N-CSR 1 d667481.txt MFS SERIES TRUST XIII 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 ------------------------------------------------------------------------------- MFS SERIES TRUST XIII ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 500 Boylston Street, Boston, Massachusetts 02116 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Susan S. Newton Massachusetts Financial Services Company 500 Boylston Street Boston, Massachusetts 02116 ------------------------------------------------------------------------------- (Name and address of agents for service) Registrant's telephone number, including area code: (617) 954-5000 ------------------------------------------------------------------------------- Date of fiscal year end: February 28 ------------------------------------------------------------------------------- Date of reporting period: February 28, 2007 ------------------------------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. M F S(R) INVESTMENT MANAGEMENT [graphic omitted] ANNUAL REPORT MFS(R) DIVERSIFIED INCOME FUND LETTER FROM THE CEO 1 ------------------------------------------------------------------ PORTFOLIO COMPOSITION 2 ------------------------------------------------------------------ MANAGEMENT REVIEW 3 ------------------------------------------------------------------ PERFORMANCE SUMMARY 5 ------------------------------------------------------------------ EXPENSE TABLE 8 ------------------------------------------------------------------ PORTFOLIO OF INVESTMENTS 10 ------------------------------------------------------------------ STATEMENT OF ASSETS AND LIABILITIES 26 ------------------------------------------------------------------ STATEMENT OF OPERATIONS 28 ------------------------------------------------------------------ STATEMENT OF CHANGES IN NET ASSETS 29 ------------------------------------------------------------------ FINANCIAL HIGHLIGHTS 30 ------------------------------------------------------------------ NOTES TO FINANCIAL STATEMENTS 33 ------------------------------------------------------------------ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 42 ------------------------------------------------------------------ TRUSTEES AND OFFICERS 43 ------------------------------------------------------------------ BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 49 ------------------------------------------------------------------ PROXY VOTING POLICIES AND INFORMATION 49 ------------------------------------------------------------------ QUARTERLY PORTFOLIO DISCLOSURE 49 ------------------------------------------------------------------ FEDERAL TAX INFORMATION 49 ------------------------------------------------------------------ MFS(R) PRIVACY NOTICE 50 ------------------------------------------------------------------ CONTACT INFORMATION BACK COVER ------------------------------------------------------------------ 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 ------------------------------------------------------------------------------ 2/28/07 DIF-ANN LETTER FROM THE CEO [Photo of Robert J. Manning] Dear Shareholders: The past year has been a great example of why investors should keep their eyes on the long term. In 2006 the Dow Jones Industrial Average returned 19%. In February 2007 it hit its all-time high of 12,787. Less than a week later, stocks sold off around the globe. By March 5 the Dow was off 5.8%. That is a sign of volatile markets and a reason investors should make sure they have an investment plan that can ride out the peaks and troughs. If you are focused on a long-term investment strategy, the short-term ups and downs of the markets should not necessarily dictate portfolio action on your part. Both the bond and stock markets are inherently cyclical. In our view, investors who remain committed to a long-term plan are more likely to achieve their financial goals. We believe you should not let the headlines guide you in your investment decisions and that there is no sense in reacting to short- term volatility. In any market environment, we believe individual investors are best served by following a three-pronged investment strategy of allocating their holdings across the major asset classes, diversifying within each class, and regularly rebalancing their portfolios to maintain their desired allocations. Of course, these strategies cannot guarantee a profit or protect against a loss. Investing and planning for the long term require diligence and patience, two traits that 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) April 16, 2007 The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed. PORTFOLIO COMPOSITION PORTFOLIO STRUCTURE (i) Bonds 56.3% Common Stocks 37.4% Floating Rate Loans 2.2% Cash & Other Net Assets 4.1% TOP TEN HOLDINGS (i) Fannie Mae, 5.5%, 30 year 1.8% ------------------------------------------------ Freddie Mac, 4.625%, 2008 1.3% ------------------------------------------------ Exxon Mobil Corp. 1.2% ------------------------------------------------ U.S. Treasury Notes, 3.125%, 2008 1.2% ------------------------------------------------ Citigroup, Inc. 1.2% ------------------------------------------------ Fannie Mae, 4.625%, 2013 1.2% ------------------------------------------------ Bank of America Corp. 1.1% ------------------------------------------------ Chevron Corp. 1.0% ------------------------------------------------ JPMorgan Chase & Co. 1.0% ------------------------------------------------ Peabody Energy Corp., "B", 6.875%, 2013 0.9% ------------------------------------------------ CREDIT QUALITY OF BONDS (r) AAA 25.8% ------------------------------------------------ A 1.7% ------------------------------------------------ BBB 9.4% ------------------------------------------------ BB 25.2% ------------------------------------------------ B 28.6% ------------------------------------------------ CCC 8.7% ------------------------------------------------ Not Rated 0.6% ------------------------------------------------ PORTFOLIO FACTS Average Duration (d)(i) 4.9 ------------------------------------------------ Average Life (i)(m) 9.3 yrs. ------------------------------------------------ Average Maturity (i)(m) 10.6 yrs. ------------------------------------------------ Average Credit Quality of Rated Securities (long-term) (a) BBB- ------------------------------------------------ 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 presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre- refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 2/28/07. Percentages are based on net assets as of 2/28/07, unless otherwise noted. The portfolio is actively managed and current holdings may be different. MANAGEMENT REVIEW SUMMARY OF RESULTS The MFS Diversified Income Fund is a portfolio that includes investments in high-yield corporate bonds, U.S. government securities, emerging markets debt, real estate investment trusts (REITs), and domestic equity securities. In our review of the performance of this portfolio, we look to a number of different benchmarks, each reflecting the results of the various markets in which we invest. For the reporting period May 26, 2006 through February 28, 2007, Class A shares of the fund provided a total return of 13.20%, at net asset value. This compares with the following returns over the same period for the funds' benchmarks: 11.93% for the JPMorgan Emerging Markets Bond Index Global, 10.94% for the Lehman Brothers U.S. High-Yield Corporate Bond Index, 15.32% for the Russell 1000 Value Index, 33.84% for the MSCI U.S. REIT Index, and 6.36% for the Lehman Brothers U.S. Government/Mortgage Bond Index. DETRACTORS FROM PERFORMANCE An underweighted position in real estate investment trusts detracted from relative performance, although this was offset somewhat by positive security selection within the sector. Our overweighted position in high-yield corporate bonds was also a slight detractor. The fund's cash position also detracted. As with nearly all mutual funds, this portfolio holds cash to buy new holdings and to provide liquidity, which was especially pronounced during the period in question as inflows were very rapid with new fund sales. In a period when markets rose, as measured by the fund's benchmarks, holding cash hurt performance versus the benchmarks, which have no cash position. CONTRIBUTORS TO PERFORMANCE The fund's underweighted position in U.S. government bonds helped relative performance. Our positioning in domestic equity securities also contributed to results as did security selection in the emerging markets debt category. Respectfully, John Addeo David Cole Richard Gable Portfolio Manager Portfolio Manager Portfolio Manager Thomas Pedulla Matthew Ryan Jonathan Sage Portfolio Manager Portfolio Manager Portfolio Manager Leo Saraceno Geoffrey Schechter James Swanson Portfolio Manager Portfolio Manager Portfolio Manager The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market and other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio's current or future investments. PERFORMANCE SUMMARY THROUGH 2/28/07 The following chart illustrates the historical performance of the fund's Class A shares in comparison to its benchmark. Performance results include the deduction of the maximum applicable sales charge and reflect the percentage change in net asset value, including reinvestment of dividends and capital gains distributions. The performance of other share classes will be greater than or less than that of the class depicted below. Benchmark comparisons are unmanaged; do not reflect sales charges, commissions or expenses; and cannot be invested in directly. (See Notes to Performance Summary.) THE PERFORMANCE SHOWN DOES NOT REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT (For the period from the commencement of the fund's investment operations, May 26, 2006, through February 28, 2007)
JP Morgan Lehman Brothers Lehman Brothers MFS Diversified MSCI U.S. Emerging U.S. High-Yield U.S. Government/ Income Fund- REIT Russell 1000 Markets Bond Corporate Mortgage Class A Index Value Index Index Global Bond Index Bond Index --------------- --------- ------------ ------------ --------------- ---------------- 5/06 $ 9,525 $10,000 $10,000 $10,000 $10,000 $10,000 2/07 10,782 13,384 11,532 11,193 11,094 10,636
TOTAL RETURNS THROUGH 2/28/07 AVERAGE ANNUAL WITHOUT SALES CHARGE Share class Class inception date Life (t) ------------------------------------------------------------------------------- A 5/26/06 13.20% ------------------------------------------------------------------------------- C 5/26/06 12.51% ------------------------------------------------------------------------------- I 5/26/06 13.45% ------------------------------------------------------------------------------- AVERAGE ANNUAL Comparative benchmarks ------------------------------------------------------------------------------- JPMorgan Emerging Markets Bond Index Global (f) 11.93% ------------------------------------------------------------------------------- Lehman Brothers U.S. Government/Mortgage Bond Index (f) 6.36% ------------------------------------------------------------------------------- Lehman Brothers U.S. High-Yield Corporate Bond Index (f) 10.94% ------------------------------------------------------------------------------- MSCI U.S. REIT Index (f) 33.84% ------------------------------------------------------------------------------- Russell 1000 Value Index (f) 15.32% ------------------------------------------------------------------------------- AVERAGE ANNUAL WITH SALES CHARGE Share class ------------------------------------------------------------------------------- A 7.82% With Initial Sales Charge (4.75%) ------------------------------------------------------------------------------- C 11.51% With CDSC (1% for 12 months) (x) ------------------------------------------------------------------------------- Class I shares do not have a sales charge. Please see Notes to Performance Summary for more details. CDSC - Contingent Deferred Sales Charge. (f) Source: FactSet Research Systems Inc. (t) For the period from the commencement of the fund's investment operations, May 26, 2006 through the stated period end. (x) Assuming redemption at the end of the applicable period. Periods less than one year are actual, not annualized. INDEX DEFINITIONS JPMorgan Emerging Markets Bond Index Global (EMBI Global) - tracks total returns for U.S.-dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, Eurobonds. Lehman Brothers U.S. Government/Mortgage Bond Index - measures debt issued by the U.S. Government as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). Lehman Brothers U.S. High-Yield Corporate Bond Index - measures the universe of non-investment grade, fixed rate debt. Eurobonds, and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded. Morgan Stanley Capital International (MSCI) U.S. REIT Index - a market capitalization weighted index that is designed to measure equity market performance for real estate investment trusts (REITs) that generate a majority of their revenue and income from real estate rental and leasing operations. Russell 1000 Value Index - constructed to provide a comprehensive barometer for the value securities in the large-cap segment of the U.S. equity universe. Companies in this index generally have lower price-to-book ratios and lower forecasted growth values. It is not possible to invest directly in an index. NOTES TO PERFORMANCE SUMMARY Class I shares are only available to certain eligible investors. Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund's performance results would be less favorable. Please see the prospectus and financial statements for complete details. From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. EXPENSE TABLE Fund expenses borne by the shareholders during the period, September 1, 2006 through February 28, 2007 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 September 1, 2006 through February 28, 2007. 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 9/01/06- Class Ratio 9/01/06 2/28/07 2/28/07 -------------------------------------------------------------------------------- Actual 0.95% $1,000.00 $1,089.10 $4.92 A ------------------------------------------------------------------------ Hypothetical (h) 0.95% $1,000.00 $1,020.08 $4.76 -------------------------------------------------------------------------------- Actual 1.65% $1,000.00 $1,084.40 $8.53 C ------------------------------------------------------------------------ Hypothetical (h) 1.65% $1,000.00 $1,016.61 $8.25 -------------------------------------------------------------------------------- Actual 0.65% $1,000.00 $1,090.70 $3.37 I ------------------------------------------------------------------------ Hypothetical (h) 0.65% $1,000.00 $1,021.57 $3.26 -------------------------------------------------------------------------------- (h) 5% class return per year before expenses. (p) Expenses paid is equal to each class' annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. Expenses paid do not include any applicable sales charges (loads) or redemption fees. If these transaction costs had been included, your costs would have been higher. PORTFOLIO OF INVESTMENTS 2/28/07 The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Bonds - 55.3% -------------------------------------------------------------------------------------------------------------------------------- ISSUER SHARES/PAR VALUE ($) -------------------------------------------------------------------------------------------------------------------------------- Aerospace - 0.6% -------------------------------------------------------------------------------------------------------------------------------- Bombardier, Inc., 8%, 2014 (n) $ 1,016,000 $ 1,061,720 DRS Technologies, Inc., 7.625%, 2018 250,000 257,500 Vought Aircraft Industry, Inc., 8%, 2011 60,000 58,500 ------------ $ 1,377,720 -------------------------------------------------------------------------------------------------------------------------------- Automotive - 1.0% -------------------------------------------------------------------------------------------------------------------------------- Cooper-Standard Automotive, Inc., 8.375%, 2014 $ 125,000 $ 105,000 Ford Motor Credit Co., 9.75%, 2010 (n) 960,000 1,028,584 Ford Motor Credit Co., 8%, 2016 545,000 538,008 Ford Motor Credit Co., FRN, 8.11%, 2012 120,000 120,648 General Motors Corp., 8.375%, 2033 250,000 231,875 Goodyear Tire & Rubber Co., 9%, 2015 180,000 195,525 ------------ $ 2,219,640 -------------------------------------------------------------------------------------------------------------------------------- Broadcasting - 1.1% -------------------------------------------------------------------------------------------------------------------------------- Allbritton Communications Co., 7.75%, 2012 $ 250,000 $ 256,250 Clear Channel Communications, Inc., 5.5%, 2014 255,000 226,032 Grupo Televisa S.A., 8.5%, 2032 122,000 153,913 Intelsat Ltd., 11.25%, 2016 (n) 835,000 945,638 Intelsat Subsidiary Holding Co. Ltd., 8.625%, 2015 250,000 268,750 ION Media Networks, Inc., FRN, 11.61%, 2013 (n) 600,000 627,000 ------------ $ 2,477,583 -------------------------------------------------------------------------------------------------------------------------------- Building - 0.6% -------------------------------------------------------------------------------------------------------------------------------- Builders FirstSource, Inc., FRN, 9.61%, 2012 $ 235,000 $ 239,700 Goodman Global Holdings, Inc., 7.875%, 2012 250,000 255,000 Masonite Corp., 11%, 2015 (z) 341,000 340,148 NTK Holdings, Inc., 8.5%, 2014 545,000 554,538 ------------ $ 1,389,386 -------------------------------------------------------------------------------------------------------------------------------- Business Services - 0.8% -------------------------------------------------------------------------------------------------------------------------------- Nortel Networks Ltd., 10.75%, 2016 (n) $ 250,000 $ 278,750 SunGard Data Systems, Inc., 10.25%, 2015 1,145,000 1,245,188 Xerox Corp., 7.625%, 2013 250,000 271,294 ------------ $ 1,795,232 -------------------------------------------------------------------------------------------------------------------------------- Cable TV - 1.0% -------------------------------------------------------------------------------------------------------------------------------- CCH II Holdings LLC, 10.25%, 2010 $ 325,000 $ 342,063 CCO Holdings LLC, 8.75%, 2013 965,000 1,003,600 CSC Holdings, Inc., 6.75%, 2012 (n) 400,000 396,000 Mediacom LLC, 9.5%, 2013 55,000 56,513 NTL Cable PLC, 9.125%, 2016 400,000 425,000 ------------ $ 2,223,176 -------------------------------------------------------------------------------------------------------------------------------- Chemicals - 1.2% -------------------------------------------------------------------------------------------------------------------------------- Crystal U.S. Holdings LLC, "B", 0% to 2009, 10.5% to 2014 $ 500,000 $ 437,500 Innophos, Inc., 8.875%, 2014 585,000 606,938 Koppers, Inc., 9.875%, 2013 140,000 152,600 Momentive Performance Materials, Inc., 11.5%, 2016 (n) 600,000 624,000 Mosaic Co., 7.625%, 2016 (n) 550,000 573,375 Nalco Co., 8.875%, 2013 160,000 170,400 ------------ $ 2,564,813 -------------------------------------------------------------------------------------------------------------------------------- Construction - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Urbi Desarrollos Urbanos S.A. de C.V., 8.5%, 2016 $ 200,000 $ 217,500 -------------------------------------------------------------------------------------------------------------------------------- Consumer Goods & Services - 1.0% -------------------------------------------------------------------------------------------------------------------------------- Corrections Corp. of America, 6.25%, 2013 $ 120,000 $ 119,700 Jarden Corp., 7.5%, 2017 415,000 420,706 Service Corp. International, 7.375%, 2014 125,000 130,938 Service Corp. International, 7%, 2017 540,000 545,400 Visant Holding Corp., 8.75%, 2013 1,000,000 1,067,500 ------------ $ 2,284,244 -------------------------------------------------------------------------------------------------------------------------------- Containers - 1.0% -------------------------------------------------------------------------------------------------------------------------------- Berry Plastics Holding Corp., 8.875%, 2014 $ 1,000,000 $ 1,035,000 Greif, Inc., 6.75%, 2017 (n) 570,000 575,700 Owens-Brockway Glass Container, Inc., 8.25%, 2013 595,000 623,263 ------------ $ 2,233,963 -------------------------------------------------------------------------------------------------------------------------------- Defense Electronics - 0.4% -------------------------------------------------------------------------------------------------------------------------------- L-3 Communications Corp., 6.125%, 2014 $ 100,000 $ 98,750 L-3 Communications Corp., 5.875%, 2015 750,000 731,250 ------------ $ 830,000 -------------------------------------------------------------------------------------------------------------------------------- Electronics - 0.3% -------------------------------------------------------------------------------------------------------------------------------- Avago Technologies Financial, 11.875%, 2015 $ 75,000 $ 83,438 NXP B.V./NXP Funding LLC, 7.875%, 2014 (n) 40,000 41,300 NXP B.V./NXP Funding LLC, 9.5%, 2015 (n) 95,000 98,088 Sensata Technologies B.V., 8%, 2014 (n) 425,000 427,125 ------------ $ 649,951 -------------------------------------------------------------------------------------------------------------------------------- Emerging Market Quasi-Sovereign - 3.0% -------------------------------------------------------------------------------------------------------------------------------- Gaz Capital S.A., 6.212%, 2016 $ 209,000 $ 209,418 Gaz Capital S.A., 8.625%, 2034 495,000 631,868 Gazprom International S.A., 7.201%, 2020 1,478,319 1,552,975 Gazprom OAO, 9.625%, 2013 550,000 651,750 Majapahit Holding B.V., 7.75%, 2016 200,000 208,000 National Power Corp., 6.875%, 2016 (n) 100,000 101,250 Pemex Project Funding Master Trust, 8.625%, 2022 550,000 686,400 Pemex Project Funding Master Trust, 9.5%, 2027 200,000 271,000 Pemex Project Funding Master Trust, 6.625%, 2035 1,887,000 1,953,045 Petronas Capital Ltd., 7.875%, 2022 304,000 379,825 ------------ $ 6,645,531 -------------------------------------------------------------------------------------------------------------------------------- Emerging Market Sovereign - 10.6% -------------------------------------------------------------------------------------------------------------------------------- Arab Republic of Egypt, 8.75%, 2011 $ 920,000 $ 1,037,300 Banque Centrale de Tunisie, 7.375%, 2012 200,000 216,600 Federative Republic of Brazil, 6%, 2017 1,007,000 1,004,986 Federative Republic of Brazil, 8%, 2018 543,000 607,889 Federative Republic of Brazil, 8.25%, 2034 430,000 529,760 Federative Republic of Brazil, 7.125%, 2037 800,000 868,000 Federative Republic of Brazil, 11%, 2040 332,000 443,718 Republic of Argentina, 7%, 2013 1,558,000 1,492,824 Republic of Argentina, 8.28%, 2033 530,731 606,360 Republic of Argentina, FRN, 5.475%, 2012 1,071,750 1,014,733 Republic of Colombia, 10.375%, 2033 20,000 28,550 Republic of Colombia, FRN, 7.16%, 2015 796,000 839,780 Republic of Croatia, FRN, 6.25%, 2010 795,455 799,782 Republic of El Salvador, 7.65%, 2035 (n) 225,000 255,375 Republic of El Salvador, 7.65%, 2035 300,000 340,500 Republic of Indonesia, 8.5%, 2035 1,037,000 1,262,340 Republic of Panama, 9.375%, 2029 690,000 921,150 Republic of Peru, FRN, 5% to 2007, FRN to 2017 428,160 426,019 Republic of Peru, FRN, 6.125%, 2017 329,080 327,435 Republic of Philippines, 9.375%, 2017 260,000 317,525 Republic of Philippines, 9.5%, 2030 20,000 26,550 Republic of Philippines, 7.75%, 2031 700,000 788,375 Republic of South Africa, 7.375%, 2012 520,000 566,800 Republic of Turkey, 11.5%, 2012 16,000 19,460 Republic of Turkey, 9.5%, 2014 300,000 347,250 Republic of Turkey, 7.25%, 2015 20,000 20,650 Republic of Turkey, 7%, 2016 150,000 151,965 Republic of Turkey, 7%, 2020 388,000 388,000 Republic of Turkey, 7.375%, 2025 297,000 302,940 Republic of Turkey, 8%, 2034 85,000 90,950 Republic of Turkey, 6.875%, 2036 800,000 756,000 Republic of Uruguay, 9.25%, 2017 630,000 768,600 Republic of Venezuela, 8.5%, 2014 1,757,000 1,937,093 Republic of Venezuela, 7%, 2018 670,000 674,355 Republic of Venezuela, 7.65%, 2025 427,000 452,193 Republic of Venezuela, 9.25%, 2027 196,000 244,020 Republica Orient Uruguay, 7.625%, 2036 300,000 326,400 United Mexican States, 6.625%, 2015 325,000 348,238 United Mexican States, 5.625%, 2017 394,000 395,576 United Mexican States, 8.3%, 2031 470,000 603,245 United Mexican States, 6.75%, 2034 913,000 996,540 ------------ $ 23,545,826 -------------------------------------------------------------------------------------------------------------------------------- Energy - Independent - 1.4% -------------------------------------------------------------------------------------------------------------------------------- Chaparral Energy, Inc., 8.875%, 2017 (n) $ 650,000 $ 663,000 Chesapeake Energy Corp., 7.5%, 2014 250,000 261,875 Chesapeake Energy Corp., 6.875%, 2016 190,000 192,375 Hilcorp Energy, 7.75%, 2015 (n) 95,000 95,000 Hilcorp Energy I, 9%, 2016 (n) 455,000 484,575 Newfield Exploration Co., 6.625%, 2014 310,000 307,675 Quicksilver Resources, Inc., 7.125%, 2016 1,045,000 1,024,100 ------------ $ 3,028,600 -------------------------------------------------------------------------------------------------------------------------------- Energy - Integrated - 0.2% -------------------------------------------------------------------------------------------------------------------------------- TNK-BP Finance S.A., 7.5%, 2016 (n) $ 14,000 $ 14,805 TNK-BP Finance S.A., 7.5%, 2016 500,000 528,750 ------------ $ 543,555 -------------------------------------------------------------------------------------------------------------------------------- Entertainment - 0.1% -------------------------------------------------------------------------------------------------------------------------------- AMC Entertainment, Inc., 9.5%, 2011 $ 250,000 $ 250,000 -------------------------------------------------------------------------------------------------------------------------------- Financial Institutions - 0.6% -------------------------------------------------------------------------------------------------------------------------------- General Motors Acceptance Corp., 6.875%, 2011 $ 621,000 $ 628,454 General Motors Acceptance Corp., 6.75%, 2014 635,000 633,299 ------------ $ 1,261,753 -------------------------------------------------------------------------------------------------------------------------------- Food & Beverages - 0.7% -------------------------------------------------------------------------------------------------------------------------------- ARAMARK Corp., 8.5%, 2015 (n) $ 795,000 $ 825,806 Dole Foods Co., Inc., 8.875%, 2011 700,000 696,500 ------------ $ 1,522,306 -------------------------------------------------------------------------------------------------------------------------------- Forest & Paper Products - 0.2% -------------------------------------------------------------------------------------------------------------------------------- Buckeye Technologies, Inc., 8%, 2010 $ 500,000 $ 500,000 -------------------------------------------------------------------------------------------------------------------------------- Gaming & Lodging - 2.3% -------------------------------------------------------------------------------------------------------------------------------- Great Canadian Gaming Corp., 7.25%, 2015 (z) $ 370,000 $ 375,550 Harrah's Entertainment, Inc., 5.75%, 2017 1,100,000 918,500 Majestic Star Casino LLC, 9.75%, 2011 880,000 844,800 MGM Mirage, Inc., 6.75%, 2013 750,000 740,625 Station Casinos, Inc., 6.5%, 2014 610,000 565,775 Wimar Opco LLC, 9.625%, 2014 (n) 1,000,000 1,006,250 Wynn Las Vegas LLC, 6.625%, 2014 750,000 742,500 ------------ $ 5,194,000 -------------------------------------------------------------------------------------------------------------------------------- Industrial - 0.3% -------------------------------------------------------------------------------------------------------------------------------- American Railcar Industries, Inc., 7.5%, 2014 (z) $ 15,000 $ 15,263 Blount, Inc., 8.875%, 2012 325,000 338,813 Education Management LLC, 8.75%, 2014 250,000 263,125 ------------ $ 617,201 -------------------------------------------------------------------------------------------------------------------------------- Machinery & Tools - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Case New Holland, Inc., 7.125%, 2014 $ 250,000 $ 258,750 -------------------------------------------------------------------------------------------------------------------------------- Medical & Health Technology & Services - 2.2% -------------------------------------------------------------------------------------------------------------------------------- CDRV Investors, Inc., 0% to 2010, 9.625% to 2015 $ 250,000 $ 200,625 Cooper Cos., Inc., 7.125%, 2015 (n) 205,000 207,050 DaVita, Inc., 7.25%, 2015 720,000 727,200 HCA, Inc., 6.375%, 2015 395,000 340,688 HCA, Inc., 9.25%, 2016 (n) 705,000 755,231 HealthSouth Corp., 10.75%, 2016 (n) 150,000 167,625 Omnicare, Inc., 6.875%, 2015 500,000 495,000 Psychiatric Solutions, Inc., 7.75%, 2015 340,000 345,100 Tenet Healthcare Corp., 9.25%, 2015 1,005,000 1,003,744 U.S. Oncology, Inc., 10.75%, 2014 500,000 550,000 Vanguard Health Holding II, 9%, 2014 115,000 118,163 ------------ $ 4,910,426 -------------------------------------------------------------------------------------------------------------------------------- Metals & Mining - 1.9% -------------------------------------------------------------------------------------------------------------------------------- Arch Western Finance LLC, 6.75%, 2013 $ 250,000 $ 245,625 FMG Finance Ltd., 10.625%, 2016 (n) 820,000 943,000 Griffin Coal Mining Co., 9.5%, 2016 (z) 248,000 262,260 Massey Energy Co., 6.875%, 2013 155,000 148,800 Peabody Energy Corp., 7.375%, 2016 105,000 109,725 Peabody Energy Corp., "B", 6.875%, 2013 2,015,000 2,040,188 PNA Group, Inc., 10.75%, 2016 (n) 500,000 530,000 ------------ $ 4,279,598 -------------------------------------------------------------------------------------------------------------------------------- Mortgage Backed - 5.1% -------------------------------------------------------------------------------------------------------------------------------- Fannie Mae, 4.517%, 2013 $ 128,754 $ 125,881 Fannie Mae, 5.369%, 2013 98,990 100,033 Fannie Mae, 4.778%, 2014 123,549 122,176 Fannie Mae, 4.871%, 2014 324,054 321,965 Fannie Mae, 4.88%, 2014 67,647 66,884 Fannie Mae, 4.551%, 2015 149,629 145,999 Fannie Mae, 4.56%, 2015 77,951 75,922 Fannie Mae, 4.6%, 2015 29,372 28,646 Fannie Mae, 4.7%, 2015 153,432 150,618 Fannie Mae, 4.78%, 2015 87,138 85,946 Fannie Mae, 4.856%, 2015 68,565 67,285 Fannie Mae, 4.925%, 2015 156,026 155,302 Fannie Mae, 5.034%, 2015 114,853 115,073 Fannie Mae, 5.09%, 2016 144,136 144,501 Fannie Mae, 5.423%, 2016 34,646 35,597 Fannie Mae, 5.845%, 2016 77,510 79,869 Fannie Mae, 4.996%, 2017 310,134 310,062 Fannie Mae, 5.05%, 2017 70,000 69,748 Fannie Mae, 5.5%, 2017 - 2036 4,831,025 4,806,267 Fannie Mae, 4.5%, 2019 1,376,411 1,335,697 Fannie Mae, 6%, 2034 1,015,897 1,028,001 Freddie Mac, 4.5%, 2015 - 2021 197,970 196,165 Freddie Mac, 5%, 2018 - 2024 1,264,729 1,253,270 Freddie Mac, 5.5%, 2024 - 2027 630,605 631,020 ------------ $ 11,451,927 -------------------------------------------------------------------------------------------------------------------------------- Natural Gas - Distribution - 0.1% -------------------------------------------------------------------------------------------------------------------------------- AmeriGas Partners LP, 7.125%, 2016 $ 300,000 $ 301,500 -------------------------------------------------------------------------------------------------------------------------------- Natural Gas - Pipeline - 1.0% -------------------------------------------------------------------------------------------------------------------------------- El Paso Energy Corp., 7.75%, 2013 $ 300,000 $ 313,500 El Paso Performance-Linked Trust, 7.75%, 2011 (n) 600,000 637,500 Williams Cos., Inc., 8.75%, 2032 1,000,000 1,145,000 Williams Partners LP, 7.25%, 2017 (n) 175,000 183,750 ------------ $ 2,279,750 -------------------------------------------------------------------------------------------------------------------------------- Network & Telecom - 1.0% -------------------------------------------------------------------------------------------------------------------------------- Cincinnati Bell, Inc., 8.375%, 2014 $ 55,000 $ 56,444 Citizens Communications Co., 9.25%, 2011 250,000 278,125 Hawaiian Telecom Communications, Inc., 9.75%, 2013 375,000 401,250 Nordic Telephone Co. Holdings, 8.875%, 2016 (n) 195,000 210,113 Qwest Capital Funding, Inc., 7.25%, 2011 235,000 240,581 Qwest Corp., 8.875%, 2012 260,000 287,300 Time Warner Telecom Holdings, Inc., 9.25%, 2014 300,000 321,750 Windstream Corp., 8.625%, 2016 300,000 328,500 Windstream Corp., 7%, 2019 (z) 65,000 65,244 ------------ $ 2,189,307 -------------------------------------------------------------------------------------------------------------------------------- Oil Services - 0.3% -------------------------------------------------------------------------------------------------------------------------------- Basic Energy Services, Inc., 7.125%, 2016 $ 305,000 $ 298,138 Compagnie Generale De Geophysique-Veritas, 7.75%, 2017 270,000 279,450 ------------ $ 577,588 -------------------------------------------------------------------------------------------------------------------------------- Other Banks & Diversified Financials - 1.8% -------------------------------------------------------------------------------------------------------------------------------- Banco BMG S.A., 9.15%, 2016 $ 300,000 $ 319,500 Banco do Estado de Sao Paulo S.A., 8.7%, 2049 (n) 80,000 84,800 HSBK Europe B.V., 7.75%, 2013 (n) 100,000 103,750 HSBK Europe B.V., 7.75%, 2013 600,000 622,500 ICICI Bank Ltd., FRN, 6.375%, 2022 (n) 101,000 102,672 Kazkommerts International B.V., 8%, 2015 900,000 906,750 RSHB Capital S.A., 7.175%, 2013 1,150,000 1,203,188 Russian Standard Finance S.A., 8.625%, 2011 500,000 495,000 VTB Capital S.A., 7.5%, 2011 54,000 57,365 ------------ $ 3,895,525 -------------------------------------------------------------------------------------------------------------------------------- Pharmaceuticals - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Warner Chilcott Corp., 8.75%, 2015 $ 242,000 $ 252,285 -------------------------------------------------------------------------------------------------------------------------------- Precious Metals & Minerals - 0.5% -------------------------------------------------------------------------------------------------------------------------------- Alrosa Finance S.A., 8.875%, 2014 $ 900,000 $ 1,032,390 -------------------------------------------------------------------------------------------------------------------------------- Printing & Publishing - 0.9% -------------------------------------------------------------------------------------------------------------------------------- American Media Operations, Inc., 10.25%, 2009 $ 500,000 $ 477,500 Dex Media, Inc., 0% to 2008, 9% to 2013 250,000 231,250 Idearc, Inc., 8%, 2016 (n) 685,000 703,838 MediaNews Group, Inc., 6.875%, 2013 130,000 120,250 R.H. Donnelley Corp., 8.875%, 2016 530,000 565,775 ------------ $ 2,098,613 -------------------------------------------------------------------------------------------------------------------------------- Retailers - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Buhrmann U.S., Inc., 7.875%, 2015 $ 230,000 $ 230,575 Neiman Marcus Group, Inc., 10.375%, 2015 50,000 56,000 ------------ $ 286,575 -------------------------------------------------------------------------------------------------------------------------------- Specialty Stores - 0.1% -------------------------------------------------------------------------------------------------------------------------------- GSC Holdings Corp., 8%, 2012 $ 10,000 $ 10,625 Michaels Stores, Inc., 11.375%, 2016 (n) 210,000 227,850 Payless ShoeSource, Inc., 8.25%, 2013 80,000 82,800 ------------ $ 321,275 -------------------------------------------------------------------------------------------------------------------------------- Supermarkets - 0.1% -------------------------------------------------------------------------------------------------------------------------------- SUPERVALU, Inc., 7.5%, 2014 $ 185,000 $ 192,318 -------------------------------------------------------------------------------------------------------------------------------- Telecommunications - Wireless - 0.4% -------------------------------------------------------------------------------------------------------------------------------- OJSC Vimpel Communications, 8.25%, 2016 $ 300,000 $ 319,500 Rogers Wireless, Inc., 6.375%, 2014 50,000 51,313 Wind Acquisition Finance S.A., 10.75%, 2015 (n) 375,000 432,188 ------------ $ 803,001 -------------------------------------------------------------------------------------------------------------------------------- Transportation - Services - 0.3% -------------------------------------------------------------------------------------------------------------------------------- Hertz Corp., 8.875%, 2014 $ 595,000 $ 641,113 -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Agencies - 5.7% -------------------------------------------------------------------------------------------------------------------------------- Fannie Mae, 6.625%, 2009 $ 1,932,000 $ 2,014,011 Fannie Mae, 6%, 2011 1,340,000 1,399,733 Fannie Mae, 4.625%, 2013 2,581,000 2,548,843 Fannie Mae, 5.25%, 2016 1,916,000 1,964,162 Fannie Mae, 7.125%, 2030 1,234,000 1,564,850 Freddie Mac, 4.625%, 2008 2,986,000 2,974,746 Freddie Mac, 5.125%, 2008 200,000 200,297 ------------ $ 12,666,642 -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Obligations - 4.1% -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds, 6.5%, 2010 $ 53,000 $ 55,818 U.S. Treasury Bonds, 9.25%, 2016 576,000 772,178 U.S. Treasury Bonds, 6%, 2026 106,000 122,008 U.S. Treasury Bonds, 6.75%, 2026 284,000 354,379 U.S. Treasury Bonds, 4.5%, 2036 52,000 50,432 U.S. Treasury Notes, 6.125%, 2007 435,000 437,124 U.S. Treasury Notes, 5.5%, 2008 1,223,000 1,229,736 U.S. Treasury Notes, 3.125%, 2008 2,703,000 2,637,220 U.S. Treasury Notes, 5.125%, 2011 1,279,000 1,309,206 U.S. Treasury Notes, 4.25%, 2013 298,000 293,739 U.S. Treasury Notes, 5.125%, 2016 1,604,000 1,670,290 U.S. Treasury Notes, TIPS, 2.375%, 2017 279,173 283,949 ------------ $ 9,216,079 -------------------------------------------------------------------------------------------------------------------------------- Utilities - Electric Power - 1.0% -------------------------------------------------------------------------------------------------------------------------------- AES Corp., 9.375%, 2010 $ 240,000 $ 260,400 Edison Mission Energy, 7.75%, 2016 250,000 265,000 Midwest Generation LLC, 8.75%, 2034 90,000 96,975 Mirant North American LLC, 7.375%, 2013 135,000 138,713 NRG Energy, Inc., 7.375%, 2016 755,000 770,100 NRG Energy, Inc., 7.375%, 2017 460,000 468,050 TXU Corp., 5.55%, 2014 355,000 324,694 ------------ $ 2,323,932 -------------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS (IDENTIFIED COST, $121,453,282) $123,350,574 -------------------------------------------------------------------------------------------------------------------------------- Common Stocks - 37.4% -------------------------------------------------------------------------------------------------------------------------------- Aerospace - 0.7% -------------------------------------------------------------------------------------------------------------------------------- Lockheed Martin Corp. 4,170 $ 405,658 Northrop Grumman Corp. 17,116 1,229,785 ------------ $ 1,635,443 -------------------------------------------------------------------------------------------------------------------------------- Automotive - 0.2% -------------------------------------------------------------------------------------------------------------------------------- General Motors Corp. 16,310 $ 520,615 -------------------------------------------------------------------------------------------------------------------------------- Biotechnology - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Amgen, Inc. (a) 4,530 $ 291,098 -------------------------------------------------------------------------------------------------------------------------------- Broadcasting - 0.4% -------------------------------------------------------------------------------------------------------------------------------- CBS Corp., "B" 12,350 $ 374,823 News Corp., "A" 15,580 351,017 Walt Disney Co. 7,609 260,684 ------------ $ 986,524 -------------------------------------------------------------------------------------------------------------------------------- Brokerage & Asset Managers - 1.2% -------------------------------------------------------------------------------------------------------------------------------- Goldman Sachs Group, Inc. 4,130 $ 832,608 Lehman Brothers Holdings, Inc. 5,052 370,312 Morgan Stanley 18,340 1,374,033 ------------ $ 2,576,953 -------------------------------------------------------------------------------------------------------------------------------- Chemicals - 0.7% -------------------------------------------------------------------------------------------------------------------------------- 3M Co. 3,179 $ 235,500 Dow Chemical Co. 16,044 702,727 E.I. du Pont de Nemours & Co. 11,590 588,193 ------------ $ 1,526,420 -------------------------------------------------------------------------------------------------------------------------------- Computer Software - 0.3% -------------------------------------------------------------------------------------------------------------------------------- Hyperion Solutions Corp. (a) 14,288 $ 612,098 McAfee, Inc. (a) 3,893 117,257 ------------ $ 729,355 -------------------------------------------------------------------------------------------------------------------------------- Computer Software - Systems - 0.5% -------------------------------------------------------------------------------------------------------------------------------- Hewlett-Packard Co. 14,070 $ 554,077 International Business Machines Corp. 6,550 609,216 ------------ $ 1,163,293 -------------------------------------------------------------------------------------------------------------------------------- Construction - 0.2% -------------------------------------------------------------------------------------------------------------------------------- D.R. Horton, Inc. 19,130 $ 485,328 -------------------------------------------------------------------------------------------------------------------------------- Consumer Goods & Services - 0.0% -------------------------------------------------------------------------------------------------------------------------------- Kimberly-Clark Corp. 1,573 $ 107,137 -------------------------------------------------------------------------------------------------------------------------------- Electrical Equipment - 0.3% -------------------------------------------------------------------------------------------------------------------------------- General Electric Co. 14,230 $ 496,912 Rockwell Automation, Inc. 2,047 127,098 ------------ $ 624,010 -------------------------------------------------------------------------------------------------------------------------------- Energy - Integrated - 2.6% -------------------------------------------------------------------------------------------------------------------------------- Chevron Corp. 32,260 $ 2,213,359 ConocoPhillips 2,010 131,494 Exxon Mobil Corp. 38,320 2,746,778 Hess Corp. 15,330 813,257 ------------ $ 5,904,888 -------------------------------------------------------------------------------------------------------------------------------- Food & Beverages - 0.2% -------------------------------------------------------------------------------------------------------------------------------- General Mills, Inc. 6,917 $ 389,842 -------------------------------------------------------------------------------------------------------------------------------- Furniture & Appliances - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Tupperware Brands Corp. 9,290 $ 217,479 -------------------------------------------------------------------------------------------------------------------------------- Gaming & Lodging - 0.5% -------------------------------------------------------------------------------------------------------------------------------- Harrah's Entertainment, Inc. 1,440 $ 121,666 Hilton Hotels Corp. 19,031 671,794 International Game Technology 3,200 132,000 Penn National Gaming, Inc. (a) 3,100 144,553 ------------ $ 1,070,013 -------------------------------------------------------------------------------------------------------------------------------- General Merchandise - 0.6% -------------------------------------------------------------------------------------------------------------------------------- Family Dollar Stores, Inc. 7,725 $ 223,793 Federated Department Stores, Inc. 22,555 1,007,306 ------------ $ 1,231,099 -------------------------------------------------------------------------------------------------------------------------------- Health Maintenance Organizations - 0.4% -------------------------------------------------------------------------------------------------------------------------------- AMERIGROUP Corp. (a) 5,720 $ 189,218 Humana, Inc. (a) 11,100 664,224 ------------ $ 853,442 -------------------------------------------------------------------------------------------------------------------------------- Insurance - 2.0% -------------------------------------------------------------------------------------------------------------------------------- Ace Ltd. 16,877 $ 947,812 Allstate Corp. 7,670 460,660 Hartford Financial Services Group, Inc. 5,520 521,971 IPC Holdings Ltd. 4,590 133,385 MetLife, Inc. 17,420 1,100,073 Travelers Cos., Inc. 17,940 910,634 Zenith National Insurance Corp. 9,510 457,907 ------------ $ 4,532,442 -------------------------------------------------------------------------------------------------------------------------------- Machinery & Tools - 0.4% -------------------------------------------------------------------------------------------------------------------------------- Cummins, Inc. 3,780 $ 509,090 Eaton Corp. 3,030 245,460 Timken Co. 6,099 174,309 ------------ $ 928,859 -------------------------------------------------------------------------------------------------------------------------------- Major Banks - 2.6% -------------------------------------------------------------------------------------------------------------------------------- Bank of America Corp. 49,981 $ 2,542,533 JPMorgan Chase & Co. 43,880 2,167,672 PNC Financial Services Group, Inc. 7,720 565,953 Regions Financial Corp. 16,779 601,024 ------------ $ 5,877,182 -------------------------------------------------------------------------------------------------------------------------------- Medical & Health Technology & Services - 0.2% -------------------------------------------------------------------------------------------------------------------------------- McKesson Corp. 8,560 $ 477,306 -------------------------------------------------------------------------------------------------------------------------------- Medical Equipment - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Cooper Cos., Inc. 2,680 $ 122,985 -------------------------------------------------------------------------------------------------------------------------------- Metals & Mining - 0.4% -------------------------------------------------------------------------------------------------------------------------------- Phelps Dodge Corp. 1,400 $ 174,874 Southern Copper Corp. 9,580 674,432 ------------ $ 849,306 -------------------------------------------------------------------------------------------------------------------------------- Natural Gas - Pipeline - 0.4% -------------------------------------------------------------------------------------------------------------------------------- Williams Cos., Inc. 33,490 $ 903,225 -------------------------------------------------------------------------------------------------------------------------------- Other Banks & Diversified Financials - 3.4% -------------------------------------------------------------------------------------------------------------------------------- American Capital Strategies Ltd. 6,430 $ 286,006 CapitalSource, Inc., REIT 32,245 831,599 Citigroup, Inc. 51,553 2,598,271 Countrywide Financial Corp. 30,949 1,184,728 Fannie Mae 9,520 540,070 First Marblehead Corp. 1,700 76,738 IndyMac Bancorp, Inc. 16,520 567,132 New York Community Bancorp, Inc. 91,427 1,530,488 ------------ $ 7,615,032 -------------------------------------------------------------------------------------------------------------------------------- Pharmaceuticals - 1.4% -------------------------------------------------------------------------------------------------------------------------------- Eli Lilly & Co. 2,472 $ 130,126 Johnson & Johnson 8,330 525,207 Merck & Co., Inc. 36,613 1,616,830 Pfizer, Inc. 21,440 535,142 Wyeth 6,190 302,815 ------------ $ 3,110,120 -------------------------------------------------------------------------------------------------------------------------------- Printing & Publishing - 0.1% -------------------------------------------------------------------------------------------------------------------------------- R.R. Donnelley & Sons Co. 3,980 $ 143,996 Scholastic Corp. (a) 3,640 126,636 ------------ $ 270,632 -------------------------------------------------------------------------------------------------------------------------------- Real Estate - 12.5% -------------------------------------------------------------------------------------------------------------------------------- Alexandria Real Estate Equities, Inc., REIT 10,350 $ 1,088,717 Archstone-Smith Trust, REIT 20,205 1,139,764 AvalonBay Communities, Inc., REIT 6,504 894,690 BRE Properties, Inc., "A", REIT 17,836 1,183,419 Developers Diversified Realty Corp., REIT 15,295 1,002,740 Douglas Emmett, Inc., REIT 7,360 203,578 EastGroup Properties, Inc., REIT 15,883 857,364 Equity Residential, REIT 15,188 771,399 General Growth Properties, Inc., REIT 16,129 1,023,062 GMH Communities Trust, REIT 68,037 727,316 Health Care Poperty Investors, Inc., REIT 21,737 799,269 Highwoods Properties, Inc., REIT 25,659 1,133,615 Host Hotels & Resorts, Inc., REIT 33,991 893,283 Innkeepers USA Trust, REIT 32,784 547,493 iStar Financial, Inc., REIT 20,703 990,639 Kimco Realty Corp., REIT 22,688 1,140,299 Lexington Corporate Properties Trust, REIT 46,129 947,951 Macerich Co., REIT 14,256 1,334,362 Medical Properties Trust, Inc., REIT 56,871 873,539 Nationwide Health Properties, Inc., REIT 19,164 633,945 Pennsylvania Real Estate Investment Trust, REIT 31,424 1,356,260 ProLogis, REIT 14,559 962,787 Public Storage, Inc., REIT 8,445 855,225 Regency Centers Corp., REIT 10,154 870,604 Simon Property Group, Inc., REIT 13,602 1,533,489 SL Green Realty Corp., REIT 9,901 1,444,160 Ventas, Inc., REIT 34,576 1,584,618 Vornado Realty Trust, REIT 8,171 1,039,351 ------------ $ 27,832,938 -------------------------------------------------------------------------------------------------------------------------------- Restaurants - 0.1% -------------------------------------------------------------------------------------------------------------------------------- YUM! Brands, Inc. 3,170 $ 183,670 -------------------------------------------------------------------------------------------------------------------------------- Specialty Chemicals - 0.3% -------------------------------------------------------------------------------------------------------------------------------- Lyondell Chemical Co. 17,490 $ 557,231 -------------------------------------------------------------------------------------------------------------------------------- Specialty Stores - 0.4% -------------------------------------------------------------------------------------------------------------------------------- Aeropostale, Inc. (a) 5,930 $ 217,275 Limited Brands, Inc. 5,760 159,437 OfficeMax, Inc. 10,620 551,178 ------------ $ 927,890 -------------------------------------------------------------------------------------------------------------------------------- Telephone Services - 1.6% -------------------------------------------------------------------------------------------------------------------------------- AT&T, Inc. 17,930 $ 659,824 Citizens Communications Co. 28,730 432,961 Embarq Corp. 21,369 1,182,774 Qwest Communications International, Inc. (a) 34,870 309,646 Verizon Communications, Inc. 23,940 896,074 ------------ $ 3,481,279 -------------------------------------------------------------------------------------------------------------------------------- Tobacco - 1.1% -------------------------------------------------------------------------------------------------------------------------------- Altria Group, Inc. 21,620 $ 1,822,134 Reynolds American, Inc. 9,878 603,052 ------------ $ 2,425,186 -------------------------------------------------------------------------------------------------------------------------------- Utilities - Electric Power - 1.4% -------------------------------------------------------------------------------------------------------------------------------- Dominion Resources, Inc. 7,650 $ 654,305 Duke Energy Corp. 18,280 359,933 FirstEnergy Corp. 9,750 610,058 FPL Group, Inc. 4,320 255,182 TXU Corp. 19,942 1,319,163 ------------ $ 3,198,641 -------------------------------------------------------------------------------------------------------------------------------- TOTAL COMMON STOCKS (IDENTIFIED COST, $79,158,795) $ 83,606,863 -------------------------------------------------------------------------------------------------------------------------------- Floating Rate Loans - 2.2% (g)(r) -------------------------------------------------------------------------------------------------------------------------------- Automotive - 0.9% -------------------------------------------------------------------------------------------------------------------------------- Ford Motor Co., Term Loan B, 8.36%. 2013 $ 1,093,659 $ 1,104,596 General Motors Corp., Term Loan B, 7.695%, 2013 640,934 647,644 Mark IV Industries, Inc., Second Lien Term Loan, 11.1163%, 2011 300,597 303,353 ------------ $ 2,055,593 -------------------------------------------------------------------------------------------------------------------------------- Cable TV - 0.2% -------------------------------------------------------------------------------------------------------------------------------- CSC Holdings, Inc., Incremental Term Loan, 2013 (o) $ 200,282 $ 201,264 Mediacom Communications Corp., Term Loan A, 2012 (o) 181,685 180,095 ------------ $ 381,359 -------------------------------------------------------------------------------------------------------------------------------- Forest & Paper Products - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Georgia-Pacific Corp., Term Loan, 7.3547%, 2012 $ 157,939 $ 159,321 Georgia-Pacific Corp., Term Loan B-2, 7.1137%, 2013 19,701 19,845 ------------ $ 179,166 -------------------------------------------------------------------------------------------------------------------------------- Medical & Health Technology & Services - 0.2% -------------------------------------------------------------------------------------------------------------------------------- HCA, Inc., Term Loan B, 7.6138%, 2013 $ 519,118 $ 525,058 -------------------------------------------------------------------------------------------------------------------------------- Pollution Control - 0.1% -------------------------------------------------------------------------------------------------------------------------------- Allied Waste North America, Inc., Term Loan A, 2012 (o) $ 87,776 $ 88,369 Allied Waste North America, Inc., Term Loan, 2012 (o) 213,469 214,865 ------------ $ 303,234 -------------------------------------------------------------------------------------------------------------------------------- Printing & Publishing - 0.5% -------------------------------------------------------------------------------------------------------------------------------- Idearc, Inc., Term Loan B, 7.32%, 2014 $ 1,051,735 $ 1,060,281 -------------------------------------------------------------------------------------------------------------------------------- Specialty Stores - 0.2% -------------------------------------------------------------------------------------------------------------------------------- Michaels Stores, Inc., Term Loan, 8.125%, 2013 $ 424,730 $ 428,473 -------------------------------------------------------------------------------------------------------------------------------- TOTAL FLOATING RATE LOANS (IDENTIFIED COST, $4,902,975) $ 4,933,164 -------------------------------------------------------------------------------------------------------------------------------- Short-Term Obligations - 4.1% -------------------------------------------------------------------------------------------------------------------------------- Abbey National North America LLC, 5.32%, due 3/01/07 (y) $ 8,799,000 $ 8,799,000 Falcon Asset Securitization Co. LLC, 5.32%, due 3/01/07 (t)(y) 305,000 305,000 -------------------------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM OBLIGATIONS, AT AMORTIZED COST $ 9,104,000 -------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (IDENTIFIED COST, $214,619,052)(k) $220,994,601 -------------------------------------------------------------------------------------------------------------------------------- Other Assets, Less Liabilities - 1.0% 2,227,686 -------------------------------------------------------------------------------------------------------------------------------- NET ASSETS - 100.0% $223,222,287 -------------------------------------------------------------------------------------------------------------------------------- (a) Non-income producing security. (g) The rate shown represents a weighted average coupon rate on settled positions at period end. (k) As of February 28, 2007, the fund held securities fair valued in accordance with the policies adopted by the Board of Trustees, aggregating $122,191,105 and 55.29% of market value. An independent pricing service provided an evaluated bid for 50.94% of the market value. (n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $15,412,708 representing 6.9% of net assets. (o) All or a portion of this position has not settled. Upon settlement date, interest rates will be determined. (r) Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium. (t) Security exempt from registration with the U.S. Securities and Exchange Commission under Section 4(2) of the Securities Act of 1933. (y) The rate shown represents an annualized yield at time of purchase. (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 -------------------------------------------------------------------------------------------------------------------------------- American Railcar Industries, Inc., 7.5%, 2014 2/23/07 $ 15,000 $ 15,263 Great Canadian Gaming Corp., 7.25%, 2015 2/07/07-2/26/07 373,019 375,550 Griffin Coal Mining Co., 9.5%, 2016 11/10/06 248,000 262,260 Masonite Corp., 11%, 2015 11/07/06-1/04/07 313,415 340,148 Windstream Corp., 7%, 2019 2/12/07 65,000 65,244 -------------------------------------------------------------------------------------------------------------------------------- Total Restricted Securities $1,058,465 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 TIPS Treasury Inflation Protected Security SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements STATEMENT OF ASSETS AND LIABILITIES At 2/28/07 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, $214,619,052) $220,994,601 Cash 54,461 Receivable for investments sold 448,413 Receivable for fund shares sold 4,076,053 Interest and dividends receivable 2,387,077 Receivable from investment adviser 62,522 Other assets 2,900 ------------------------------------------------------------------------------------------------------ Total assets $228,026,027 ------------------------------------------------------------------------------------------------------ LIABILITIES ------------------------------------------------------------------------------------------------------ Distributions payable $194,770 Payable for investments purchased 3,907,349 Payable for fund shares reacquired 564,133 Payable to affiliates Management fee 7,913 Shareholder servicing costs 8,426 Distribution and service fees 6,062 Administrative services fee 261 Payable for independent trustees' compensation 765 Accrued expenses and other liabilities 114,061 ------------------------------------------------------------------------------------------------------ Total liabilities $4,803,740 ------------------------------------------------------------------------------------------------------ Net assets $223,222,287 ------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF ------------------------------------------------------------------------------------------------------ Paid-in capital $216,160,380 Unrealized appreciation (depreciation) on investments 6,375,549 Accumulated net realized gain (loss) on investments 668,904 Undistributed net investment income 17,454 ------------------------------------------------------------------------------------------------------ Net assets $223,222,287 ------------------------------------------------------------------------------------------------------ Shares of beneficial interest outstanding 20,392,075 ------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued Class A shares ------------------------------------------------------------------------------------------------------ Net assets $156,446,723 Shares outstanding 14,288,187 ------------------------------------------------------------------------------------------------------ Net asset value per share $10.95 ------------------------------------------------------------------------------------------------------ Offering price per share (100/95.25Xnet asset value per share) $11.50 ------------------------------------------------------------------------------------------------------ Class C shares ------------------------------------------------------------------------------------------------------ Net assets $64,316,330 Shares outstanding 5,879,355 ------------------------------------------------------------------------------------------------------ Net asset value and offering price per share $10.94 ------------------------------------------------------------------------------------------------------ Class I shares ------------------------------------------------------------------------------------------------------ Net assets $2,459,234 Shares outstanding 224,533 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $10.95 ------------------------------------------------------------------------------------------------------ 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 2/28/07 (c) 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 ------------------------------------------------------------------------------------------------------ Income Interest $2,904,044 Dividends 762,790 ------------------------------------------------------------------------------------------------------ Total investment income $3,666,834 ------------------------------------------------------------------------------------------------------ Expenses Management fee $443,931 Distribution and service fees 318,957 Shareholder servicing costs 67,954 Administrative services fee 20,048 Independent trustees' compensation 1,400 Custodian fee 73,323 Shareholder communications 29,929 Auditing fees 51,519 Legal fees 1,836 Miscellaneous 28,761 ------------------------------------------------------------------------------------------------------ Total expenses $1,037,658 ------------------------------------------------------------------------------------------------------ Fees paid indirectly (7,088) Reduction of expenses by investment adviser (273,154) ------------------------------------------------------------------------------------------------------ Net expenses $757,416 ------------------------------------------------------------------------------------------------------ Net investment income $2,909,418 ------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ------------------------------------------------------------------------------------------------------ Realized gain (loss) (identified cost basis) on investment transactions $853,945 ------------------------------------------------------------------------------------------------------ Change in unrealized appreciation (depreciation) on investments $6,375,549 ------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments $7,229,494 ------------------------------------------------------------------------------------------------------ Change in net assets from operations $10,138,912 ------------------------------------------------------------------------------------------------------ (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 2/28/07(c) CHANGE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------- Net investment income $2,909,418 Net realized gain (loss) on investments 853,945 Net unrealized gain (loss) on investments 6,375,549 ------------------------------------------------------------------------------- Change in net assets from operations $10,138,912 ------------------------------------------------------------------------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------- From net investment income Class A $(2,272,559) Class C (653,322) Class I (72,756) From net realized gain on investments Class A (29,122) Class C (10,423) Class I (541) ------------------------------------------------------------------------------- Total distributions declared to shareholders $(3,038,723) ------------------------------------------------------------------------------- Change in net assets from fund share transactions $216,122,098 ------------------------------------------------------------------------------- Total change in net assets $223,222,287 ------------------------------------------------------------------------------- NET ASSETS ------------------------------------------------------------------------------- At end of period (including undistributed net investment income of $17,454) $223,222,287 ------------------------------------------------------------------------------- (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 past 5 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. PERIOD ENDED CLASS A 2/28/07(c) Net asset value, beginning of period $10.00 ---------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ---------------------------------------------------------------------------- Net investment income (d) $0.37 Net realized and unrealized gain (loss) on investments 0.93 ---------------------------------------------------------------------------- Total from investment operations $1.30 ---------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ---------------------------------------------------------------------------- From net investment income $(0.35) From net realized gain on investments and foreign currency transactions (0.00)(w) ---------------------------------------------------------------------------- Total distributions declared to shareholders $(0.35) ---------------------------------------------------------------------------- Net asset value, end of period $10.95 ---------------------------------------------------------------------------- Total return (%) (r)(s)(t) 13.20(n) ---------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA ---------------------------------------------------------------------------- Expenses before expense reductions (f) 1.36(a) Expenses after expense reductions (f) 0.95(a) Net investment income 4.45(a) Portfolio turnover 46% Net assets at end of period (000 Omitted) $156,447 ---------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS Financial Highlights - continued PERIOD ENDED CLASS C 2/28/07(c) Net asset value, beginning of period $10.00 ---------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ---------------------------------------------------------------------------- Net investment income (d) $0.30 Net realized and unrealized gain (loss) on investments 0.93 ---------------------------------------------------------------------------- Total from investment operations $1.23 ---------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ---------------------------------------------------------------------------- From net investment income $(0.29) From net realized gain on investments and foreign currency transactions (0.00)(w) ---------------------------------------------------------------------------- Total distributions declared to shareholders $(0.29) ---------------------------------------------------------------------------- Net asset value, end of period $10.94 ---------------------------------------------------------------------------- Total return (%) (r)(s)(t) 12.51(n) ---------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA ---------------------------------------------------------------------------- Expenses before expense reductions (f) 2.01(a) Expenses after expense reductions (f) 1.65(a) Net investment income 3.67(a) Portfolio turnover 46% Net assets at end of period (000 Omitted) $64,316 ---------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS Financial Highlights - continued PERIOD ENDED CLASS I 2/28/07(c) Net asset value, beginning of period $10.00 ---------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ---------------------------------------------------------------------------- Net investment income (d) $0.41 Net realized and unrealized gain (loss) on investments 0.91 ---------------------------------------------------------------------------- Total from investment operations $1.32 ---------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ---------------------------------------------------------------------------- From net investment income $(0.37) From net realized gain on investments and foreign currency transactions (0.00)(w) ---------------------------------------------------------------------------- Total distributions declared to shareholders $(0.37) ---------------------------------------------------------------------------- Net asset value, end of period $10.95 ---------------------------------------------------------------------------- Total return (%) (r)(s) 13.45(n) ---------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA ---------------------------------------------------------------------------- Expenses before expense reductions (f) 1.29(a) Expenses after expense reductions (f) 0.65(a) Net investment income 4.84(a) Portfolio turnover 46% Net assets at end of period (000 Omitted) $2,459 ---------------------------------------------------------------------------- (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. (w) Per share amount was less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS NOTES TO FINANCIAL STATEMENTS (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. For securities held short for which there were no sales reported for the day, the position is generally valued at the last quoted daily ask quotation as reported by an independent pricing service on the market or exchange on which such securities 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. 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 and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. 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. In September 2006, FASB Statement No. 157, Fair Value Measurements (the "Statement") was issued, and is effective for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements. Management is evaluating the application of the Statement to the fund, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Statement in the fund's financial statements. 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 and other funds managed by 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. LOANS AND OTHER DIRECT DEBT INSTRUMENTS - The fund may invest in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary. INDEMNIFICATIONS - Under the fund's organizational documents, its officers and trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred. INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. All discount is accreted for tax reporting purposes as required by federal income tax regulations. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. These fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the 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. Dividends received on REITs that represent a return of capital or capital gain are recorded as a reduction of cost of investments or as a realized gain, respectively. The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving its portfolio holdings 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. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations. 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 February 28, 2007, 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 U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes. Book/tax differences primarily relate to amortization and accretion of debt securities. The tax character of distributions declared to shareholders for the period ended February 28, 2007 is as follows: Ordinary income (including any short-term capital gains) $3,038,723 The federal tax cost and the tax basis components of distributable earnings were as follows: AS OF 2/28/07 Cost of investments $214,749,832 ---------------------------------------------------------- Gross appreciation $7,025,076 Gross depreciation (780,307) ---------------------------------------------------------- Net unrealized appreciation (depreciation) $6,244,769 Undistributed ordinary income 1,539,424 Other temporary differences (722,286) 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. On December 22, 2006, the SEC delayed the implementation of the Interpretation for regulated investment companies for an additional six months. This Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return, and requires certain expanded disclosures. Management is evaluating the application of the Interpretation to the 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, an affiliate of the adviser, 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 February 28, 2007, this reduction amounted to $272,838 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 $255,697 for the period ended February 28, 2007, 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% $148,988 Class C 0.75% 0.25% 1.00% 1.00% 169,969 -------------------------------------------------------------------------------------------------------- Total Distribution and Service Fees $318,957 (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 February 28, 2007 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. All contingent deferred sales charges are paid to MFD and during the period ended February 28, 2007, were as follows: AMOUNT Class A $ -- Class C $7,745 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 daily net assets of the fund as determined periodically under the supervision of the fund's Board of Trustees. For the period ended February 28, 2007, the fee was $48,922, which equated to 0.0716% annually of the fund's average daily net assets. Effective January 1, 2007, MFSC has entered into a sub-accounting agreement with SunLife Retirement Services (U.S.), Inc. (SRS), an affiliate of MFSC, on behalf of the fund to provide omnibus account services to the fund. MFSC pays SRS both an asset based fee and a per account charge of the assets held in the omnibus account. The fund then reimburses MFSC for the sub- accounting fees paid to SRS. For the period ended February 28, 2007, the sub- accounting fee for SRS was $698, which equated to 0.0010% annually of the fund's average daily net assets. MFSC also receives payment from the fund for out-of-pocket and sub-accounting expenses. For the period ended February 28, 2007, these out-of-pocket and sub-accounting costs amounted to $14,639. The fund may also pay shareholder servicing related costs directly 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 February 28, 2007 was equivalent to an annual effective rate of 0.0294% of the fund's 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. 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 February 28, 2007, the fee paid to Tarantino LLC was $528. MFS has agreed to reimburse the fund for a portion of the payments made by the funds to Tarantino LLC in the amount of $316, 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 $38,997,366 $5,733,564 Investments (non-U.S. government securities) $200,904,514 $31,289,181 (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 2/28/07(c) SHARES AMOUNT Shares sold Class A 15,839,726 $168,001,449 Class C 6,062,654 64,640,226 Class I 330,293 3,408,157 ------------------------------------------------------------------------------- 22,232,673 $236,049,832 Shares issued to shareholders in reinvestment of distributions Class A 169,948 $1,832,412 Class C 35,102 379,283 Class I 6,874 73,117 ------------------------------------------------------------------------------- 211,924 $2,284,812 Shares reacquired Class A (1,721,487) $(18,641,988) Class C (218,401) (2,353,187) Class I (112,634) (1,217,371) ------------------------------------------------------------------------------- (2,052,522) $(22,212,546) Net change Class A 14,288,187 $151,191,873 Class C 5,879,355 62,666,322 Class I 224,533 2,263,903 ------------------------------------------------------------------------------- 20,392,075 $216,122,098 (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 is permitted to have bank borrowings for temporary or emergency purposes to fund shareholder redemptions. The fund has established borrowing arrangements with certain banks. The interest rate on the borrowings is equal to the Federal Reserve funds rate plus 0.35%. The fund had no significant borrowings during the period. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Trustees and Shareholders of MFS Diversified Income Fund: We have audited the accompanying statement of assets and liabilities of MFS Diversified Income Fund (the Fund), including the portfolio of investments, as of February 28, 2007, and the related statements of operations and changes in net assets, and the financial highlights for the period from May 26, 2006 (commencement of operations) to February 28, 2007. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. We were not engaged to perform an audit of the Fund's internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 28, 2007, by correspondence with the Fund's custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Diversified Income Fund at February 28, 2007, the results of its operations, the changes in its net assets, and its financial highlights for the period from May 26, 2006 to February 28, 2007, in conformity with U.S. generally accepted accounting principles. /s/ ERNST & YOUNG LLP Boston, Massachusetts April 16, 2007 TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND The Trustees and officers of the Trust, as of April 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS DURING POSITION(S) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS & NAME, DATE OF BIRTH WITH FUND SINCE(h) OTHER DIRECTORSHIPS(j) ------------------- ---------------- --------------- ---------------------------------- INTERESTED TRUSTEES Robert J. Manning(k) Trustee February 2004 Massachusetts Financial Services (born 10/20/63) Company, Chief Executive Officer, President, Chief Investment Officer and Director Robert C. Pozen(k) Trustee February 2004 Massachusetts Financial Services (born 8/08/46) Company, Chairman (since February 2004); MIT Sloan School (education), Senior Lecturer (since 2006); Secretary of Economic Affairs, The Commonwealth of Massachusetts (January 2002 to December 2002); Fidelity Investments, Vice Chairman (June 2000 to December 2001); Fidelity Management & Research Company (investment adviser), President (March 1997 to July 2001); Bell Canada Enterprises (telecommunications), Director; Medtronic, Inc. (medical technology), Director; Telesat (satellite communications), Director INDEPENDENT TRUSTEES J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern (born 5/01/36) of Trustees Enterprises (diversified services company), Chairman, Trustee and Chief Executive Officer (until November 2000) Robert E. Butler(n) Trustee January 2006 Consultant - regulatory and (born 11/29/41) compliance matters (since July 2002); PricewaterhouseCoopers LLP (professional services firm), Partner (November 2000 until June 2002) Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital, (born 3/11/37) Chief of Cardiac Surgery (2005); Harvard Medical School, Professor of Cardiac Surgery; Physician Director of Medical Device Technology for Partners HealthCare David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining (born 5/30/42) products and service provider), Vice Chairman/Director (since April 2001); Portman Limited (mining), Director (since 2005); Encinitos Ventures (private investment company), Principal (1997 to April 2001); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director William R. Gutow Trustee December 1993 Private investor and real estate (born 9/27/41) consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman; Atlantic Coast Tan (tanning salons), Vice Chairman (since 2002) Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial (born 12/21/44) services and insurance), Vice Chairman and Chief Operating Officer (until May 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until May 2001) Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys), (born 6/23/35) Partner J. Dale Sherratt Trustee August 1993 Insight Resources, Inc. (born 9/23/38) (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner (since 1993); Cambridge Nutraceuticals (professional nutritional products), Chief Executive Officer (until May 2001) Laurie J. Thomsen Trustee March 2005 Private investor; Prism Venture (born 8/05/57) Partners (venture capital), Co- founder and General Partner (until June 2004); St. Paul Travelers Companies (commercial property liability insurance), Director Robert W. Uek Trustee January 2006 Retired (since 1999); (born 5/18/41) PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); Consultant to investment company industry (since 2000); TT International Funds (mutual fund complex), Trustee (2000 until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (2000 until 2005) OFFICERS Maria F. Dwyer(k) President November 2005 Massachusetts Financial Services (born 12/01/58) Company, Executive Vice President and Chief Regulatory Officer (since March 2004); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (prior to March 2004) Tracy Atkinson(k) Treasurer September 2005 Massachusetts Financial Services (born 12/30/64) Company, Senior Vice President (since September 2004); PricewaterhouseCoopers LLP, Partner (prior to September 2004) Christopher R. Bohane(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 1/18/74) and Assistant Clerk Company, Vice President and Senior Counsel (since April 2003); Kirkpatrick & Lockhart LLP (law firm), Associate (prior to April 2003) Ethan D. Corey(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 11/21/63) and Assistant Clerk Company, Special Counsel (since December 2004); Dechert LLP (law firm), Counsel (prior to December 2004) David L. DiLorenzo(k) Assistant Treasurer July 2005 Massachusetts Financial Services (born 8/10/68) Company, Vice President (since June 2005); JP Morgan Investor Services, Vice President (prior to June 2005) Timothy M. Fagan(k) Assistant Secretary September 2005 Massachusetts Financial Services (born 7/10/68) and Assistant Clerk Company, Vice President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President and Chief Compliance Officer (September 2004 to August 2005), Senior Attorney (prior to September 2004); John Hancock Group of Funds, Vice President and Chief Compliance Officer (September 2004 to December 2004) Mark D. Fischer(k) Assistant Treasurer July 2005 Massachusetts Financial Services (born 10/27/70) Company, Vice President (since May 2005); JP Morgan Investment Management Company, Vice President (prior to May 2005) Brian E. Langenfeld(k) Assistant Secretary June 2006 Massachusetts Financial Services (born 3/07/73) and Assistant Clerk Company, Assistant Vice President and Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (May 2005 to April 2006); John Hancock Advisers, LLC, Attorney and Assistant Secretary (prior to May 2005) Ellen Moynihan(k) Assistant Treasurer April 1997 Massachusetts Financial Services (born 11/13/57) Company, Senior Vice President Susan S. Newton(k) Assistant Secretary May 2005 Massachusetts Financial Services (born 3/07/50) and Assistant Clerk Company, Senior Vice President and Associate General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005); John Hancock Group of Funds, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005) Susan A. Pereira(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 11/05/70) and Assistant Clerk Company, Vice President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (prior to June 2004) Mark N. Polebaum(k) Secretary and Clerk January 2006 Massachusetts Financial Services (born 5/01/52) Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (prior to January 2006) Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of (born 3/07/44) Compliance Officer compliance services), Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (April 2003 to June 2004); David L. Babson & Co. (investment adviser), Managing Director, Chief Administrative Officer and Director (prior to March 2003) James O. Yost(k) Assistant Treasurer September 1990 Massachusetts Financial Services (born 6/12/60) Company, Senior Vice President ------------ (h) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. (j) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (k) "Interested person" of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. (n) In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The terms of that settlement required that compensation and expenses related to the independent compliance consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29. The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Mr. Butler and Mr. Uek) has been elected by share- holders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. Messrs. Butler, Gutow, Sherratt and Uek and Ms. Thomsen are members of the Trust's Audit Committee. Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds. The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-225-2606. -------------------------------------------------------------------------------------------------------------- INVESTMENT ADVISER CUSTODIAN Massachusetts Financial Services Company State Street Bank and Trust Company 500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street Boston, MA 02110 SUB-INVESTMENT ADVISER Effective March 1, 2007, the custodian changed to: Sun Capital Advisers LLC JPMorgan Chase Bank One Sun Life Executive Park One Chase Manhattan Plaza Wellesley Hills, MA 02481 New York, NY 10081 DISTRIBUTOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM MFS Fund Distributors, Inc. Ernst & Young LLP 500 Boylston Street, Boston, MA 02116-3741 200 Clarendon Street Boston, MA 02116 PORTFOLIO MANAGERS John Addeo David Cole Richard Gable Thomas Pedulla Matthew Ryan Jonathan Sage Leo Saraceno Geoffrey Schechter James Swanson
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT A discussion regarding the Board's most recent review and renewal of the Fund's investment advisory agreement is available by clicking on the fund's name under "Select a fund" on the MFS Web site (mfs.com). PROXY VOTING POLICIES AND INFORMATION A general description of the MFS funds' proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The 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. FEDERAL TAX INFORMATION (unaudited) The fund will notify shareholders of amounts for use in preparing 2007 income tax forms in January 2008. The following information is provided pursuant to provisions of the Internal Revenue Code. The fund designates the maximum amount allowable as qualified dividend income eligible for the 15% tax rate. The fund designates $38,282 as capital gain dividends paid during the fiscal year. For corporate shareholders, 10.88% of the ordinary income dividends paid during the fiscal year qualify for the corporate dividends received deduction. MFS(R) PRIVACY NOTICE Privacy is a concern for every investor today. At MFS Investment Management(R) and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries. Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include o data from investment applications and other forms o share balances and transactional history with us, our affiliates, or others o facts from a consumer reporting agency We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements. Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you. If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time. Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. CONTACT 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] ANNUAL REPORT MFS(R) GOVERNMENT SECURITIES FUND LETTER FROM THE CEO 1 ------------------------------------------------------------------ PORTFOLIO COMPOSITION 2 ------------------------------------------------------------------ MANAGEMENT REVIEW 3 ------------------------------------------------------------------ PERFORMANCE SUMMARY 4 ------------------------------------------------------------------ EXPENSE TABLE 7 ------------------------------------------------------------------ PORTFOLIO OF INVESTMENTS 9 ------------------------------------------------------------------ STATEMENT OF ASSETS AND LIABILITIES 13 ------------------------------------------------------------------ STATEMENT OF OPERATIONS 16 ------------------------------------------------------------------ STATEMENTS OF CHANGES IN NET ASSETS 17 ------------------------------------------------------------------ FINANCIAL HIGHLIGHTS 18 ------------------------------------------------------------------ NOTES TO FINANCIAL STATEMENTS 26 ------------------------------------------------------------------ REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 39 ------------------------------------------------------------------ TRUSTEES AND OFFICERS 40 ------------------------------------------------------------------ BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 46 ------------------------------------------------------------------ PROXY VOTING POLICIES AND INFORMATION 46 ------------------------------------------------------------------ QUARTERLY PORTFOLIO DISCLOSURE 46 ------------------------------------------------------------------ FEDERAL TAX INFORMATION 46 ------------------------------------------------------------------ MFS(R) PRIVACY NOTICE 47 ------------------------------------------------------------------ CONTACT INFORMATION BACK COVER ------------------------------------------------------------------ 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 ------------------------------------------------------------------------------ 2/28/07 MFG-ANN LETTER FROM THE CEO [Photo of Robert J. Manning] Dear Shareholders: The past year has been a great example of why investors should keep their eyes on the long term. In 2006 the Dow Jones Industrial Average returned 19%. In February 2007 it hit its all-time high of 12,787. Less than a week later, stocks sold off around the globe. By March 5 the Dow was off 5.8%. That is a sign of volatile markets and a reason investors should make sure they have an investment plan that can ride out the peaks and troughs. If you are focused on a long-term investment strategy, the short-term ups and downs of the markets should not necessarily dictate portfolio action on your part. Both the bond and stock markets are inherently cyclical. In our view, investors who remain committed to a long-term plan are more likely to achieve their financial goals. We believe you should not let the headlines guide you in your investment decisions and that there is no sense in reacting to short- term volatility. In any market environment, we believe individual investors are best served by following a three-pronged investment strategy of allocating their holdings across the major asset classes, diversifying within each class, and regularly rebalancing their portfolios to maintain their desired allocations. Of course, these strategies cannot guarantee a profit or protect against a loss. Investing and planning for the long term require diligence and patience, two traits that 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) April 16, 2007 The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed. PORTFOLIO COMPOSITION PORTFOLIO STRUCTURE (i) Bonds 95.5% Cash & Other Net Assets 4.5% FIXED INCOME SECTORS (i) Mortgage-Backed Securities 49.2% ------------------------------------------------ U.S. Government Agencies 37.0% ------------------------------------------------ U.S. Treasury Securities 9.3% ------------------------------------------------ CREDIT QUALITY OF BONDS (r) AAA 100% ------------------------------------------------ PORTFOLIO FACTS Average Duration (d)(i) 4.1 ------------------------------------------------ Average Life (i)(m) 6.6 yrs. ------------------------------------------------ Average Maturity (i)(m) 14.1 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 presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre- refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 02/28/07. Percentages are based on net assets as of 02/28/07, unless otherwise noted. The portfolio is actively managed and current holdings may be different. MANAGEMENT REVIEW SUMMARY OF RESULTS For the twelve months ended February 28, 2007, Class A shares of the MFS Government Securities Fund provided a total return of 4.75%, at net asset value. This compares with a return of 5.36% for the fund's benchmark, the Lehman Brothers U.S. Government/Mortgage Bond Index. DETRACTORS FROM PERFORMANCE Relative to the benchmark, a number of U.S. Treasury securities held by the portfolio detracted from relative performance. Yield curve(y) positioning also had a minor negative impact on relative results. CONTRIBUTORS TO PERFORMANCE An overweighted position in U.S. Government Agency securities contributed to relative returns. A combination of the reduction of new issues in the marketplace and solid demand for Agency debt helped lower the spread between Agency and Treasury securities, boosting the performance of this sector over the reporting period. Holdings of mortgage-backed securities also helped as a result of low interest rate volatility and an income advantage over Treasury securities. Respectfully, Geoffrey Schechter Portfolio Manager (y) A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates. The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market and other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio's current or future investments. PERFORMANCE SUMMARY THROUGH 2/28/07 The following chart illustrates the historical performance of the fund's Class A shares in comparison to its benchmark. Performance results include the deduction of the maximum applicable sales charge and reflect the percentage change in net asset value, including reinvestment of dividends and capital gains distributions. The performance of other share classes will be greater than or less than that of the class depicted below. Benchmark comparisons are unmanaged; do not reflect sales charges, commissions or expenses; and cannot be invested in directly. (See Notes to Performance Summary.) PERFORMANCE DATA SHOWN REPRESENTS PAST PERFORMANCE AND IS NO GUARANTEE OF FUTURE RESULTS. THE PERFORMANCE SHOWN DOES NOT REFLECT THE DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS OR THE REDEMPTION OF FUND SHARES. GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT Lehman Brothers MFS Government U.S. Government/ Securities Fund- Mortgage Class A Bond Index 2/97 $ 9,525 $10,000 2/98 10,469 11,027 2/99 11,097 11,730 2/00 11,108 11,896 2/01 12,550 13,514 2/02 13,377 14,512 2/03 14,519 15,864 2/04 14,837 16,395 2/05 15,105 16,769 2/06 15,450 17,278 2/07 16,185 18,205 TOTAL RETURNS THROUGH 2/28/07 AVERAGE ANNUAL WITHOUT SALES CHARGE Share class Class inception date 1-yr 5-yr 10-yr ---------------------------------------------------------------------------- A 7/25/84 4.75% 3.88% 5.44% ---------------------------------------------------------------------------- B 8/30/93 3.97% 3.17% 4.74% ---------------------------------------------------------------------------- C 4/01/96 3.97% 3.17% 4.74% ---------------------------------------------------------------------------- I 1/02/97 5.01% 4.20% 5.79% ---------------------------------------------------------------------------- R 12/31/02 4.49% 3.71% 5.36% ---------------------------------------------------------------------------- R1 4/01/05 3.98% 3.14% 4.73% ---------------------------------------------------------------------------- R2 4/01/05 4.23% 3.25% 4.79% ---------------------------------------------------------------------------- R3 10/31/03 4.34% 3.39% 4.86% ---------------------------------------------------------------------------- R4 4/01/05 4.49% 3.82% 5.41% ---------------------------------------------------------------------------- R5 4/01/05 5.24% 4.01% 5.51% ---------------------------------------------------------------------------- 529A 7/31/02 4.39% 3.58% 5.29% ---------------------------------------------------------------------------- 529B 7/31/02 3.72% 2.94% 4.63% ---------------------------------------------------------------------------- 529C 7/31/02 3.82% 2.96% 4.63% ---------------------------------------------------------------------------- AVERAGE ANNUAL Comparative benchmark ---------------------------------------------------------------------------- Lehman Brothers U.S. Government/Mortgage Bond Index (f) 5.36% 4.64% 6.17% ---------------------------------------------------------------------------- AVERAGE ANNUAL WITH SALES CHARGE Share class ---------------------------------------------------------------------------- A (0.22)% 2.88% 4.93% With Initial Sales Charge (4.75%) ---------------------------------------------------------------------------- B (0.03)% 2.82% 4.74% With CDSC (Declining over six years from 4% to 0%) (x) ---------------------------------------------------------------------------- C 2.97% 3.17% 4.74% With CDSC (1% for 12 months) (x) ---------------------------------------------------------------------------- 529A (0.57)% 2.58% 4.78% With Initial Sales Charge (4.75%) ---------------------------------------------------------------------------- 529B (0.28)% 2.59% 4.63% With CDSC (Declining over six years from 4% to 0%) (x) ---------------------------------------------------------------------------- 529C 2.82% 2.96% 4.63% With CDSC (1% for 12 months) (x) ---------------------------------------------------------------------------- Class I, R, R1, R2, R3, R4, and R5 shares do not have a sales charge. Please see Notes to Performance Summary for more details. CDSC - Contingent Deferred Sales Charge. (f) Source: FactSet Research Systems Inc. (x) Assuming redemption at the end of the applicable period. INDEX DEFINITION Lehman Brothers U.S. Government/Mortgage Bond Index - measures debt issued by the U.S. Government as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). It is not possible to invest directly in an index. NOTES TO PERFORMANCE SUMMARY Class R shares are available only to existing Class R shareholders and certain other investors. Class R1, R2, R3, R4, and R5 shares are only available to certain retirement plans. Class 529 shares are only available in conjunction with qualified tuition programs, such as the MFS 529 Savings Plan. There also is an additional annual fee, which is detailed in the program description, on qualified tuition programs. If this fee was reflected, the performance for Class 529 shares would have been lower. This annual fee is waived for Oregon residents and for those accounts with assets of $25,000 or more. Performance for Classes R, R4, R5 and 529A shares includes the performance of the fund's Class A shares for periods prior to their offering. Performance for Classes R1, R2, R3 and 529B shares includes the performance of the fund's Class B shares for periods prior to their offering. Performance for Class 529C shares includes the performance of the fund's Class C shares for periods prior to their offering. This blended class performance has been adjusted to take into account differences in sales loads, if any, applicable to these share classes, but has not been adjusted to take into account differences in class specific operating expenses (such as Rule 12b-1 fees). Compared to performance these share classes would have experienced had they been offered for the entire period, the use of blended performance generally results in higher performance for share classes with higher operating expenses than the share class to which it is blended, and lower performance for share classes with lower operating expenses than the share class to which it is blended. Performance results reflect any applicable expense subsidies and waivers in effect during the periods shown. Without such subsidies and waivers the fund's performance results would be less favorable. Please see the prospectus and financial statements for complete details. From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower. EXPENSE TABLE Fund expenses borne by the shareholders during the period, September 1, 2006 through February 28, 2007 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 September 1, 2006 through February 28, 2007. 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 9/01/06- Class Ratio 9/01/06 2/28/07 2/28/07 -------------------------------------------------------------------------------- Actual 0.77% $1,000.00 $1,031.70 $3.88 A ------------------------------------------------------------------------ Hypothetical (h) 0.77% $1,000.00 $1,020.98 $3.86 -------------------------------------------------------------------------------- Actual 1.52% $1,000.00 $1,027.80 $7.64 B ------------------------------------------------------------------------- Hypothetical (h) 1.52% $1,000.00 $1,017.26 $7.60 -------------------------------------------------------------------------------- Actual 1.52% $1,000.00 $1,027.80 $7.64 C ------------------------------------------------------------------------ Hypothetical (h) 1.52% $1,000.00 $1,017.26 $7.60 -------------------------------------------------------------------------------- Actual 0.51% $1,000.00 $1,033.00 $2.57 I ------------------------------------------------------------------------ Hypothetical (h) 0.51% $1,000.00 $1,022.27 $2.56 -------------------------------------------------------------------------------- Actual 1.02% $1,000.00 $1,030.40 $5.13 R ------------------------------------------------------------------------- Hypothetical (h) 1.02% $1,000.00 $1,019.74 $5.11 -------------------------------------------------------------------------------- Actual 1.60% $1,000.00 $1,028.40 $8.05 R1 ------------------------------------------------------------------------ Hypothetical (h) 1.60% $1,000.00 $1,016.86 $8.00 -------------------------------------------------------------------------------- Actual 1.25% $1,000.00 $1,029.10 $6.29 R2 ------------------------------------------------------------------------ Hypothetical (h) 1.25% $1,000.00 $1,018.60 $6.26 -------------------------------------------------------------------------------- Actual 1.15% $1,000.00 $1,030.70 $5.79 R3 ------------------------------------------------------------------------- Hypothetical (h) 1.15% $1,000.00 $1,019.09 $5.76 -------------------------------------------------------------------------------- Actual 0.90% $1,000.00 $1,030.90 $4.53 R4 ------------------------------------------------------------------------ Hypothetical (h) 0.90% $1,000.00 $1,020.33 $4.51 -------------------------------------------------------------------------------- Actual 0.61% $1,000.00 $1,035.70 $3.08 R5 ------------------------------------------------------------------------ Hypothetical (h) 0.61% $1,000.00 $1,021.77 $3.06 -------------------------------------------------------------------------------- Actual 1.11% $1,000.00 $1,029.90 $5.59 529A ------------------------------------------------------------------------ Hypothetical (h) 1.11% $1,000.00 $1,019.29 $5.56 -------------------------------------------------------------------------------- Actual 1.77% $1,000.00 $1,027.70 $8.90 529B ------------------------------------------------------------------------ Hypothetical (h) 1.77% $1,000.00 $1,016.02 $8.85 -------------------------------------------------------------------------------- Actual 1.76% $1,000.00 $1,027.60 $8.85 529C ------------------------------------------------------------------------ Hypothetical (h) 1.76% $1,000.00 $1,016.07 $8.80 -------------------------------------------------------------------------------- (h) 5% class return per year before expenses. (p) Expenses paid is equal to each class' annualized expense ratio, as shown above, multiplied by the average account value over the period, multiplied by the number of days in the period, divided by the number of days in the year. Expenses paid do not include any applicable sales charges (loads) or redemption fees. If these transaction costs had been included, your costs would have been higher. PORTFOLIO OF INVESTMENTS 2/28/07 The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.
Bonds - 96.7% -------------------------------------------------------------------------------------------------------------------------------- ISSUER SHARES/PAR VALUE ($) -------------------------------------------------------------------------------------------------------------------------------- Agency - Other - 6.8% -------------------------------------------------------------------------------------------------------------------------------- Financing Corp., 10.7%, 2017 $14,360,000 $ 21,110,133 Financing Corp., 9.4%, 2018 11,750,000 16,112,904 Financing Corp., 9.8%, 2018 14,975,000 21,094,189 Financing Corp., 10.35%, 2018 15,165,000 22,173,672 Financing Corp., STRIPS, 0%, 2017 18,780,000 11,073,871 -------------- $ 91,564,769 -------------------------------------------------------------------------------------------------------------------------------- Mortgage Backed - 48.8% -------------------------------------------------------------------------------------------------------------------------------- Fannie Mae, 4.374%, 2013 $ 2,579,803 $ 2,500,303 Fannie Mae, 4.5%, 2019 53,534,142 51,950,643 Fannie Mae, 4.518%, 2014 4,328,698 4,216,059 Fannie Mae, 4.543%, 2013 1,474,729 1,442,998 Fannie Mae, 4.56%, 2015 2,377,838 2,315,945 Fannie Mae, 4.6%, 2014 1,841,732 1,802,890 Fannie Mae, 4.62%, 2015 3,398,353 3,323,296 Fannie Mae, 4.665%, 2015 1,604,800 1,572,936 Fannie Mae, 4.666%, 2014 9,162,319 8,997,186 Fannie Mae, 4.69%, 2015 1,307,976 1,284,150 Fannie Mae, 4.7%, 2015 1,841,088 1,808,210 Fannie Mae, 4.73%, 2012 2,819,668 2,785,657 Fannie Mae, 4.74%, 2015 1,810,000 1,773,408 Fannie Mae, 4.77%, 2014 1,587,693 1,560,659 Fannie Mae, 4.78%, 2015 1,980,672 1,953,582 Fannie Mae, 4.786%, 2012 833,665 825,834 Fannie Mae, 4.79%, 2012 11,265,251 11,008,198 Fannie Mae, 4.8%, 2013 1,292,571 1,280,849 Fannie Mae, 4.815%, 2015 1,968,000 1,936,288 Fannie Mae, 4.82%, 2014 - 2015 6,669,477 6,580,875 Fannie Mae, 4.845%, 2013 3,821,827 3,779,045 Fannie Mae, 4.847%, 2014 10,075,616 9,989,560 Fannie Mae, 4.85%, 2015 1,461,181 1,448,105 Fannie Mae, 4.87%, 2015 1,394,930 1,383,853 Fannie Mae, 4.871%, 2014 5,756,245 5,719,127 Fannie Mae, 4.88%, 2020 1,367,722 1,354,608 Fannie Mae, 4.89%, 2015 1,291,046 1,282,517 Fannie Mae, 4.92%, 2014 1,413,542 1,406,198 Fannie Mae, 4.925%, 2015 5,437,179 5,411,942 Fannie Mae, 4.996%, 2017 4,927,468 4,926,325 Fannie Mae, 5%, 2013 - 2027 40,833,839 40,491,637 Fannie Mae, 5.05%, 2017 1,897,000 1,890,183 Fannie Mae, 5.06%, 2013 1,526,422 1,521,590 Fannie Mae, 5.09%, 2016 600,000 599,906 Fannie Mae, 5.1%, 2014 1,998,980 2,010,144 Fannie Mae, 5.369%, 2013 1,979,800 2,000,654 Fannie Mae, 5.423%, 2016 3,002,353 3,084,766 Fannie Mae, 5.471%, 2015 2,561,559 2,638,409 Fannie Mae, 5.5%, 2017 - 2035 212,847,657 211,833,022 Fannie Mae, 6%, 2017 - 2034 47,998,142 48,607,355 Fannie Mae, 6.5%, 2016 - 2036 29,055,359 29,754,777 Fannie Mae, 7.056%, 2007 693,994 693,849 Fannie Mae, 7.5%, 2024 - 2031 735,834 768,604 Freddie Mac, 4.375%, 2015 8,023,478 7,876,304 Freddie Mac, 4.5%, 2013 - 2021 11,614,876 11,522,277 Freddie Mac, 5%, 2016 - 2025 41,219,438 41,099,422 Freddie Mac, 5.5%, 2024 - 2035 49,654,285 49,371,452 Freddie Mac, 6%, 2017 - 2035 20,808,529 21,069,706 Freddie Mac, 6.5%, 2016 1,407,082 1,441,535 Ginnie Mae, 5.5%, 2033 - 2034 28,136,174 28,125,898 -------------- $ 654,022,736 -------------------------------------------------------------------------------------------------------------------------------- U.S. Government Agencies - 29.5% -------------------------------------------------------------------------------------------------------------------------------- Aid-Egypt, 4.45%, 2015 $ 7,118,000 $ 6,911,293 Aid-Israel, 0%, 2021 9,036,000 4,306,820 Aid-Israel, 0%, 2024 7,131,000 2,994,692 Aid-Israel, 0%, 2024 7,131,000 2,919,182 Aid-Israel, 5.5%, 2023 16,567,000 17,532,608 Empresa Energetica Cornito Ltd., 6.07%, 2010 5,958,000 6,056,426 Fannie Mae, 3.125%, 2007 35,000,000 34,457,465 Fannie Mae, 4.25%, 2007 30,000,000 29,810,250 Fannie Mae, 4.625%, 2013 3,286,000 3,245,060 Fannie Mae, 5.5%, 2011 77,391,000 79,268,970 Farmer Mac, 5.5%, 2011 (n) 11,110,000 11,365,519 Federal Home Loan Bank, 4.5%, 2007 8,450,000 8,436,793 Federal Home Loan Bank, 4.625%, 2008 34,255,000 34,123,358 Federal Home Loan Bank, 5%, 2008 15,000,000 15,026,430 Freddie Mac, 4.2%, 2007 12,065,000 11,980,304 Freddie Mac, 4.875%, 2013 2,121,000 2,124,201 Freddie Mac, 5.05%, 2015 13,957,000 14,121,162 Overseas Private Investment Corp., 0%, 2007 4,341,443 4,638,398 Small Business Administration, 4.34%, 2024 3,949,200 3,797,284 Small Business Administration, 4.72%, 2024 6,616,973 6,494,869 Small Business Administration, 4.76%, 2025 8,106,992 7,937,954 Small Business Administration, 4.77%, 2024 5,722,205 5,633,522 Small Business Administration, 4.86%, 2024 - 2025 9,033,106 8,917,055 Small Business Administration, 4.87%, 2024 5,294,117 5,228,507 Small Business Administration, 4.88%, 2024 3,280,806 3,243,277 Small Business Administration, 4.89%, 2023 6,613,676 6,555,863 Small Business Administration, 4.98%, 2023 2,656,324 2,646,114 Small Business Administration, 4.99%, 2024 4,857,395 4,834,645 Small Business Administration, 5.11%, 2025 4,731,626 4,733,350 Small Business Administration, 5.18%, 2024 6,459,793 6,489,030 Small Business Administration, 5.19%, 2024 4,256,320 4,276,093 Small Business Administration, 5.52%, 2024 4,011,137 4,084,771 Small Business Administration, 6.07%, 2022 3,271,073 3,380,751 Small Business Administration, 6.34%, 2021 3,508,775 3,644,535 Small Business Administration, 6.35%, 2021 3,080,957 3,199,723 Small Business Administration, 6.44%, 2021 3,177,844 3,307,441 Small Business Administration, 6.625%, 2021 3,258,546 3,418,542 Small Business Administration, 8.625%, 2011 126,571 131,828 Small Business Administration, 8.8%, 2011 110,912 115,392 Small Business Administration, 9.05%, 2009 19,411 19,918 Small Business Administration, 9.1%, 2009 14,998 15,358 Small Business Administration, 9.25%, 2010 39,953 41,654 Small Business Administration, 9.3%, 2010 96,473 100,585 Small Business Administration, 9.5%, 2010 81,826 85,005 Small Business Administration, 9.65%, 2010 117,977 122,950 Small Business Administration, 9.7%, 2010 57,114 59,520 Small Business Administration, 9.9%, 2008 24,581 25,056 Small Business Administration, 10.05%, 2008 - 2009 5,912 6,067 U.S. Department of Housing & Urban Development, 6.36%, 2016 7,000,000 7,282,604 U.S. Department of Housing & Urban Development, 6.59%, 2016 6,599,000 6,709,678 -------------- $ 395,857,872 -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Obligations - 11.6% -------------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds, 6.5%, 2010 (f) $25,197,000 $ 26,536,571 U.S. Treasury Bonds, 6.875%, 2025 1,307,000 1,640,489 U.S. Treasury Bonds, 6%, 2026 32,933,000 37,906,410 U.S. Treasury Bonds, 5.25%, 2028 1,139,000 1,213,569 U.S. Treasury Bonds, 6.25%, 2030 6,166,000 7,462,784 U.S. Treasury Bonds, 4.5%, 2036 16,366,000 15,872,467 U.S. Treasury Bonds, TIPS, 3.875%, 2009 10,207,564 10,555,254 U.S. Treasury Notes, 5.5%, 2008 16,147,000 16,235,938 U.S. Treasury Notes, 6%, 2009 4,566,000 4,712,610 U.S. Treasury Notes, 4.25%, 2013 19,612,000 19,331,607 U.S. Treasury Notes, TIPS, 2.375%, 2017 13,402,304 13,631,604 -------------- $ 155,099,303 -------------------------------------------------------------------------------------------------------------------------------- TOTAL BONDS (IDENTIFIED COST, $1,300,810,575) $1,296,544,680 -------------------------------------------------------------------------------------------------------------------------------- Repurchase Agreements - 2.6% -------------------------------------------------------------------------------------------------------------------------------- Merrill Lynch & Co., 5.32%, dated 2/28/07, due 3/1/07, total to be received $34,714,129 (secured by various U.S. Treasury and Federal Agency obligations and Mortgage Backed securities in a jointly traded account), at Cost $34,709,000 $ 34,709,000 -------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (IDENTIFIED COST, $1,335,519,575) (k) $1,331,253,680 -------------------------------------------------------------------------------------------------------------------------------- Other Assets, Less Liabilities - 0.7% 9,049,437 -------------------------------------------------------------------------------------------------------------------------------- NET ASSETS - 100.0% $1,340,303,117 -------------------------------------------------------------------------------------------------------------------------------- (f) All or a portion of the security has been segregated as collateral for an open futures contract. (k) As of February 28, 2007, the fund held securities fair valued in accordance with the policies adopted by the Board of Trustees, aggregating $1,288,009,997 and 96.75% of market value. All of these security values were provided by an independent pricing service using an evaluated bid. (n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $11,365,519 representing 0.8% of net assets. FUTURES CONTRACTS OUTSTANDING AT FEBRUARY 28, 2007: UNREALIZED EXPIRATION APPRECIATION DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION) ---------------------------------------------------------------------------------------------------- U.S. Treasury Bond (Short) 224 $25,298,000 Jun-07 $ 93,716 U.S. Treasury Note 5 yr (Long) 175 18,541,797 Jun-07 81,419 U.S. Treasury Note 10 yr (Short) 229 24,867,969 Jun-07 (28,880) -------- $146,255 -------- At February 28, 2007, 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 2/28/07 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, $1,335,519,575) $1,331,253,680 Cash 351 Receivable for daily variation margin on open futures contracts 125,573 Receivable for fund shares sold 2,479,479 Interest receivable 10,257,909 Other assets 421,451 ------------------------------------------------------------------------------------------------------ Total assets $1,344,538,443 ------------------------------------------------------------------------------------------------------ LIABILITIES ------------------------------------------------------------------------------------------------------ Distributions payable $890,493 Payable for fund shares reacquired 2,646,858 Payable to affiliates Management fee 21,941 Shareholder servicing costs 226,475 Distribution and service fees 18,822 Administrative services fee 1,312 Program manager fees 13 Retirement plan administration and services fees 125 Payable for independent trustees' compensation 133,219 Accrued expenses and other liabilities 296,068 ------------------------------------------------------------------------------------------------------ Total liabilities $4,235,326 ------------------------------------------------------------------------------------------------------ Net assets $1,340,303,117 ------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF ------------------------------------------------------------------------------------------------------ Paid-in capital $1,417,431,692 Unrealized appreciation (depreciation) on investments (4,119,640) Accumulated net realized gain (loss) on investments (74,533,994) Undistributed net investment income 1,525,059 ------------------------------------------------------------------------------------------------------ Net assets $1,340,303,117 ------------------------------------------------------------------------------------------------------ Shares of beneficial interest outstanding 141,347,505 ------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued Class A shares ------------------------------------------------------------------------------------------------------ Net assets $731,125,654 Shares outstanding 77,089,230 ------------------------------------------------------------------------------------------------------ Net asset value per share $9.48 ------------------------------------------------------------------------------------------------------ Offering price per share (100/95.25Xnet asset value per share) $9.95 ------------------------------------------------------------------------------------------------------ Class B shares ------------------------------------------------------------------------------------------------------ Net assets $124,276,957 Shares outstanding 13,123,295 ------------------------------------------------------------------------------------------------------ Net asset value and offering price per share $9.47 ------------------------------------------------------------------------------------------------------ Class C shares ------------------------------------------------------------------------------------------------------ Net assets $27,529,314 Shares outstanding 2,894,851 ------------------------------------------------------------------------------------------------------ Net asset value and offering price per share $9.51 ------------------------------------------------------------------------------------------------------ Class I shares ------------------------------------------------------------------------------------------------------ Net assets $432,535,540 Shares outstanding 45,620,232 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.48 ------------------------------------------------------------------------------------------------------ Class R shares ------------------------------------------------------------------------------------------------------ Net assets $9,995,063 Shares outstanding 1,054,605 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.48 ------------------------------------------------------------------------------------------------------ Class R1 shares ------------------------------------------------------------------------------------------------------ Net assets $586,122 Shares outstanding 61,825 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.48 ------------------------------------------------------------------------------------------------------ Class R2 shares ------------------------------------------------------------------------------------------------------ Net assets $1,238,640 Shares outstanding 130,746 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.47 ------------------------------------------------------------------------------------------------------ Class R3 shares ------------------------------------------------------------------------------------------------------ Net assets $3,928,113 Shares outstanding 414,533 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.48 ------------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued Class R4 shares ------------------------------------------------------------------------------------------------------ Net assets $8,107,636 Shares outstanding 854,842 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.48 ------------------------------------------------------------------------------------------------------ Class R5 shares ------------------------------------------------------------------------------------------------------ Net assets $54,092 Shares outstanding 5,689 ------------------------------------------------------------------------------------------------------ Net asset value, offering price, and redemption price per share $9.51 ------------------------------------------------------------------------------------------------------ Class 529A shares ------------------------------------------------------------------------------------------------------ Net assets $368,247 Shares outstanding 38,877 ------------------------------------------------------------------------------------------------------ Net asset value per share $9.47 ------------------------------------------------------------------------------------------------------ Offering price per share (100/95.25Xnet asset value per share) $9.94 ------------------------------------------------------------------------------------------------------ Class 529B shares ------------------------------------------------------------------------------------------------------ Net assets $337,079 Shares outstanding 35,593 ------------------------------------------------------------------------------------------------------ Net asset value and offering price per share $9.47 ------------------------------------------------------------------------------------------------------ Class 529C shares ------------------------------------------------------------------------------------------------------ Net assets $220,660 Shares outstanding 23,187 ------------------------------------------------------------------------------------------------------ Net asset value and offering price per share $9.52 ------------------------------------------------------------------------------------------------------ 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 Year ended 2/28/07 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 $68,043,222 Other income 398,150 ------------------------------------------------------------------------------------------------------ Total investment income $68,441,372 ------------------------------------------------------------------------------------------------------ Expenses Management fee $5,405,203 Distribution and service fees 3,770,269 Program manager fees 2,411 Shareholder servicing costs 2,009,352 Administrative services fee 239,408 Retirement plan administration and services fees 18,711 Independent trustees' compensation 43,314 Custodian fee 509,347 Shareholder communications 90,888 Auditing fees 49,504 Legal fees 28,720 Miscellaneous 176,555 ------------------------------------------------------------------------------------------------------ Total expenses $12,343,682 ------------------------------------------------------------------------------------------------------ Fees paid indirectly (126,288) Reduction of expenses by investment adviser (1,363,188) ------------------------------------------------------------------------------------------------------ Net expenses $10,854,206 ------------------------------------------------------------------------------------------------------ Net investment income $57,587,166 ------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS ------------------------------------------------------------------------------------------------------ Realized gain (loss) (identified cost basis) Investment transactions $(3,981,701) Futures contracts (507,288) ------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments $(4,488,989) ------------------------------------------------------------------------------------------------------ Change in unrealized appreciation (depreciation) Investments $8,070,628 Futures contracts 213,160 ------------------------------------------------------------------------------------------------------ Net unrealized gain (loss) on investments $8,283,788 ------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments $3,794,799 ------------------------------------------------------------------------------------------------------ Change in net assets from operations $61,381,965 ------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements STATEMENTS OF CHANGES IN NET ASSETS These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
YEARS ENDED 2/28 ------------------------------------- 2007 2006 CHANGE IN NET ASSETS FROM OPERATIONS ------------------------------------------------------------------------------------------------------- Net investment income $57,587,166 $58,120,328 Net realized gain (loss) on investments (4,488,989) (4,878,236) Net unrealized gain (loss) on investments 8,283,788 (21,107,783) ------------------------------------------------------------------------------------------------------- Change in net assets from operations $61,381,965 $32,134,309 ------------------------------------------------------------------------------------------------------- DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------- From net investment income Class A $(34,710,885) $(36,730,768) Class B (5,536,265) (6,947,250) Class C (1,162,820) (1,420,773) Class I (18,749,306) (13,967,234) Class R (500,675) (436,665) Class R1 (13,926) (4,121) Class R2 (30,894) (6,328) Class R3 (112,323) (35,810) Class R4 (215,531) (22,606) Class R5 (2,443) (2,004) Class 529A (15,334) (15,171) Class 529B (13,460) (13,373) Class 529C (7,793) (8,730) ------------------------------------------------------------------------------------------------------- Total distributions declared to shareholders $(61,071,655) $(59,610,833) ------------------------------------------------------------------------------------------------------- Change in net assets from fund share transactions $(72,725,449) $(61,115,105) ------------------------------------------------------------------------------------------------------- Redemption fees $-- $3,132 ------------------------------------------------------------------------------------------------------- Total change in net assets $(72,415,139) $(88,588,497) ------------------------------------------------------------------------------------------------------- NET ASSETS ------------------------------------------------------------------------------------------------------- At beginning of period 1,412,718,256 1,501,306,753 At end of period (including undistributed net investment income of $1,525,059 and $459,344, respectively) $1,340,303,117 $1,412,718,256 ------------------------------------------------------------------------------------------------------- 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 past 5 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.
CLASS A YEARS ENDED 2/28 AND 2/29 --------------------------------------------------------------------------- 2007 2006 2005 2004 2003 Net asset value, beginning of period $9.47 $9.65 $9.84 $10.03 $9.73 ------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS ------------------------------------------------------------------------------------------------------------------------------ Net investment income (d) $0.40 $0.39 $0.36 $0.29 $0.39 Net realized and unrealized gain (loss) on investments 0.04 (0.17) (0.19) (0.08) 0.42 ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations $0.44 $0.22 $0.17 $0.21 $0.81 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------------------------------ From net investment income $(0.43) $(0.40) $(0.36) $(0.40) $(0.51) ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.48 $9.47 $9.65 $9.84 $10.03 ------------------------------------------------------------------------------------------------------------------------------ Total return (%) (r)(s)(t) 4.75 2.28 1.81 2.19 8.54 ------------------------------------------------------------------------------------------------------------------------------ RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ------------------------------------------------------------------------------------------------------------------------------ Expenses before expense reductions (f) 0.88 0.90 0.93 1.00 0.98 Expenses after expense reductions (f) 0.78 0.80 0.83 0.95 0.93 Net investment income 4.29 4.03 3.75 2.94 3.97 Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $731,126 $826,001 $932,879 $803,974 $927,886 ------------------------------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
CLASS B YEARS ENDED 2/28 AND 2/29 --------------------------------------------------------------------------- 2007 2006 2005 2004 2003 Net asset value, beginning of period $9.46 $9.64 $9.83 $10.02 $9.72 ------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS ------------------------------------------------------------------------------------------------------------------------------ Net investment income (d) $0.33 $0.31 $0.29 $0.24 $0.33 Net realized and unrealized gain (loss) on investments 0.04 (0.16) (0.18) (0.09) 0.41 ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations $0.37 $0.15 $0.11 $0.15 $0.74 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------------------------------ From net investment income $(0.36) $(0.33) $(0.30) $(0.34) $(0.44) ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.47 $9.46 $9.64 $9.83 $10.02 ------------------------------------------------------------------------------------------------------------------------------ Total return (%) (r)(s)(t) 3.97 1.52 1.12 1.53 7.84 ------------------------------------------------------------------------------------------------------------------------------ RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ------------------------------------------------------------------------------------------------------------------------------ Expenses before expense reductions (f) 1.64 1.65 1.62 1.64 1.63 Expenses after expense reductions (f) 1.54 1.55 1.52 1.59 1.58 Net investment income 3.55 3.27 3.03 2.42 3.32 Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $124,277 $175,207 $233,734 $255,512 $408,553 ------------------------------------------------------------------------------------------------------------------------------ CLASS C YEARS ENDED 2/28 AND 2/29 ----------------------------------------------------------------------- 2007 2006 2005 2004 2003 Net asset value, beginning of period $9.50 $9.68 $9.87 $10.06 $9.76 ------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS ------------------------------------------------------------------------------------------------------------------------------ Net investment income (d) $0.33 $0.32 $0.29 $0.25 $0.33 Net realized and unrealized gain (loss) on investments 0.04 (0.17) (0.18) (0.10) 0.41 ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations $0.37 $0.15 $0.11 $0.15 $0.74 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------------------------------ From net investment income $(0.36) $(0.33) $(0.30) $(0.34) $(0.44) ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.51 $9.50 $9.68 $9.87 $10.06 ------------------------------------------------------------------------------------------------------------------------------ Total return (%) (r)(s)(t) 3.97 1.52 1.13 1.54 7.81 ------------------------------------------------------------------------------------------------------------------------------ RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ------------------------------------------------------------------------------------------------------------------------------ Expenses before expense reductions (f) 1.64 1.65 1.62 1.64 1.63 Expenses after expense reductions (f) 1.54 1.55 1.52 1.59 1.58 Net investment income 3.55 3.27 2.95 2.47 3.32 Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $27,529 $35,768 $44,692 $63,609 $110,096 ------------------------------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued CLASS I YEARS ENDED 2/28 AND 2/29 ----------------------------------------------------------------------------- 2007 2006 2005 2004 2003 Net asset value, beginning of period $9.47 $9.65 $9.84 $10.03 $9.73 ------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) FROM INVESTMENT OPERATIONS ------------------------------------------------------------------------------------------------------------------------------ Net investment income (d) $0.42 $0.41 $0.39 $0.25 $0.33 Net realized and unrealized gain (loss) on investments 0.04 (0.17) (0.19) (0.00)(g)(w) 0.51 ------------------------------------------------------------------------------------------------------------------------------ Total from investment operations $0.46 $0.24 $0.20 $0.25 $0.84 ------------------------------------------------------------------------------------------------------------------------------ LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ------------------------------------------------------------------------------------------------------------------------------ From net investment income $(0.45) $(0.42) $(0.39) $(0.44) $(0.54) ------------------------------------------------------------------------------------------------------------------------------ Net asset value, end of period $9.48 $9.47 $9.65 $9.84 $10.03 ------------------------------------------------------------------------------------------------------------------------------ Total return (%) (r)(s) 5.01 2.54 2.14 2.55 8.92 ------------------------------------------------------------------------------------------------------------------------------ RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ------------------------------------------------------------------------------------------------------------------------------ Expenses before expense reductions (f) 0.63 0.65 0.60 0.67 0.63 Expenses after expense reductions (f) 0.53 0.55 0.50 0.62 0.58 Net investment income 4.54 4.34 4.09 2.57 3.64 Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $432,536 $359,623 $279,080 $168,124 $33,682 ------------------------------------------------------------------------------------------------------------------------------
CLASS R YEARS ENDED 2/28 AND 2/29 ------------------------------------------------------------------------ 2007 2006 2005 2004 2003(i) 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) $0.38 $0.36 $0.34 $0.18 $0.16 Net realized and unrealized gain (loss) on investments 0.03 (0.17) (0.18) 0.02(g) (0.08) ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.41 $0.19 $0.16 $0.20 $0.08 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.40) $(0.37) $(0.35) $(0.39) $(0.08) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.47 $9.65 $9.84 $10.03 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s) 4.49 2.03 1.63 2.05 0.78(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.14 1.15 1.11 1.19 1.13(a) Expenses after expense reductions (f) 1.03 1.05 1.01 1.14 1.08(a) Net investment income 4.03 3.76 3.64 1.87 3.04(a) Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $9,995 $11,751 $9,411 $6,188 $79 ----------------------------------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
CLASS R1 YEARS ENDED 2/28 ---------------------------- 2007 2006(i) Net asset value, beginning of period $9.46 $9.57 ---------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ---------------------------------------------------------------------------------------------------------- Net investment income (d) $0.32 $0.29 Net realized and unrealized gain (loss) on investments 0.05 (0.12)(g) ---------------------------------------------------------------------------------------------------------- Total from investment operations $0.37 $0.17 ---------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ---------------------------------------------------------------------------------------------------------- From net investment income $(0.35) $(0.28) ---------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.46 ---------------------------------------------------------------------------------------------------------- Total return (%) (r)(s) 3.98 1.82(n) ---------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ---------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.82 1.85(a) Expenses after expense reductions (f) 1.62 1.68(a) Net investment income 3.45 3.25(a) Portfolio turnover 14 73 Net assets at end of period (000 Omitted) $586 $192 ---------------------------------------------------------------------------------------------------------- CLASS R2 YEARS ENDED 2/28 ----------------------------- 2007 2006(i) Net asset value, beginning of period $9.46 $9.57 ---------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ---------------------------------------------------------------------------------------------------------- Net investment income (d) $0.35 $0.31 Net realized and unrealized gain (loss) on investments 0.04 (0.11)(g) ---------------------------------------------------------------------------------------------------------- Total from investment operations $0.39 $0.20 ---------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ---------------------------------------------------------------------------------------------------------- From net investment income $(0.38) $(0.31) ---------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 $9.46 ---------------------------------------------------------------------------------------------------------- Total return (%) (r)(s) 4.23 2.13(n) ---------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ---------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.52 1.55(a) Expenses after expense reductions (f) 1.27 1.34(a) Net investment income 3.80 3.60(a) Portfolio turnover 14 73 Net assets at end of period (000 Omitted) $1,239 $358 ---------------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
CLASS R3 YEARS ENDED 2/28 AND 2/29 --------------------------------------------------------------- 2007 2006 2005 2004(i) Net asset value, beginning of period $9.47 $9.65 $9.84 $9.69 ----------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ----------------------------------------------------------------------------------------------------------------------------- Net investment income (d) $0.37 $0.35 $0.38 $0.02 Net realized and unrealized gain (loss) on investments 0.03 (0.18) (0.25) 0.23(g) ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.40 $0.17 $0.13 $0.25 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.39) $(0.35) $(0.32) $(0.10) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.47 $9.65 $9.84 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s) 4.34 1.82 1.38 2.58(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.37 1.40 1.36 1.42(a) Expenses after expense reductions (f) 1.17 1.24 1.26 1.37(a) Net investment income 3.89 3.64 3.99 0.72(a) Portfolio turnover 14 73 126 143 Net assets at end of period (000 Omitted) $3,928 $1,392 $422 $41 ----------------------------------------------------------------------------------------------------------------------------- CLASS R4 YEARS ENDED 2/28 ---------------------------- 2007 2006(i) Net asset value, beginning of period $9.48 $9.58 ----------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ----------------------------------------------------------------------------------------------------------------------------- Net investment income (d) $0.39 $0.36 Net realized and unrealized gain (loss) on investments 0.02 (0.11)(g) ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.41 $0.25 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.41) $(0.35) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.48 $9.48 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s) 4.49 2.64(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.02 1.05(a) Expenses after expense reductions (f) 0.92 0.95(a) Net investment income 4.15 4.02(a) Portfolio turnover 14 73 Net assets at end of period (000 Omitted) $8,108 $1,305 ----------------------------------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
CLASS R5 YEARS ENDED 2/28 ---------------------------- 2007 2006(i) Net asset value, beginning of period $9.47 $9.58 ----------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS ----------------------------------------------------------------------------------------------------------------------------- Net investment income (d) $0.42 $0.37 Net realized and unrealized gain (loss) on investments 0.06 (0.10)(g) ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.48 $0.27 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.44) $(0.38) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.51 $9.47 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s) 5.24 2.81(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 0.73 0.75(a) Expenses after expense reductions (f) 0.63 0.65(a) Net investment income 4.44 4.20(a) Portfolio turnover 14 73 Net assets at end of period (000 Omitted) $54 $51 ----------------------------------------------------------------------------------------------------------------------------- CLASS 529A YEARS ENDED 2/28 AND 2/29 ----------------------------------------------------------------------- 2007 2006 2005 2004 2003(i) 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) $0.37 $0.35 $0.33 $0.26 $0.28 Net realized and unrealized gain (loss) on investments 0.03 (0.17) (0.18) (0.07) 0.20 ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.40 $0.18 $0.15 $0.19 $0.48 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.39) $(0.36) $(0.34) $(0.38) $(0.27) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 $9.46 $9.64 $9.83 $10.02 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s)(t) 4.39 1.92 1.53 1.94 4.97(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.23 1.25 1.21 1.25 1.23(a) Expenses after expense reductions (f) 1.13 1.15 1.11 1.20 1.18(a) Net investment income 3.95 3.68 3.47 2.69 3.05(a) Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $368 $401 $388 $332 $312 ----------------------------------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
CLASS 529B YEARS ENDED 2/28 AND 2/29 ----------------------------------------------------------------------- 2007 2006 2005 2004 2003(i) 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) $0.31 $0.29 $0.26 $0.20 $0.24 Net realized and unrealized gain (loss) on investments 0.03 (0.17) (0.17) (0.08) 0.21 ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.34 $0.12 $0.09 $0.12 $0.45 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.33) $(0.30) $(0.27) $(0.31) $(0.24) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.47 $9.46 $9.64 $9.82 $10.01 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s)(t) 3.72 1.26 0.97 1.27 4.58(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.89 1.90 1.87 1.90 1.88(a) Expenses after expense reductions (f) 1.78 1.80 1.77 1.85 1.83(a) Net investment income 3.29 3.03 2.71 2.07 2.53(a) Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $337 $435 $404 $524 $522 ----------------------------------------------------------------------------------------------------------------------------- SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
CLASS 529C YEARS ENDED 2/28 AND 2/29 ----------------------------------------------------------------------- 2007 2006 2005 2004 2003(i) 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) $0.31 $0.29 $0.26 $0.22 $0.20 Net realized and unrealized gain (loss) on investments 0.04 (0.17) (0.18) (0.10) 0.26 ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.35 $0.12 $0.08 $0.12 $0.46 ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.33) $(0.30) $(0.27) $(0.31) $(0.24) ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $9.52 $9.50 $9.68 $9.87 $10.06 ----------------------------------------------------------------------------------------------------------------------------- Total return (%) (r)(s)(t) 3.82 1.27 0.88 1.28 4.66(n) ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 1.88 1.90 1.86 1.89 1.88(a) Expenses after expense reductions (f) 1.78 1.80 1.76 1.84 1.83(a) Net investment income 3.30 3.01 2.76 2.15 2.37(a) Portfolio turnover 14 73 126 143 134 Net assets at end of period (000 Omitted) $221 $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 per share amount of realized and unrealized gains and losses at such time. (i) For the period from the class' inception, July 31, 2002 (Classes 529A, 529B, and 529C), December 31, 2002 (Class R), October 31, 2003 (Class R3), 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. (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. (w) Per share amount was less than $0.01. SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS (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. 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 such futures contracts 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. Values 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. 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 and certain types of derivatives. These investments are generally valued at fair value based on information from independent pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the fund's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the fund's net asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the fund's foreign equity securities may often be valued at fair value. 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. In September 2006, FASB Statement No. 157, Fair Value Measurements (the "Statement") was issued, and is effective for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements. Management is evaluating the application of the Statement to the fund, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Statement in the fund's financial statements. 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 and other funds managed by 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. PURCHASED OPTIONS - The fund may purchase call or put options for a premium. Purchasing call options may be a hedge against an anticipated increase in the dollar cost of securities to be acquired or to increase the fund's exposure to the underlying instrument. Purchasing put options may hedge against a decline in the value of portfolio securities. The premium paid is included as an investment in the Statement of Assets and Liabilities and is subsequently adjusted to the current value of the option. Premiums paid for purchased options which have expired are treated as realized losses on investments in the Statement of Operations. Premiums paid for purchased options which are exercised or closed are added to the amount paid or offset against the proceeds on the underlying security or financial instrument to determine the realized gain or loss. The risk of loss associated with purchased options is limited to the premium paid. 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. INDEMNIFICATIONS - Under the fund's organizational documents, its officers and trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The fund's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred. 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 receive proceeds from litigation settlements. Any proceeds received from litigation involving its portfolio holdings 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. Any other proceeds from litigation not related to portfolio holdings are reflected as other income in the Statement of Operations. 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 year ended February 28, 2007, 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 U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes. Book/tax differences primarily relate to expiration of capital loss carryforwards and amortization and accretion of debt securities. The tax character of distributions declared to shareholders is as follows: 2/28/07 2/28/06 Ordinary income (including any short-term capital gains) $61,071,655 $59,610,833 The federal tax cost and the tax basis components of distributable earnings were as follows: AS OF 2/28/07 Cost of investments $1,346,984,139 ----------------------------------------------------------- Gross appreciation $5,747,237 Gross depreciation (21,477,696) ----------------------------------------------------------- Net unrealized appreciation (depreciation) $(15,730,459) Undistributed ordinary income $6,756,987 Capital loss carryforwards (60,854,630) Post-October capital loss deferral (1,666,723) Other temporary differences (5,633,750) As of February 28, 2007, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows: 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) 2/28/15 (6,799,136) ------------------------------------------------ $(60,854,630) 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. On December 22, 2006, the SEC delayed the implementation of the Interpretation for regulated investment companies for an additional six months. This Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return, and requires certain expanded disclosures. Management is evaluating the application of the Interpretation to the 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 year ended February 28, 2007, this waiver amounted to $1,351,301 and is reflected as a reduction of total expenses in the Statement of Operations. 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 year ended February 28, 2007, the fund's actual operating expenses did not exceed the limit and therefore, the investment adviser did not pay any portion of the fund's expenses. DISTRIBUTOR - MFS Fund Distributors, Inc. (MFD), a wholly-owned subsidiary of MFS, as distributor, received $32,794 and $343 for the year ended February 28, 2007, 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% $1,907,718 Class B 0.75% 0.25% 1.00% 1.00% 1,458,793 Class C 0.75% 0.25% 1.00% 1.00% 306,119 Class R 0.25% 0.25% 0.50% 0.50% 58,294 Class R1 0.50% 0.25% 0.75% 0.75% 2,793 Class R2 0.25% 0.25% 0.50% 0.50% 3,778 Class R3 0.25% 0.25% 0.50% 0.50% 13,410 Class R4 -- 0.25% 0.25% 0.25% 12,093 Class 529A 0.25% 0.25% 0.50% 0.35% 1,278 Class 529B 0.75% 0.25% 1.00% 1.00% 3,796 Class 529C 0.75% 0.25% 1.00% 1.00% 2,197 --------------------------------------------------------------------------------------------------------------------- Total Distribution and Service Fees $3,770,269 (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 year ended February 28, 2007 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 year ended February 28, 2007, were as follows: AMOUNT Class A $11,111 Class B $316,023 Class C $4,423 Class 529B $68 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 year ended February 28, 2007, were as follows: AMOUNT Class 529A $913 Class 529B 949 Class 529C 549 ----------------------------------------------- Total Program Manager Fees $2,411 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 daily net assets of the fund as determined periodically under the supervision of the fund's Board of Trustees. For the year ended February 28, 2007, the fee was $1,181,275, which equated to 0.0874% annually of the fund's average daily net assets. Effective January 1, 2007, MFSC has entered into a sub-accounting agreement with SunLife Retirement Services (U.S.), Inc. (SRS), an affiliate of MFSC, on behalf of the fund to provide omnibus account services to the fund. MFSC pays SRS both an asset based fee and a per account charge of the assets held in the omnibus account. The fund then reimburses MFSC for the sub- accounting fees paid to SRS. For the year ended February 28, 2007, the sub- accounting fee for SRS was $80,268, which equated to 0.0059% annually of the fund's average daily net assets. MFSC also receives payment from the fund for out-of-pocket and sub-accounting expenses. For the year ended February 28, 2007, these out-of-pocket and sub-accounting costs amounted to $531,887. The fund may also pay shareholder servicing related costs directly 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 year ended February 28, 2007 was equivalent to an annual effective rate of 0.0177% 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 year ended February 28, 2007, 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% $1,676 Class R2 0.40% 0.25% 3,022 Class R3 0.25% 0.15% 6,705 Class R4 0.15% 0.15% 7,256 Class R5 0.10% 0.10% 52 ------------------------------------------------------------------------------- Total Retirement Plan Administration and Services Fees $18,711 (g) 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 year ended February 28, 2007, this waiver amounted to $4,188 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 $7,706. The fund also has an unfunded retirement benefit deferral plan for certain independent trustees which resulted in an expense of $2,525. Both amounts are included in independent trustees' compensation for the year ended February 28, 2007. The liability for deferred retirement benefits payable to certain independent trustees under both plans amounted to $129,353 at February 28, 2007, 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 year ended February 28, 2007, the fee paid to Tarantino LLC was $9,713. MFS has agreed to reimburse the fund for a portion of the payments made by the funds to Tarantino LLC in the amount of $7,699, 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 $176,951,645 $278,075,383 -------------------------------------------------------------------------------- Investments (non-U.S. government securities) $ 11,499,715 $ 1,281,000 -------------------------------------------------------------------------------- (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:
YEAR ENDED YEAR ENDED 2/28/07 2/28/06(i) SHARES AMOUNT SHARES AMOUNT Shares sold Class A 11,285,264 $105,743,019 10,611,681 $101,911,884 Class B 1,456,037 13,596,301 1,753,090 16,845,100 Class C 451,650 4,244,843 956,545 9,240,885 Class I 7,108,258 66,709,361 7,664,900 73,401,210 Class R 438,726 4,110,964 565,418 5,426,802 Class R1 107,909 1,010,776 29,826 286,568 Class R2 178,491 1,672,669 37,327 356,858 Class R3 566,006 5,301,972 153,972 1,475,492 Class R4 1,323,023 12,405,415 158,071 1,517,633 Class R5 -- -- 5,219 50,000 Class 529A 5,924 55,565 5,299 50,939 Class 529B 1,011 9,420 3,450 33,038 Class 529C 874 8,240 2,987 28,608 ----------------------------------------------------------------------------------------------------------- 22,923,173 $214,868,545 21,947,785 $210,625,017 Shares issued to shareholders in reinvestment of distributions Class A 2,638,948 $24,744,925 2,780,579 $26,662,325 Class B 479,290 4,484,566 583,318 5,586,303 Class C 95,876 901,006 115,199 1,108,064 Class I 1,999,288 18,748,667 1,458,711 13,966,752 Class R 46,568 436,339 42,681 408,808 Class R1 1,451 13,630 420 4,004 Class R2 3,276 30,732 665 6,326 Class R3 11,854 111,221 3,685 35,165 Class R4 22,714 213,544 2,366 22,498 Class R5 261 2,443 209 2,004 Class 529A 1,633 15,282 1,584 15,157 Class 529B 1,418 13,272 1,398 13,369 Class 529C 828 7,787 905 8,703 ----------------------------------------------------------------------------------------------------------- 5,303,405 $49,723,414 4,991,720 $47,839,478 Shares reacquired Class A (24,024,930) $(224,930,513) (22,830,344) $(218,822,611) Class B (7,334,208) (68,583,138) (8,058,578) (77,182,632) Class C (1,418,028) (13,309,913) (1,922,572) (18,495,932) Class I (1,458,523) (13,641,690) (85,757) (823,643) Class R (671,979) (6,303,837) (342,272) (3,275,075) Class R1 (67,787) (635,778) (9,994) (95,027) Class R2 (88,895) (834,531) (118) (1,126) Class R3 (310,344) (2,910,384) (54,407) (520,088) Class R4 (628,599) (5,914,599) (22,733) (215,873) Class 529A (11,040) (102,491) (4,795) (45,919) Class 529B (12,793) (119,862) (799) (7,708) Class 529C (3,286) (30,672) (9,788) (93,966) ----------------------------------------------------------------------------------------------------------- (36,030,412) $(337,317,408) (33,342,157) $(319,579,600) Net change Class A (10,100,718) $(94,442,569) (9,438,084) $(90,248,402) Class B (5,398,881) (50,502,271) (5,722,170) (54,751,229) Class C (870,502) (8,164,064) (850,828) (8,146,983) Class I 7,649,023 71,816,338 9,037,854 86,544,319 Class R (186,685) (1,756,534) 265,827 2,560,535 Class R1 41,573 388,628 20,252 195,545 Class R2 92,872 868,870 37,874 362,058 Class R3 267,516 2,502,809 103,250 990,569 Class R4 717,138 6,704,360 137,704 1,324,258 Class R5 261 2,443 5,428 52,004 Class 529A (3,483) (31,644) 2,088 20,177 Class 529B (10,364) (97,170) 4,049 38,699 Class 529C (1,584) (14,645) (5,896) (56,655) ----------------------------------------------------------------------------------------------------------- (7,803,834) $(72,725,449) (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 Growth Allocation Fund, and the MFS Moderate Allocation Fund were the owners of record of approximately 5%, 10%, and 17%, 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 the owners of record of less than 1% of the value of outstanding voting shares. (6) LINE OF CREDIT The fund and other funds managed by MFS participate in a $1 billion unsecured committed line of credit provided by a syndication of banks under a credit agreement. In addition, the fund and other funds managed by MFS have established uncommitted borrowing arrangements with certain banks. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the Federal Reserve funds rate plus 0.35%. In addition, a commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. For the year ended February 28, 2007, the fund's commitment fee and interest expense were $7,220 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations. (7) SUBSEQUENT EVENT Effective March 31, 2007, Class 529A, Class 529B, and Class 529C shares of the MFS Government Securities Fund were terminated. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Trustees of MFS Series Trust XIII and the Shareholders of MFS Government Securities Fund: We have audited the accompanying statement of assets and liabilities, including the portfolio of investments, of MFS Government Securities Fund (the "Fund"), one of the series constituting MFS Series Trust XIII as of February 28, 2007, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 28, 2007, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements and financial highlights present fairly, in all material respects, the financial position of MFS Government Securities Fund as of February 28, 2007, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts April 16, 2007 TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND The Trustees and officers of the Trust, as of April 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS DURING POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS & NAME, DATE OF BIRTH WITH FUND SINCE(h) OTHER DIRECTORSHIPS(j) ------------------- ---------------- --------------- -------------------------------- INTERESTED TRUSTEES Robert J. Manning(k) Trustee February 2004 Massachusetts Financial Services (born 10/20/63) Company, Chief Executive Officer, President, Chief Investment Officer and Director Robert C. Pozen(k) Trustee February 2004 Massachusetts Financial Services (born 8/08/46) Company, Chairman (since February 2004); MIT Sloan School (education), Senior Lecturer (since 2006); Secretary of Economic Affairs, The Commonwealth of Massachusetts (January 2002 to December 2002); Fidelity Investments, Vice Chairman (June 2000 to December 2001); Fidelity Management & Research Company (investment adviser), President (March 1997 to July 2001); Bell Canada Enterprises (telecommunications), Director; Medtronic, Inc. (medical technology), Director; Telesat (satellite communications), Director INDEPENDENT TRUSTEES J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern (born 5/01/36) of Trustees Enterprises (diversified services company), Chairman, Trustee and Chief Executive Officer (until November 2000) Robert E. Butler(n) Trustee January 2006 Consultant - regulatory and (born 11/29/41) compliance matters (since July 2002); PricewaterhouseCoopers LLP (professional services firm), Partner (November 2000 until June 2002) Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital, (born 3/11/37) Chief of Cardiac Surgery (2005); Harvard Medical School, Professor of Cardiac Surgery; Physician Director of Medical Device Technology for Partners HealthCare David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining (born 5/30/42) products and service provider), Vice Chairman/Director (since April 2001); Portman Limited (mining), Director (since 2005); Encinitos Ventures (private investment company), Principal (1997 to April 2001); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director William R. Gutow Trustee December 1993 Private investor and real estate (born 9/27/41) consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman; Atlantic Coast Tan (tanning salons), Vice Chairman (since 2002) Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial (born 12/21/44) services and insurance), Vice Chairman and Chief Operating Officer (until May 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until May 2001) Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys), (born 6/23/35) Partner J. Dale Sherratt Trustee August 1993 Insight Resources, Inc. (born 9/23/38) (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner (since 1993); Cambridge Nutraceuticals (professional nutritional products), Chief Executive Officer (until May 2001) Laurie J. Thomsen Trustee March 2005 Private investor; Prism Venture (born 8/05/57) Partners (venture capital), Co- founder and General Partner (until June 2004); St. Paul Travelers Companies (commercial property liability insurance), Director Robert W. Uek Trustee January 2006 Retired (since 1999); (born 5/18/41) PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); Consultant to investment company industry (since 2000); TT International Funds (mutual fund complex), Trustee (2000 until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (2000 until 2005) OFFICERS Maria F. Dwyer(k) President November 2005 Massachusetts Financial Services (born 12/01/58) Company, Executive Vice President and Chief Regulatory Officer (since March 2004); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (prior to March 2004) Tracy Atkinson(k) Treasurer September 2005 Massachusetts Financial Services (born 12/30/64) Company, Senior Vice President (since September 2004); PricewaterhouseCoopers LLP, Partner (prior to September 2004) Christopher R. Bohane(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 1/18/74) and Assistant Clerk Company, Vice President and Senior Counsel (since April 2003); Kirkpatrick & Lockhart LLP (law firm), Associate (prior to April 2003) Ethan D. Corey(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 11/21/63) and Assistant Clerk Company, Special Counsel (since December 2004); Dechert LLP (law firm), Counsel (prior to December 2004) David L. DiLorenzo(k) Assistant Treasurer July 2005 Massachusetts Financial Services (born 8/10/68) Company, Vice President (since June 2005); JP Morgan Investor Services, Vice President (prior to June 2005) Timothy M. Fagan(k) Assistant Secretary September 2005 Massachusetts Financial Services (born 7/10/68) and Assistant Clerk Company, Vice President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President and Chief Compliance Officer (September 2004 to August 2005), Senior Attorney (prior to September 2004); John Hancock Group of Funds, Vice President and Chief Compliance Officer (September 2004 to December 2004) Mark D. Fischer(k) Assistant Treasurer July 2005 Massachusetts Financial Services (born 10/27/70) Company, Vice President (since May 2005); JP Morgan Investment Management Company, Vice President (prior to May 2005) Brian E. Langenfeld(k) Assistant Secretary June 2006 Massachusetts Financial Services (born 3/07/73) and Assistant Clerk Company, Assistant Vice President and Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (May 2005 to April 2006); John Hancock Advisers, LLC, Attorney and Assistant Secretary (prior to May 2005) Ellen Moynihan(k) Assistant Treasurer April 1997 Massachusetts Financial Services (born 11/13/57) Company, Senior Vice President Susan S. Newton(k) Assistant Secretary May 2005 Massachusetts Financial Services (born 3/07/50) and Assistant Clerk Company, Senior Vice President and Associate General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005); John Hancock Group of Funds, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005) Susan A. Pereira(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 11/05/70) and Assistant Clerk Company, Vice President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (prior to June 2004) Mark N. Polebaum(k) Secretary and Clerk January 2006 Massachusetts Financial Services (born 5/01/52) Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (prior to January 2006) Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of (born 3/07/44) Compliance Officer compliance services), Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (April 2003 to June 2004); David L. Babson & Co. (investment adviser), Managing Director, Chief Administrative Officer and Director (prior to March 2003) James O. Yost(k) Assistant Treasurer September 1990 Massachusetts Financial Services (born 6/12/60) Company, Senior Vice President ------------ (h) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. (j) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (k) "Interested person" of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. (n) In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The terms of that settlement required that compensation and expenses related to the independent compliance consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29. The Trust held a shareholders' meeting in 2005 to elect Trustees, and will hold a shareholders' meeting at least once every five years thereafter, to elect Trustees. Each Trustee (except Mr. Butler and Mr. Uek) has been elected by share- holders and each Trustee and officer holds office until his or her successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. Messrs. Butler, Gutow, Sherratt and Uek and Ms. Thomsen are members of the Trust's Audit Committee. Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2007, the Trustees served as board members of 97 funds within the MFS Family of Funds. The Statement of Additional Information contains further information about the Trustees and is available without charge upon request by calling 1-800-225-2606. -=--------------------------------------------------------------------------------------------------------- INVESTMENT ADVISER CUSTODIAN Massachusetts Financial Services Company State Street Bank and Trust Company 500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA 02110 02116-3741 Effective March 1, 2007, the changed DISTRIBUTOR to: MFS Fund Distributors, Inc. JPMorgan Chase Bank 500 Boylston Street, Boston, MA One Chase Manhattan Plaza 02116-3741 New York, NY 10081 PORTFOLIO MANAGER INDEPENDENT REGISTERED PUBLIC Geoffrey Schechter ACCOUNTING FIRM Deloitte & Touche 200 Berkeley Street, Boston, MA 02116
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT A discussion regarding the Board's most recent review and renewal of the Fund's investment advisory agreement is available by clicking on the fund's name under "Select a fund" on the MFS Web site (mfs.com). PROXY VOTING POLICIES AND INFORMATION A general description of the MFS funds' proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The 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. FEDERAL TAX INFORMATION (unaudited) The fund will notify shareholders of amounts for use in preparing 2007 income tax forms in January 2008. MFS(R) PRIVACY NOTICE Privacy is a concern for every investor today. At MFS Investment Management(R) and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries. Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include o data from investment applications and other forms o share balances and transactional history with us, our affiliates, or others o facts from a consumer reporting agency We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements. Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you. If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time. Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. CONTACT US WEB SITE MAILING ADDRESS mfs.com MFS Service Center, Inc. P.O. Box 55824 MFS TALK Boston, MA 02205-5824 1-800-637-8255 24 hours a day OVERNIGHT MAIL MFS Service Center, Inc. ACCOUNT SERVICE AND 500 Boylston Street LITERATURE 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 adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's principal executive officer and principal financial and accounting officer. The Registrant has not amended any provision in its Code of Ethics (the "Code") that relates to an element of the Code's definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR. A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Messrs. Robert E. Butler and Robert W. Uek and Ms. Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of "audit committee financial expert" as such term is defined in Form N-CSR. In addition, Messrs. Butler and Uek and Ms. Thomsen are "independent" members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEMS 4(A) THROUGH 4(D) AND 4(G): The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve as independent accountants to certain series of the Registrant and Ernst & Young LLP ("E&Y") to serve in the same capacity to certain other series of the Registrant (the series referred to collectively as the "Funds" and singularly as a "Fund"). The tables below set forth the audit fees billed to the Funds as well as fees for non-audit services provided to the Funds and/or to the Funds' investment adviser, Massachusetts Financial Services Company ("MFS") and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Funds ("MFS Related Entities"). For the fiscal years ended February 28, 2007 and 2006, audit fees billed to the Funds by Deloitte and E&Y were as follows: Audit Fees FEES BILLED BY DELOITTE: 2007 2006 ---- ---- MFS Government Securities Fund 44,650 40,270 AUDIT FEES FEES BILLED BY E&Y: 2007 2006+ ---- ----- MFS Diversified Income Fund 43,735 N/A + The MFS Diversified Income Fund's initial fiscal year end is February 28, 2007. For the fiscal years ended February 28, 2007 and 2006, fees billed by Deloitte and E&Y for audit-related, tax and other services provided to the Funds and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3) FEES BILLED BY DELOITTE: 2007 2006 2007 2006 2007 2006 ---- ---- ---- ---- ---- ---- To MFS Government 0 0 6,269 10,350 379 0 Securities Fund To MFS and MFS Related 981,825 741,371 0 0 460,596 373,825 Entities of MFS Government Securities Fund* AGGREGATE FEES FOR NON-AUDIT SERVICES: 2007 2006 ---- ---- To MFS Government 1,586,038 1,242,052 Securities Fund, MFS and MFS Related Entities# Audit-Related Fees(2) Tax Fees(2) All Other Fees(4) FEES BILLED BY E&Y: 2007 2006+ 2007 2006+ 2007 2006+ ---- ----- ---- ----- ---- ----- To MFS Diversified 43,735 N/A 7,500 N/A 0 N/A Income Fund To MFS and MFS Related 0 0 0 15,500 0 667,899 Entities of MFS Diversified Income Fund* AGGREGATE FEES FOR NON-AUDIT SERVICES: 2007 2006 ---- ---- To MFS Diversified Income 90,831 740,095 Fund, MFS and MFS Related Entities#
+ The MFS Diversified Income Fund's initial fiscal year end is February 28, 2007. * This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Funds (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex). # This amount reflects the aggregate fees billed by Deloitte, for non-audit services rendered to the Funds and for non-audit services rendered to MFS and the MFS Related Entities. (1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under "Audit Fees," including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. (2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. (3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte other than those reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees," including fees for services related to sales tax refunds, consultation on internal cost allocations, review of internal controls and review of Rule 38a-1 compliance program. (4) The fees included under "All Other Fees" are fees for products and services provided by E&Y other than those reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees," including fees for the subscription to tax treatise and for services related to analysis of fund administrative expenses, compliance program and records management projects. ITEM 4(E)(1): Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services: To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Funds and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 in each period between regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting ITEM 4(E)(2): None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied). ITEM 4(F): Not applicable. ITEM 4(H): The Registrant's Audit Committee has considered whether the provision by a Registrant's independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant's principal auditors. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. Not applicable to the Registrant. ITEM 6. SCHEDULE OF INVESTMENTS. A schedule of investments 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 407(c)(2)(iv) of Regulation S-K (as required by Item 22(b)(15) of Schedule 14A), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the effectiveness of the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant's principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter 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: Code of Ethics attached hereto. (2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. (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: April 16, 2007 -------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* MARIA F. DWYER ------------------------------------------------------ Maria F. Dwyer, President (Principal Executive Officer) Date: April 16, 2007 -------------- By (Signature and Title)* TRACY ATKINSON ------------------------------------------------------ Tracy Atkinson, Treasurer (Principal Financial Officer and Accounting Officer) Date: April 16, 2007 -------------- * Print name and title of each signing officer under his or her signature.