust). The trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-
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
fund can invest in foreign securities, including securities of emerging market
issuers. Investments in foreign securities are vulnerable to the effects of
changes in the relative values of the local currency and the U.S. dollar and
to the effects of changes in each country's legal, political, and economic
environment. The markets of emerging markets countries are generally more
volatile than the markets of developed countries with more mature economies.
All of the risks of investing in foreign securities previously described are
heightened when investing in emerging markets countries.
INVESTMENT VALUATIONS - Equity securities, including restricted equity
securities, are generally valued at the last sale or official closing price as
reported by an independent pricing service on the market or exchange on which
they are primarily traded. For securities for which there were no sales
reported that day, equity securities are generally valued at the last quoted
daily bid quotation as reported by an independent pricing service on the
market or exchange on which they are primarily traded. 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. Short-
term instruments with a maturity at issuance of 60 days or less may be valued
at amortized cost, which approximates market value. 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 fund'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 fund'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 fund'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 fund's net asset value may differ from
quoted or published prices for the same investments.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The fund requires that the
securities collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the fund to obtain those securities
in the event of a default under the repurchase agreement. The fund 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 fund under
each such repurchase agreement. The fund, 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.
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 fund 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 fund 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 fund.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the fund. This amount, for the period ended August 31, 2006, is shown as a
reduction of total expenses on the Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund intends to qualify as a regulated
investment company, as defined under Subchapter M of the Internal Revenue
Code, and to distribute all of its taxable income, including realized capital
gains. Accordingly, no provision for federal income tax is required in the
financial statements. Foreign taxes, if any, have been accrued by the fund 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.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are
as follows:
AS OF 8/31/06
Cost of investments $24,577,586
----------------------------------------------------------
Gross appreciation $429,037
Gross depreciation (94,755)
----------------------------------------------------------
Net unrealized appreciation (depreciation) $334,282
In June 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (the "Interpretation") was issued, and is effective for fiscal years
beginning after December 15, 2006 and is to be applied to all open tax years
as of the effective date. This Interpretation prescribes a minimum threshold
for financial statement recognition of the benefit of a tax position taken or
expected to be taken in a tax return, and requires certain expanded
disclosures. Management has recently begun to evaluate the application of the
Interpretation to the fund, and has not at this time determined the impact,
if any, resulting from the adoption of this Interpretation on the fund's
financial statements.
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with MFS to
provide overall investment management and related administrative services and
facilities to the fund.
The management fee is computed daily and paid monthly at an annual rate of
0.65% of the fund's average daily net assets. The adviser has engaged a sub-
adviser for the real estate related component of the fund: Sun Capital Advisers
LLC, referred to as Sun Capital or the sub-adviser. At the commencement of the
period, MFS paid a sub-advisory fee in the amount equal to 0.40% annually of
the average daily net asset value of the fund's assets managed by the
sub-adviser. Effective July 1, 2006, the sub-advisory fee is 0.30% annually of
the average daily net asset value of the fund's assets managed by the
sub-adviser.
The investment adviser has agreed in writing to pay a portion of the fund's
operating expenses, exclusive of certain other fees and expenses, such that
total annual fund operating expenses do not exceed the following rates
annually of the fund's average daily net assets:
CLASS A CLASS C CLASS I
0.95% 1.65% 0.65%
This written agreement will continue through June 30, 2007 unless changed or
rescinded by the fund's Board of Trustees. For the period ended August 31,
2006, this reduction amounted to $52,789 and is reflected as a reduction of
total expenses in the Statement of Operations.
DISTRIBUTOR - MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of
MFS, as distributor, received $15,015 for the period ended August 31, 2006, as
its portion of the initial sales charge on sales of Class A shares of the
fund.
The Board of Trustees has adopted a distribution plan for certain class shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940.
The fund's distribution plan provides that the fund will pay MFD for services
provided by MFD and financial intermediaries in connection with the
distribution and servicing of certain share classes. One component of the plan
is a distribution fee paid to MFD and another component of the plan is a
service fee paid to MFD. MFD may subsequently pay all, or a portion, of the
distribution and/or service fees to financial intermediaries.
Distribution Fee Plan Table:
TOTAL ANNUAL DISTRIBUTION
DISTRIBUTION SERVICE DISTRIBUTION EFFECTIVE AND SERVICE
FEE RATE FEE RATE PLAN(d) RATE(e) FEE
Class A 0.10% 0.25% 0.35% 0.30% $7,152
Class C 0.75% 0.25% 1.00% 1.00% 3,639
- ---------------------------------------------------------------------------------------------------------------------
Total Distribution and Service Fees $10,791
(d) In accordance with the distribution plan for certain classes, the fund pays distribution and/or service fees up
to these annual percentage rates of each class' average daily net assets.
(e) The annual effective rates represent actual fees incurred under the distribution plan for the period ended
August 31, 2006 based on each class' average daily net assets. 0.05% of the Class A distribution fee is
currently being paid by the fund. Payment of the remaining 0.05% of the Class A distribution fee is not yet in
effect and will be implemented on such date as the fund's Board of Trustees may determine.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months of purchase.
There were no contingent deferred sales charges imposed during the period
ended August 31, 2006.
SHAREHOLDER SERVICING AGENT - MFS Service Center, Inc. (MFSC), a wholly-owned
subsidiary of MFS, receives a fee from the fund for its services as
shareholder servicing agent calculated as a percentage of the average net
assets of the fund as determined periodically under the supervision of the
fund's Board of Trustees. For the period ended August 31, 2006, the fee was
$2,968, which equated to 0.0964% annually of the fund's average daily net
assets. MFSC also receives payment from the fund for out-of-pocket and sub-
accounting expenses paid by MFSC on behalf of the fund. For the period ended
August 31, 2006, these costs amounted to $2,518. The fund may also pay
shareholder servicing related costs to non-related parties.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to the fund.
Under an administrative services agreement, the fund partially reimburses MFS
the costs incurred to provide these services. The fund is charged a fixed
amount plus a fee based on calendar year average net assets. The fund's annual
fixed amount is $17,500.
The administrative services fee incurred for the period ended August 31, 2006
was equivalent to an annual effective rate of 0.1526% of the fund average
daily net assets.
TRUSTEES' AND OFFICERS' COMPENSATION - The fund pays compensation to
Independent Trustees in the form of a retainer, attendance fees, and
additional compensation to Board and Committee chairpersons. The fund does not
pay compensation directly to Trustees or officers of the fund who are also
officers of the investment adviser, all of whom receive remuneration for their
services to the fund from MFS. Certain officers and Trustees of the fund are
officers or directors of MFS, MFD, and MFSC. The Independent Trustees
currently are not receiving any payments for their services to the fund.
OTHER - This fund 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 period ended August 31, 2006, the fee paid to Tarantino LLC
was $13. MFS has agreed to reimburse the fund for a portion of the payments
made by the funds to Tarantino LLC in the amount of $13, 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 $4,249,012 $1,337,915
- ---------------------------------------------------------------------------
Investments (non-U.S. government securities) $19,350,658 $999,461
- ---------------------------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
fund shares were as follows:
PERIOD ENDED
8/31/06(c)
SHARES AMOUNT
Shares sold
Class A 2,019,349 $20,514,172
Class C 395,756 4,025,355
Class I 149,495 1,504,241
- -----------------------------------------------------------------------------
2,564,600 $26,043,768
SHARES ISSUED TO SHAREHOLDERS IN REINVESTMENT OF DISTRIBUTIONS
Class A 11,933 $121,381
Class C 1,638 16,697
Class I 1,407 14,291
- -----------------------------------------------------------------------------
14,978 $152,369
Shares reacquired
Class A (1,803) $(18,380)
Class C (1,103) (11,205)
- ------------------------------------------------------------------------------
(2,906) $(29,585)
Net change
Class A 2,029,479 $20,617,173
Class C 396,291 4,030,847
Class I 150,902 1,518,532
- -----------------------------------------------------------------------------
2,576,672 $26,166,552
(c) For the period from the commencement of the fund's investment operations,
May 26, 2006, through the stated period end.
(6) LINE OF CREDIT
The fund 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 fund 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, generally at a rate equal to the Federal Reserve funds rate plus
0.35%. In addition, a commitment fee, based on the average daily, unused portion
of the committed line of credit, is allocated among the participating funds at
the end of each calendar quarter. For the period ended August 31, 2006, the
fund's commitment fee and interest expense were $11 and $0, respectively, and
are included in miscellaneous expense on the Statement of Operations.
BOARD REVIEW OF INVESTMENT
ADVISORY AGREEMENT
The Investment Company Act of 1940 requires that both the full Board of
Trustees and a majority of the non-interested ("independent") Trustees, voting
separately, initially approve the Fund's investment advisory agreement with
MFS and investment sub-advisory agreement among MFS Series Trust XIII, on
behalf of the Fund, MFS and Sun Capital Advisors LLC ("Sun Capital")
(together, the "Agreements") and, beginning on the second anniversary of the
initial effective date of each Agreement, annually approve the continuation of
each Agreement. In April and May 2006, the Board met to consider the initial
approval of each Agreement ("the initial review meetings"). In connection with
these meetings, the Trustees noted that Sun Capital does not currently serve
as sub-advisor to any of the MFS Funds and that representatives of the Board
and MFS had conducted diligence with respect to Sun Capital, including on-site
visits at Sun Capital and a review of Sun Capital's compliance program. The
independent Trustees were assisted in their evaluation of each Agreement by
independent legal counsel, from whom they received separate legal advice and
with whom they met separately from MFS and Sun Capital. The independent
Trustees were also assisted in this process by the MFS Funds' Independent
Chief Compliance Officer, a full-time senior officer appointed by and
reporting to the independent Trustees.
In connection with their deliberations regarding the initial approval of the
Agreements, the Trustees, including the independent Trustees, considered such
information and factors as they believed, in light of the legal advice
furnished to them and their own business judgment, to be relevant. The
Agreements for the Fund were considered separately, although the Trustees also
took into account the common interests of the MFS Funds in their review. As
described below, the Trustees considered the nature, quality, and extent of
the various investment advisory, administrative, and shareholder services to
be performed by MFS and Sun Capital, as applicable, under the Agreements and
other arrangements with the Fund.
In connection with their initial review meeting, the Trustees received and
relied upon materials which included, among other items: (i) information
provided by Lipper Inc. on the Fund's advisory fees and other expenses and the
advisory fees and other expenses of comparable funds identified by Lipper (the
"Lipper expense group"), as well as the advisory fees and other expenses of peer
funds identified by objective criteria suggested by MFS, (ii) information as to
whether and to what extent applicable expense waivers, reimbursements or fee
"breakpoints" will be observed for the Fund, (iii) information provided by Sun
Capital on the performance of a fund managed by Sun Capital in a manner similar
to the manner in which Sun Capital will manage a portion of the Fund in its
capacity as sub-advisor, as well as performance of the Sun Capital fund's peer
group of funds, and (iv) information regarding the overall organization of Sun
Capital, including information about Sun Capital personnel that would provide
investment advisory services to the Fund. In addition, in connection with the
independent Trustees' meetings in May, June and July, 2006 (together with the
initial review meeting, the "contract review meetings") for the purpose of
considering whether to approve the continuation of the investment advisory
agreement for the other investment companies that the Board oversees (the "MFS
Funds") the independent Trustees received: (i) information regarding MFS'
financial results and financial condition, including MFS' and certain of its
affiliates' estimated profitability from services performed for the MFS Funds as
a whole, (ii) MFS' views regarding the outlook for the mutual fund industry and
the strategic business plans of MFS, (iii) descriptions of various functions to
be performed by MFS for the Fund, such as compliance monitoring and portfolio
trading practices, and (iv) information regarding the overall organization of
MFS, including information about MFS' senior management and other personnel that
would provide investment advisory, administrative and other services to the Fund
and the other MFS Funds. The comparative fee and expense information prepared
and provided by Lipper Inc. was not independently verified and the independent
Trustees did not independently verify any information provided to them by MFS or
Sun Capital.
The Trustees' conclusion as to the initial approval of each Agreement was
based on a comprehensive consideration of all information provided to the
Trustees and not the result of any single factor. Some of the factors that
figured particularly in the Trustees' deliberations are described below,
although individual Trustees may have evaluated the information presented
differently from one another, giving different weights to various factors.
Because the Fund is newly organized and had not begun investment operations at
the time of the initial review meeting, the Trustees were unable to review its
investment performance, although the Trustees did take into account, in
connection with the portion of the Fund sub-advised by Sun Capital, the
investment performance of the similar Sun Capital fund.
In assessing the reasonableness of the Fund's advisory fee, the Trustees
considered, among other information, the Fund's advisory fee, sub-advisory
fee, and the estimated total expense ratio of the Fund's Class A shares as a
percentage of average net assets and the advisory fee and total expense ratios
of peer groups of funds based on information provided by Lipper Inc. and MFS
and/or Sun Capital. The Trustees noted that MFS (and not the Fund) would pay
Sun Capital its sub-advisory fee from its advisory fees. The Trustees
considered that MFS has agreed in writing to observe an expense limitation for
the Fund. The Trustees also considered that, according to the Lipper data, the
Fund's estimated effective management fee was below the Lipper expense group
median and the Fund's estimated total expense ratio was approximately at the
Lipper expense group median.
The Trustees also considered whether the Fund is likely to benefit from any
economies of scale in the management of the Fund in the event of growth in
assets of the Fund. They noted that the Fund's advisory fee rate and sub-
advisory fee rate schedules are not currently subject to any breakpoints.
Taking into account the expense limitation noted above, the Trustees
determined not to recommend any advisory fee or sub-advisory fee breakpoints
for the Fund at this time.
The Trustees did not consider MFS' or Sun Capital's costs and profits with
respect to the Fund because the Fund has no operating history. The Trustees
considered information prepared by MFS relating to MFS' costs and profits with
respect to the MFS Funds considered as a group, and other investment companies
and accounts advised by MFS, as well as MFS' methodologies used to determine
and allocate its costs to the MFS Funds and other accounts and products for
purposes of estimating profitability.
After reviewing these and other factors described herein, the Trustees
concluded, within the context of their overall conclusions regarding the
Agreements, that the advisory fee and sub-advisory fee to be charged to the
Fund represent reasonable compensation in light of the services to be provided
by MFS and Sun Capital to the Fund.
In addition, the Trustees considered MFS' and Sun Capital's resources and
related efforts to continue to retain, attract and motivate capable personnel
to serve the Fund. The Trustees also considered current and developing
conditions in the financial services industry, including the entry into the
industry of large and well-capitalized companies which are spending, and
appear to be prepared to continue to spend, substantial sums to engage
personnel and to provide services to competing investment companies. In this
regard, the Trustees also considered the financial resources of MFS, Sun
Capital and their ultimate parent, Sun Life Financial Inc. The Trustees also
considered the advantages and possible disadvantages to the Fund of having an
adviser and sub-advisor which also serve other investment companies as well as
other accounts.
The Trustees also considered the nature, quality, cost, and extent of
administrative, transfer agency, and distribution services to be provided to
the Fund by MFS and its affiliates under agreements and plans other than the
investment advisory agreement, including any 12b-1 fees the Fund will pay to
MFS Fund Distributors, Inc., an affiliate of MFS and Sun Capital. The Trustees
also considered the nature, extent and quality of certain other services MFS
may perform or arrange for on the Fund's behalf, which may include securities
lending programs, directed expense payment programs, class action recovery
programs, and MFS' and Sun Capital's interaction with third-party service
providers, principally custodians and sub-custodians. The Trustees concluded
that the various non-advisory services to be provided by MFS and its
affiliates on behalf of the Fund were satisfactory.
The Trustees also considered benefits to MFS and Sun Capital from the use of
the Fund's portfolio brokerage commissions, if applicable, to pay for
investment research (excluding third-party research, for which MFS pays
directly) and various other factors. The Trustees noted that Sun Capital may
obtain third-party research with soft dollar commissions. Additionally, the
Trustees considered so-called "fall-out benefits" to MFS and Sun Capital such
as reputational value derived from serving as an investment manager to
the Fund.
Based on their evaluation of factors that they deemed to be material,
including those factors described above, the Board of Trustees, including a
majority of the independent Trustees, concluded that the Fund's investment
advisory agreement with MFS and MFS' investment sub-advisory agreement with
Sun Capital should be approved for an initial two-year period, commencing
April 25, 2006.
A discussion regarding the Board's most recent review and renewal of the
Fund's investment advisory agreement will be available on or before
November 1, 2006 by clicking on the fund's name under "Select a fund" on the
MFS Web site (mfs.com).
PROXY VOTING POLICIES AND INFORMATION
A general description of the MFS funds' proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the Proxy Voting section of mfs.com or by visiting the SEC's Web site at
http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
100 F Street, NE, Room 1580
Washington, D.C. 20549
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-551-5850. The fund's Form N-Q is
available on the EDGAR database on the Commission's Internet Web site at
http://www.sec.gov, and copies of this information may be obtained, upon
payment of a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov or by writing the Public Reference Section at the
above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
CONTACT US
WEB SITE MAILING ADDRESS
mfs.com MFS Service Center, Inc.
P.O. Box 55824
MFS TALK Boston, MA
1-800-637-8255 02205-5824
24 hours a day
OVERNIGHT MAIL
ACCOUNT SERVICE AND MFS Service Center, Inc.
LITERATURE 500 Boylston Street
Boston, MA 02116-3741
SHAREHOLDERS
1-800-225-2606
8 a.m. to 8 p.m. ET
INVESTMENT PROFESSIONALS
1-800-343-2829
8 a.m. to 8 p.m. ET
RETIREMENT PLAN SERVICES
1-800-637-1255
8 a.m. to 8 p.m. ET
- -------------------------------------------------------------------------------
Go paperless with eDELIVERY: Arrange to have MFS send prospectuses, reports,
and proxies directly to your e-mail inbox. You'll get timely information and
less clutter in your mailbox (not to mention help your fund save printing and
postage costs).
SIGN UP: If your account is registered with us, simply go to mfs.com, log in to
your account via MFS Access, and select the eDelivery sign up options.
If you own your MFS fund shares through a financial institution or a retirement
plan, MFS TALK, MFS Access, and eDelivery may not be available to you.
- -------------------------------------------------------------------------------
M F S(R)
INVESTMENT MANAGEMENT
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 to the Registrant.
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 to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
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 SERIES TRUST XIII
------------------------------------------------------------------
By (Signature and Title)* MARIA F. DWYER
-----------------------------------------------------
Maria F. Dwyer, President
Date: October 19, 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: October 19, 2006
----------------
By (Signature and Title)* TRACY ATKINSON
-----------------------------------------------------
Tracy Atkinson, Treasurer (Principal Financial Officer
and Accounting Officer)
Date: October 19, 2006
----------------
* Print name and title of each signing officer under his or her signature.