[MFS LOGO](R)
INVESTMENT MANAGEMENT
MFS(R) GOVERNMENT
MARKETS INCOME TRUST
ANNUAL REPORT o NOVEMBER 30, 2002
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Results of Shareholder Meeting ............................................ 9
Portfolio of Investments .................................................. 10
Financial Statements ..................................................... 14
Notes to Financial Statements ............................................ 18
Independent Auditors' Report .............................................. 26
Trustees and Officers ..................................................... 28
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MFS(R) PRIVACY POLICY
At MFS(R), we are committed to protecting your privacy.
On behalf of the MFS Family of Funds(R), the MFS(R) Institutional Trusts, the
Vertex(SM) Funds, Massachusetts Financial Services Company, and certain
affiliates(1) (collectively, "MFS," "we," "us" or "our"), this privacy policy
outlines certain of our policies designed to maintain the privacy of your
nonpublic personal information.
Nonpublic personal information includes much of the information you provide to
us and the related information about you and your transactions involving your
MFS investment product or service. Examples of nonpublic personal information
include the information you provide on new account applications for MFS
investment products or services, your share balance or transactional history,
and the fact that you are a customer of MFS.
We may collect nonpublic personal information about you from the following
sources:
o information we receive from you on applications or other forms
o information about your transactions with us, our affiliates, or others, and
o information we receive from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may disclose all of
the information we collect, as described above, to companies that perform
marketing services on our behalf or to other financial institutions with whom
we have joint marketing arrangements.
We restrict access to nonpublic personal information about you to personnel
who are necessary or appropriate to provide products or services to you. We
maintain physical, electronic, and procedural safeguards that comply with
federal regulations to guard your nonpublic personal information.
Our privacy policy applies only to individual MFS investors who have a direct
relationship with us. If you own MFS products or receive MFS investment
services in the name of a third-party broker-dealer, bank, investment adviser
or other financial service provider, that third-party's privacy policies may
apply to you and our privacy policy may not.
If you have any questions with respect to MFS' privacy policy, please call
1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time.
(1) MFS Institutional Advisors, Inc., Vertex Investment Management, Inc., MFS
Original Research Advisors, LLC, MFS Original Research Partners, LLC,
MFS(R) Heritage Trust Company(SM), and MFS Fund Distributors, Inc.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
As I write this in mid-December, major U.S. and overseas stock market indices
have shown positive performance for two straight months -- something we
haven't seen in a long time. The Dow Jones Industrial Average has recently
recorded its second-best October ever, in terms of percentage gains(1). We see
these as hopeful signs in what has been a difficult year for investors in
stocks and corporate bonds. In our view, signals on the future direction of
the economy and the market remain decidedly mixed.
A RELAY RACE
In mid-December, we could describe the state of the U.S. economy as a relay
race against time involving two runners: the consumer, whose spending has
fueled the beginning of a recovery, and corporate spending, which has yet to
contribute much to the recovery. The hope is that corporate spending kicks in
so that the consumer can pass the baton before running out of steam. But at
this point, the near-term direction of consumer spending or corporate spending
and profits is difficult to predict. The result is that the economy seems to
us to be in a holding pattern as we wait for clear signs that things are
improving.
REASONS FOR OPTIMISM
Optimists would point out that wages, according to the U.S. Labor Department,
have been rising over the past year. This, in combination with historically
low interest rates and inflation, may enable the consumer to keep spending. In
addition, worker productivity in the third quarter grew at the highest rate
since 1966 -- 5.1% on an annualized basis, according to the Labor Department.
Higher productivity may allow firms to raise wages without raising prices.
Our research indicates that business spending overall has at least stopped
falling and that corporate earnings and spending could trend upward in 2003.
An encouraging sign is that business spending in the third quarter of 2002
eked out its first increase in two years, according to a report from the U.S.
Commerce Department.
Pessimists, however, would counter that the outlook for corporate profits
remains very murky, that corporations could resort to further layoffs if
profits languish, that consumer confidence still appears weak, and that the
situation with Iraq adds to market uncertainty.
STAYING THE COURSE
With the economy in a holding pattern and markets extremely volatile, we think
it's important to remember the familiar investment strategies that we believe
apply in any market: Think long term. Be diversified. See crises as
opportunities. That's how we'd describe our approach to this volatile
environment -- which we think plays to our strength as research-based, bottom-
up, long-term investors.
We understand that the past few years have been discouraging. Short-term
events have sorely tested investors' long-term faith in the market. However,
we would caution investors about reacting to market news -- good or bad -- by
making major changes in their portfolios. We would suggest that in difficult
times it is even more important to have a long-term financial plan and to talk
on a regular basis with your investment professional. We would also point out
that history has shown that the market and the economy have been cyclical;
downturns have usually been followed by upturns.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman
MFS Investment Management(R)
December 16, 2002
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(1) Source: The Wall St. Journal, November 1, 2002. The Dow Jones Industrial
Average (DJIA) is a price-weighted average of 30 blue-chip stocks that are
generally the leaders in their industry. It is not possible to invest
directly in an index.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Peter C. Vaream]
Peter C. Vaream
For the 12 months ended November 30, 2002, the trust provided a total return
of 9.31% based on its beginning and ending stock market prices and assuming
the reinvestment of any dividends and capital gains distributions paid during
the period. The trust's total return based on its net asset value (NAV) was
8.88%. During the same period, the trust's benchmarks, the Lehman Brothers
Government Bond Index (the Lehman Index) and the J.P. Morgan Non-Dollar
Government Bond Index (the Morgan Index) returned 7.91% and 11.81%,
respectively. The Lehman Index is unmanaged and is composed of all publicly
issued debt obligations of the U.S. Treasury, U.S. government agencies, quasi-
federal corporations, and corporate debt guaranteed by the U.S. government.
The Morgan Index is an unmanaged index of actively traded government bonds
issued by 12 countries (excluding the United States) with remaining maturities
of at least one year.
During the past 12 months, the U.S. Federal Reserve Board (the Fed) cut short-
term interest rates to 1.25% in an effort to stimulate a sagging economy. At
the same time, accounting scandals and fraud in some of this country's largest
companies were front-page news and caused a flight to quality as investors
sold their corporate bonds in favor of the safety offered by U.S. government
securities. European economies were also weak. Business spending across the
Continent was down. As a result, many believed that the European Central Bank
(ECB) would follow the Fed's lead and start to cut interest rates. However, by
November 30, the ECB hadn't cut interest rates and yields on German and other
European government bonds remained significantly higher than on comparable
U.S. Treasury bonds.
BENEFITS OF QUALITY AND DIVERSIFICATION
The high quality of the fund and its diversification between U.S. and
international government bonds made it an attractive investment to own during
the past year. In addition, we kept the fund's duration throughout the period
between roughly 4.3 and 5.5 years to help maintain the fund's price stability.
(Duration is a measure of a bond's interest rate sensitivity and its price
volatility; the lower the number, the lower the volatility.)
Throughout the past 12 months, the fund's position in U.S. Treasury securities
performed well given two trends in the market. First, when investors realized
the U.S. economy was not as strong as they thought, our Treasury holdings
helped fund performance in the first quarter of 2002. Later, performance
received a boost when investors fled the corporate bond markets and turned to
U.S. Treasuries, which caused Treasury prices to rise and yields to decline.
As Treasury prices rose to levels where we believed they offered few
opportunities, we moved some of those assets into higher yielding mortgage-
backed securities. The yields on those securities were more attractive than
Treasuries and would, in our opinion, be subject to minimal prepayment risk
because we believed that most homeowners who were going to refinance had done
so. By the end of November 2002, the fund held nearly 46% of its assets in
mortgage-backed securities and just over 22% in U.S. Treasuries. (Principal
value and interest on Treasury securities are guaranteed by the U.S.
government if held to maturity.)
SOLID RETURNS FROM INTERNATIONAL HOLDINGS
International investments in Germany, the United Kingdom, and "dollar bloc"
countries such as Canada also performed well for the fund. These issues
offered higher yields than U.S. Treasury securities. Currency gains in these
issues also benefited U.S. investors. Although we usually hedge currency risk
back into U.S. dollars, we left roughly half of our Canadian holdings in
Canadian dollars, and about a third of our European holdings in local
currencies such as the Euro, the Swedish krona, the British pound, and the
Norwegian krone. When those currencies appreciated relative to the U.S.
dollar, investors were rewarded.
Emerging market bonds were among our best performing holdings over the period.
Bonds from Korea, Mexico, Bulgaria, and Russia were standouts for the group.
All of these countries have made significant political and economic reforms
that have resulted in improved credit quality. In fact, Russia has been
upgraded in the past year. (Often when an upgrade occurs, bond prices rise to
match prices of similar quality bonds.) We also count our avoidance of
Brazilian and Argentinean bonds among the contributors to performance. Both
countries had problems making principal and interest payments. The impact of
the election of a left-of-center president in Brazil remains to be seen.
As of November 30, 2002, international bonds represented approximately 10.5%
of the fund and emerging markets bonds represented just over 3%.
FEW DETRACTORS
The few detractors from fund performance were more a result of what we didn't
own than what we did own. As examples, we could have owned more international
bonds and left a larger portion of our international holdings unhedged to U.S.
dollars, which might have resulted in higher returns for the fund. However,
this is a conservatively managed fund. Given the weakness we saw in the
European economy and a tendency for dollar bloc countries to follow the U.S.
economy, we chose to limit our international holdings. That same logic also
applied to increased currency exposure.
CONTINUED FOCUS ON INTERNATIONAL, U.S. MORTGAGE-BACKED BONDS
Looking ahead, we believe that U.S. Treasury bonds will continue to
underperform international, emerging market, and mortgage-backed bonds. Most
likely, we will continue to add to our international position with the new
holdings hedged back to U.S. dollars. Although most investors anticipate an
interest rate cut by the ECB, we still think international issues will remain
more attractive than their U.S. counterparts. Even if the yields on U.S.
Treasury bonds were to rise, we doubt that they would go up significantly. We
expect that we would keep our mortgage-backed bond allocations about where
they are. Given the uncertainties of the interest rate environment in the U.S.
and abroad, we are likely to reduce the fund's interest rate sensitivity while
seeking out good income opportunities for fund investors.
Respectfully,
/s/ Peter C. Vaream
Peter C. Vaream
Portfolio Manager
Note to Shareholders: Effective March, 2002, Peter Vaream became portfolio
manager of the trust.
Important Note to Shareholders: Effective May 1, 2002, the trust, in response
to Securities and Exchange Commission rulemaking, made a change to its
principal investment policies and now invests under normal market conditions,
at least 80% of its net assets in U.S. and non-U.S. government securities.
Previously, the fund invested under normal market conditions at least 65% of
its total assets in U.S. government securities.
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on the
cover. These views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
It is not possible to invest directly in an index.
The portfolio is actively managed, and current holdings may be different.
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PORTFOLIO MANAGER'S PROFILE
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PETER C. VAREAM IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R)
(MFS(R)) AND MANAGES THE INVESTMENT-GRADE BOND, GOVERNMENT SECURITIES
AND GLOBAL GOVERNMENTS PORTFOLIOS OF OUR MUTUAL FUNDS, VARIABLE
ANNUITIES AND INSTITUTIONAL ACCOUNTS. HE IS A MEMBER OF THE MFS FIXED
INCOME STRATEGY GROUP.
PETER JOINED MFS IN 1992 AND BECAME A PORTFOLIO MANAGER IN 1993.
PREVIOUSLY, HE WAS VICE PRESIDENT IN THE FIXED INCOME DEPARTMENT AT THE
FIRST BOSTON CORP. FROM 1986 TO 1992. PRIOR TO THAT, HE SERVED AS A
CORPORATE FINANCIAL ANALYST.
PETER EARNED A BACHELOR'S DEGREE IN FINANCE FROM NEW YORK UNIVERSITY. HE
IS A MEMBER OF THE LEHMAN BROTHERS INDEX ADVISORY COUNCIL.
ALL PORTFOLIO MANAGERS AT MFS ARE SUPPORTED BY AN INVESTMENT STAFF OF
OVER 160 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A GLOBAL,
COMPANY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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NUMBER OF SHAREHOLDERS
As of November 30, 2002, our records indicate that there are 6,388 registered
shareholders and approximately 23,035 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the trust, please write or
call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
ADDRESS CHANGE
Please use our new mailing address, effective immediately.
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
In accordance with Section 23(c) of the Investment Company Act of 1940, the
trust hereby gives notice that it may from time to time repurchase shares of
the trust in the open market at the option of the Board of Trustees and on such
terms as the Trustees shall determine.
OBJECTIVE: To provide a high level of current income.
NEW YORK STOCK EXCHANGE SYMBOL: MGF
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PERFORMANCE SUMMARY
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(For the year ended November 30, 2002)
NET ASSET VALUE PER SHARE
November 30, 2001 $7.32
November 30, 2002 $7.49
NEW YORK STOCK EXCHANGE PRICE
November 30, 2001 $6.59
October 9, 2002 (high)* $7.10
December 17, 2001 (low)* $6.31
November 30, 2002 $6.77
* For the year ended December 1, 2001, through November 30, 2002.
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RISK CONSIDERATIONS
Investments in foreign and/or emerging market securities may be unfavorably
affected by interest-rate and currency-exchange-rate changes as well as by
market, economic, and political conditions of the countries where investments
are made. There may be greater returns but also greater risk than with U.S.
investments.
The portfolio may invest in derivative securities which may include futures
and options. These types of instruments can increase price fluctuation.
As a nondiversified portfolio, the portfolio invests in a limited number of
companies and may have more risk because a change in one security's value may
have a more significant effect on the portfolio's net asset value. An
investment in the portfolio is not a complete investment program.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
These risks may increase share price volatility. See the prospectus for
details.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
MFS offers a Dividend Reinvestment and Cash Purchase Plan that allows you
to reinvest either all of the distributions paid by the trust or only the
long-term capital gains. Purchases are made at the market price unless that
price exceeds the net asset value (the shares are trading at a premium). If
the shares are trading at a premium, purchases will be made at a discounted
price of either the net asset value or 95% of the market price, whichever is
greater. Twice each year you can also buy shares. Investments of $100 or more
can be made in January and July on the 15th of the month or shortly
thereafter.
If your shares are in the name of a brokerage firm, bank, or other nominee,
you can ask the firm or nominee to participate in the plan on your behalf.
If the nominee does not offer the plan, you may wish to request that your
shares be re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. The automatic
reinvestment of distributions does not relieve you of any income tax that may
be payable (or required to be withheld) on the distributions.
To enroll in or withdraw from the plan, or if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please
have available the name of the trust and your account and Social Security
numbers. For certain types of registrations, such as corporate accounts,
instructions must be submitted in writing. Please call for additional details.
When you withdraw, you can receive the value of the reinvested shares in one
of two ways: a check for the value of the full and fractional shares, or a
certificate for the full shares and a check for the fractional shares.
RESULTS OF SHAREHOLDER MEETINGS
At the annual meeting of shareholders of MFS Government Markets
Income Trust, which was held on October 1, 2002, the following actions were
taken:
ITEM 1. Trustees of the trust were elected as follows:
NUMBER OF SHARES
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NOMINEE FOR WITHHOLD AUTHORITY
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Jeffrey L. Shames 52,785,278.355 1,067,957.148
William R. Gutow 52,783,445.355 1,069,790.148
J. Atwood Ives 52,774,951.299 1,078,284.204
Abby O'Neill 52,740,133.208 1,113,102.295
ITEM 2. The ratification of the selection of Deloitte & Touche LLP as the
independent public accountants to be employed by the trust for the
fiscal year ending November 30, 2002.
NUMBER OF SHARES
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For 52,872,387.635
Against 588,589.332
Abstain 392,258.536
PORTFOLIO OF INVESTMENTS -- November 30, 2002
Bonds - 96.1%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Bonds - 82.8%
U.S. Government Agencies - 60.5%
Federal Home Loan Mortgage Corp., 3.875s, 2005 $ 5,179 $ 5,234,643
Federal Home Loan Mortgage Corp., 7.5s, 2027 - 2028 1,232 1,305,067
Federal Housing Administration/USGI Spring Hill, 10.375s, 2030+ 2,044 2,044,247
Federal National Mortgage Assn., 5.5s, 2017 7,113 7,444,069
Federal National Mortgage Assn., 6s, 2016 - 2032 41,875 43,120,502
Federal National Mortgage Assn., 6.5s, 2016 - 2032 65,266 67,623,321
Federal National Mortgage Assn., 6.956s, 2007 5,572 6,168,476
Federal National Mortgage Assn., 7.5s, 2015 5,962 6,339,982
Federal National Mortgage Assn., 8.5s, 2027 10,100 11,330,171
Financing Corp., 10.7s, 2017 8,500 13,072,023
Financing Corp., 9.8s, 2018 5,000 7,246,930
Financing Corp., 10.35s, 2018 9,500 14,373,775
Government National Mortgage Assn., 6.5s, 2028 - 2032 17,767 18,499,790
Government National Mortgage Assn., 7s, 2022 - 2031 32,117 33,746,000
Government National Mortgage Assn., 7.5s, 2022 - 2023 319 342,120
Private Export Funding Corp., 7.01s, 2004 3,380 3,607,667
Small Business Administration, 8.875s, 2011 829 899,547
Small Business Administration, 6.34s, 2021 1,857 2,007,278
Small Business Administration, 6.35s, 2021 2,443 2,641,716
Small Business Administration, 6.44s, 2021 1,934 2,100,322
Small Business Administration, 6.625s, 2021 1,919 2,100,951
Student Loan Marketing Assoc., 5.25s, 2006 3,205 3,430,859
U.S. Department Housing & Urban Development, 6.36s, 2016 1,580 1,719,731
U.S. Department Housing & Urban Development, 6.59s, 2016 5,612 6,020,969
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$262,420,156
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U.S. Treasury Obligations - 22.3%
Principal Stripped Payments, 0s, 2023 $ 2,036 $ 664,481
U.S. Treasury Bonds, 12.375s, 2004 2,178 2,508,017
U.S. Treasury Bonds, 10.375s, 2009 6,200 7,156,641
U.S. Treasury Bonds, 10.375s, 2012 8,400 11,026,311
U.S. Treasury Bonds, 9.25s, 2016 26,500 38,079,255
U.S. Treasury Bonds, 8.875s, 2017 6,000 8,483,436
U.S. Treasury Notes, 4.625s, 2006 10,137 10,760,659
U.S. Treasury Notes, 3.25s, 2007 8,000 8,010,312
U.S. Treasury Notes, 3.375s, 2007 9,384 9,957,823
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$ 96,646,935
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Total U.S. Bonds $359,067,091
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Foreign Bonds - 13.3%
Austria - 0.4%
Republic of Austria, 5.5s, 2007 EUR 1,475 $ 1,567,124
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Bulgaria - 0.5%
Republic of Bulgaria, 7.5s, 2013## EUR 1,171 $ 1,192,574
Republic of Bulgaria, 8.25s, 2015## $ 728 789,880
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$ 1,982,454
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Canada - 3.2%
Government of Canada, 5.75s, 2006 CAD 3,031 $ 2,048,855
Government of Canada, 5.25s, 2008 $ 2,735 2,946,374
Government of Canada, 5.5s, 2009 CAD 6,483 4,318,948
Government of Canada, 5.5s, 2010 6,661 4,413,312
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$ 13,727,489
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Denmark - 0.4%
Kingdom of Denmark, 7s, 2007 DKK 12,468 $ 1,881,537
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Dominican Republic - 0.1%
Dominican Republic, 9.5s, 2006## $ 601 $ 640,065
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Finland - 0.3%
Republic of Finland, 5.375s, 2013 EUR 1,198 $ 1,262,664
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France - 0.5%
Republic of France, 4.75s, 2012 EUR 1,932 $ 1,948,506
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Germany - 2.1%
Federal Republic of Germany, 4.75s, 2008 EUR 4,755 $ 4,909,642
Federal Republic of Germany, 4s, 2009 4,450 4,369,039
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$ 9,278,681
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Ireland - 0.4%
Republic of Ireland, 4.25s, 2007 EUR 495 $ 499,602
Republic of Ireland, 5s, 2013 1,319 1,347,886
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$ 1,847,488
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Italy - 0.4%
Republic of Italy, 4.5s, 2007 EUR 1,501 $ 1,532,828
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Kazakhstan
Kaztransoil Co., 8.5s, 2006 (Oils)## $ 50 $ 51,250
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Malaysia - 0.2%
Petroliam Nasional Berhad, 7.75s, 2015 (Oils) $ 766 $ 847,106
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Mexico - 1.1%
BBVA Bancomer, 10.5s, 2011 (Banks & Credit Cos.)## $ 1,502 $ 1,663,465
Corp. Durango SA de C.V., 13.75s, 2009 (Forest &
Paper Products)## 209 108,680
Pemex Project Funding Master Trust, 9.125s, 2010 (Oils) 626 691,730
Petroleos Mexicanos, 9.375s, 2008 (Oils) 1,072 1,203,320
Petroleos Mexicanos, 9.5s, 2027 (Oils) 269 290,520
United Mexican States, 11.5s, 2026 682 904,182
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$ 4,861,897
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Netherlands - 0.4%
Kingdom of Netherlands, 5s, 2012 EUR 1,816 $ 1,865,328
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Panama - 0.4%
Republic of Panama, 10.75s, 2020 $ 305 $ 333,212
Republic of Panama, 9.375s, 2023 327 325,365
Republic of Panama, 9.375s, 2029 817 874,190
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$ 1,532,767
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Russia - 0.4%
Ministry of Finance, 12.75s, 2028 $ 730 $ 963,600
Mobile Telesystems Finance, 10.95s, 2004
(Telecommunications - Wireless) 849 887,205
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$ 1,850,805
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South Korea - 0.3%
Hanvit Bank, 12.75s, 2010 (Banks & Credit Cos.)## $ 1,123 $ 1,309,108
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Spain - 1.6%
Kingdom of Spain, 7s, 2005 $ 3,600 $ 3,973,011
Kingdom of Spain, 5.35s, 2011 EUR 2,905 3,059,495
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$ 7,032,506
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Sweden - 0.1%
Kingdom of Sweden, 5.5s, 2012 SEK 4,935 $ 562,912
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United Kingdom - 0.5%
United Kingdom Treasury, 5.75s, 2009 GBP 1,239 $ 2,055,021
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Total Foreign Bonds $ 57,637,536
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Total Bonds (Identified Cost, $402,525,307) $416,704,627
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Rights
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SHARES
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Mexico - Value Recovery Rights (Identified Cost, $0) 1,354,000 $3,385
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Warrants
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Republic of Venezuela* (Identified Cost, $0) 37,500 $ 0
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Repurchase Agreement - 12.8%
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PRINCIPAL AMOUNT
(000 OMITTED)
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Merrill Lynch, dated 11/29/02, due 12/02/02, total to be
received $43,292,834 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account) $43,288 $43,288,000
Morgan Stanley, dated 11/29/02, due 12/02/02, total to be
received $12,170,339 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account) 12,169 12,169,000
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Total Repurchase Agreement, at Cost $ 55,457,000
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Total Investments (Identified Cost, $457,982,307) $472,165,012
Other Assets, Less Liabilities - (8.9)% (38,541,050)
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Net Assets - 100.0% $433,623,962
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* Non-income producing security.
## SEC Rule 144A restriction.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below:
CAD= Canadian Dollars GBP= British Pounds
DKK= Danish Kroner SEK= Swedish Kroner
EUR= Euro Dollars
See notes to financial statements.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
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NOVEMBER 30, 2002
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Assets:
Investments, at value (identified cost, $457,982,307) $472,165,012
Investment of cash collateral for securities loaned
(at identified cost and value) 40,684,044
Receivable for forward foreign currency exchange contracts 58,485
Receivable for investments sold 332,185
Interest receivable 4,242,118
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Total assets $517,481,844
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Liabilities:
Payable to custodian $ 422,931
Payable for investments purchased 41,491,020
Payable for fund shares reacquired 257,025
Collateral for securities loaned, at value 40,684,044
Payable to dividend disbursing agent 133,187
Payable for forward foreign currency exchange contracts 177,015
Payable for forward foreign currency exchange contracts
subject to master netting agreements 154,984
Payable to affiliates -
Management fee 23,404
Transfer and dividend disbursing agent fee 9,860
Accrued expenses and other liabilities 504,412
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Total liabilities $ 83,857,882
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Net assets $433,623,962
============
Net assets consist of:
Paid-in capital $454,660,828
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 13,910,205
Accumulated net realized loss on investments and foreign
currency transactions (34,277,366)
Accumulated net investment loss (669,705)
------------
Total $433,623,962
============
Shares of beneficial interest outstanding (62,993,686 shares
authorized, less 5,104,331 treasury shares) 57,889,355
==========
Net asset value per share (net assets / shares of
beneficial interest outstanding) $7.49
=====
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Operations
-------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 2002
-------------------------------------------------------------------------------
Net investment income:
Interest income $25,295,105
Dividends 2,323
-----------
Total investment income $25,297,428
-----------
Expenses -
Management fee $ 2,807,843
Trustees' compensation 135,559
Transfer and dividend disbursing agent fee 134,319
Administrative fee 39,795
Investor communication expense 234,641
Custodian fee 192,952
Postage 32,959
Auditing fees 38,551
Printing 52,047
Legal fees 1,583
Miscellaneous 97,995
-----------
Total expenses $ 3,768,244
Fees paid indirectly (15,812)
-----------
Net expenses $ 3,752,432
-----------
Net investment income $21,544,996
-----------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions $ 7,759,932
Foreign currency transactions 1,023,825
-----------
Net realized gain on investments and foreign currency
transactions $ 8,783,757
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 3,766,929
Translation of assets and liabilities in foreign currencies (627,551)
-----------
Net unrealized gain on investments and foreign currency
translation $ 3,139,378
-----------
Net realized and unrealized gain on investments and
foreign currency $11,923,135
-----------
Increase in net assets from operations $33,468,131
===========
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
-----------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 2002 2001
-----------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 21,544,996 $ 25,051,978
Net realized gain on investments and foreign currency
transactions 8,783,757 10,733,408
Net unrealized gain on investments and foreign currency
translation 3,139,378 7,839,712
------------- -------------
Increase in net assets from operations $ 33,468,131 $ 43,625,098
------------- -------------
Distributions declared to shareholders -
From net investment income $ (21,544,996) $ (25,582,314)
In excess of net investment income (3,121,476) --
------------- -------------
Total distributions declared to shareholders $ (24,666,472) $ (25,582,314)
------------- -------------
Cost of shares reacquired $ (11,350,955) $ (3,894,610)
------------- -------------
Total increase (decrease) in net assets $ (2,549,296) $ 14,148,174
Net assets:
At beginning of period 436,173,258 422,025,084
------------- -------------
At end of period (including accumulated net investment loss
of $669,705 and $910,895, respectively) $ 433,623,962 $ 436,173,258
============= =============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each year):
Net asset value - beginning of year $ 7.32 $ 7.01 $ 6.94 $ 7.50 $ 7.41
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.37 $ 0.42 $ 0.44 $ 0.43 $ 0.46
Net realized and unrealized gain (loss) on
investments and foreign currency 0.20 0.31 0.06 (0.58) 0.08
------ ------ ------ ------ ------
Total from investment operations $ 0.57 $ 0.73 $ 0.50 $(0.15) $ 0.54
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.37) $(0.43) $(0.29) $(0.40) $(0.46)
In excess of net investment income (0.05) -- -- -- (0.01)
From paid in capital -- -- (0.20) (0.06) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.42) $(0.43) $(0.49) $(0.46) $(0.47)
------ ------ ------ ------ ------
Net increase from repurchase of
capital shares $ 0.02 $ 0.01 $ 0.06 $ 0.05 $ 0.02
------ ------ ------ ------ ------
Net asset value - end of year $ 7.49 $ 7.32 $ 7.01 $ 6.94 $ 7.50
------ ------ ------ ------ ------
Per share market value - end of year $ 6.77 $ 6.59 $ 6.19 $ 5.81 $ 6.56
====== ====== ====== ====== ======
Total return at market value 9.31% 13.56% 15.24% (4.80)% 4.21%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.87% 0.90% 0.94% 0.92% 0.89%
Net investment income 4.98% 5.82% 6.35% 6.00% 6.14%
Portfolio turnover 123% 105% 151% 102% 253%
Net assets at end of year (000 Omitted) $433,624 $436,173 $422,025 $447,178 $511,861
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(S) As required, effective December 1, 2001, the trust has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended November
30, 2002 was to decrease net investment income per share by $0.02, increase net realized and unrealized gains and losses per
share by $0.02, and decrease the ratio of net investment income to average net assets by 0.33%. Per share, ratios, and
supplemental data for periods prior to December 1, 2001 have not been restated to reflect this change in presentation.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Government Markets Income Trust (the trust) is a non-diversified
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as a closed-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The trust
can invest in foreign securities. Investments in foreign securities are
vulnerable to the effects of changes in the relative values of the local
currency and the U.S. dollar and to the effects of changes in each country's
legal, political, and economic environment.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, and forward foreign
currency exchange contracts, are valued on the basis of valuations furnished
by dealers or by a pricing service with consideration to factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data, without exclusive reliance upon exchange or over-the-counter
prices. Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the
foreign currency and translated into U.S. dollars at the closing daily
exchange rate. Securities for which there are no such quotations or valuations
are valued in good faith at the direction of the Trustees.
Repurchase Agreements - The trust may enter into repurchase agreements with
institutions that the trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The trust
requires that the securities collateral in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the trust to
obtain those securities in the event of a default under the repurchase
agreement. The trust monitors, on a daily basis, the value of the collateral
to ensure that its value, including accrued interest, is greater than amounts
owed to the trust under each such repurchase agreement. The trust, along with
other affiliated entities of Massachusetts Financial Services Company (MFS),
may utilize a joint trading account for the purpose of entering into one or
more repurchase agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
Security Loans - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the trust with indemnification against Borrower default. The
trust bears the risk of loss with respect to the investment of cash
collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
At November 30, 2002, the value of securities loaned was $39,879,335. These
loans were collateralized by cash of $40,684,044 which was invested in the
following short-term obligation:
PRINCIPAL AMORTIZED COST
AMOUNT AND VALUE
-------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio 40,684,044 $40,684,044
-----------
Forward Foreign Currency Exchange Contracts - The trust may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering into these contracts from the potential inability of counterparties to
meet the terms of their contracts and from unanticipated movements in the value
of a foreign currency relative to the U.S. dollar. The trust may enter into
forward foreign currency exchange contracts for hedging purposes as well as for
non-hedging purposes. For hedging purposes, the trust may enter into contracts
to deliver or receive foreign currency it will receive from or require for its
normal investment activities. The trust may also use contracts in a manner
intended to protect foreign currency-denominated securities from declines in
value due to unfavorable exchange rate movements. For non-hedging purposes, the
trust may enter into contracts with the intent of changing the relative
exposure of the trust's portfolio of securities to different currencies to take
advantage of anticipated changes. The forward foreign currency exchange
contracts are adjusted by the daily exchange rate of the underlying currency
and any gains or losses are recorded as unrealized until the contract
settlement date. On contract settlement date, the gains or losses are recorded
as realized gains or losses on foreign currency transactions.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
Dividend and interest payments received in additional securities are recorded
on the ex-dividend or ex-interest date in an amount equal to the value of the
security on such date. Some securities may be purchased on a "when-issued" or
"forward delivery" basis, which means that the securities will be delivered to
the trust at a future date, usually beyond customary settlement time. The
trust may enter in "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 1.0%. The
trust holds, and maintains until settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or the trust
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 trusts' other assets. Unsettled TBA purchase commitments are
valued at the current market value of the underlying securities, according to
the procedures described under "Investment Valuations" above. The trust 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 trust's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the trust. This amount is shown as a reduction of total expenses on the
Statement of Operations.
Tax Matters and Distributions - The trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The trust
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, mortgage-backed securities, capital
losses, and amortization and accretion on debt securities. During the year
ended November 30, 2002, accumulated net investment loss decreased by
$3,362,666, accumulated undistributed net realized loss on investments and
foreign currency transactions increased by $3,065,058 and paid-in capital
decreased by $297,608 due to differences between book and tax accounting for
mortgage-backed securities, currency transactions, amortization and accretion
on debt securities, market discount capital losses, etc. This change had no
effect on the net assets or net asset value per share. At November 30, 2002,
accumulated net investment loss and net realized loss on investments and
foreign currency transactions under book accounting were different from tax
accounting due to temporary differences in accounting for currency
transactions.
The tax character of distributions declared for the years ended November 30,
2002 and November 30, 2001 was as follows:
NOVEMBER 30, 2002 NOVEMBER 30, 2001
-------------------------------------------------------------------------------
Distributions declared from:
Ordinary income $24,666,472 $24,788,702
Tax return of capital -- 793,612
----------- -----------
Total distributions declared $24,666,472 $25,582,314
=========== ===========
As of November 30, 2002, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $ 313,291
Capital loss carryforward (29,490,655)
Unrealized gain 9,384,343
Other temporary differences (1,243,845)
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on:
EXPIRATION DATE
------------------------------------------------------
November 30, 2002 $ (2,893,225)
November 30, 2004 (196,662)
November 30, 2005 (8,818,381)
November 30, 2007 (11,594,208)
November 30, 2008 (5,988,179)
------------
Total $(29,490,655)
============
(3) Transactions with Affiliates
Investment Adviser - The trust has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.32%
of the trust's average daily net assets and 5.33% of investment income.
The trust pays the compensation of the Independent Trustees in the form of
both a retainer and attendance fees and pays no compensation directly to its
Trustees who are officers of the investment adviser, or to officers of the
trust, all of whom receive remuneration for their services to the trust from
MFS. Certain officers and Trustees of the trust are officers or directors of
MFS and MFS Service Center, Inc. (MFSC). On January 1, 2002, the Trustees
terminated the Independent Trustee unfunded defined benefit plan for active
Trustees and converted it to an unfunded retirement benefit deferral plan for
active Trustees. Under the new plan, the unfunded pension liability was
converted into an equivalent value of notional shares of the trust that will
fluctuate with the performance of the trust. Included in Trustees'
compensation is a net decrease of $6,764 as a result of the change in the
trust's pension liability under this plan and a pension expense of $14,521 for
inactive trustees for the year ended November 30, 2002. Also included in
Trustees' compensation is a one-time settlement expense of $4,526 and a one-
time transition expense of $31,460.
Administrator - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder communications,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the trust pays MFS an administrative fee
at the following annual percentages of the trust's average daily net assets:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
Transfer Agent - MFSC acts as registrar and dividend disbursing agent for the
Trust. The agreement provides that the Trust will pay MFSC an account
maintenance fee of no more than $9.00 and a dividend services fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of pocket expenses.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
-------------------------------------------------------------------------------
U.S. government securities $438,061,562 $471,440,566
------------ ------------
Investments (non-U.S. government securities) $ 68,535,451 $ 63,021,744
------------ ------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $462,769,018
------------
Gross unrealized appreciation $ 11,078,281
Gross unrealized depreciation (1,682,287)
------------
Net unrealized appreciation $ 9,395,994
============
(5) Shares of Beneficial InterestThe trust's Declaration of Trust permits the
Trustees to issue an unlimited number of full and fractional shares of
beneficial interest. The Trustees have authorized 62,993,686 full and
fractional shares of beneficial interest. Transactions in trust shares were as
follows:
YEAR ENDED NOVEMBER 30, 2002 YEAR ENDED NOVEMBER 30, 2001
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------------------------------------------------------------------------
Treasury shares
reacquired (1,733,400) $(11,350,955) (600,200) $(3,894,610)
---------- ------------ -------- -----------
In accordance with the provisions of the trust's prospectus, 1,733,400 shares
of beneficial interest were purchased by the trust during year ended November
30, 2002 at an average price per share of $6.55 and a weighted average discount
of 9.44% per share. The trust repurchased 600,200 shares of beneficial interest
during the year ended November 30, 2001, at an average price per shares of
$6.49 and a weighted average discount of 9.09% per share.
(6) Line of Credit
The trust, and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. In addition, a commitment fee, based on the average daily unused
portion of the line of credit, is allocated among the participating funds at
the end of each quarter. The commitment fee allocated to the trust for the year
ended November 30, 2002, was $3,657. The fund trust had no borrowings during
the year.
(7) Financial Instruments
The trust trades financial instruments with off- balance-sheet risk in the
normal course of its investing activities in order to manage exposure to market
risks such as interest rates and foreign currency exchange rates. These
financial instruments include forward foreign currency exchange contracts. The
notional or contractual amounts of these instruments represent the investment
the trust has in particular classes of financial instruments and does not
necessarily represent the amounts potentially subject to risk. The measurement
of the risks associated with these instruments is meaningful only when all
related and offsetting transactions are considered.
Forward Foreign Currency Exchange Contracts
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
-------------------------------------------------------------------------------------------------------------
Sales 12/16/02 CAD 630,747 $399,000 $402,792 $ (3,792)
12/16/02 DKK 14,897,894 1,967,186 1,991,237 (24,051)
12/16/02 EUR 16,053,398 15,789,980 15,929,139 (139,159)
12/16/02 GBP 728,000 1,131,574 1,130,576 998
12/16/02 SEK 1,806,400 200,078 198,922 1,156
----------- ----------- ---------
$19,487,818 $19,652,666 $(164,848)
=========== =========== =========
Purchases 12/16/02 CAD 1,175,431 $745,535 $750,625 $ 5,090
12/16/02 DKK 3,648,503 476,269 487,655 11,386
12/16/02 EUR 2,083,588 2,029,338 2,067,460 38,122
12/16/02 GBP 245,707 389,860 381,580 (8,280)
----------- ----------- ---------
$ 3,641,002 $ 3,687,320 $ 46,318
=========== =========== =========
At November 30, 2002, forward foreign currency purchases and sales under
master netting agreements excluded above amounted to a net payable of $3,647
with Credit Suisse First Boston Corporation, $76,057 with DB Clearing Services
and $75,280 with Merrill Lynch, Pierce, Fenner & Smith.
At November 30, 2002, the trust had sufficient cash and/or securities to cover
any commitments under these contracts.
(8) Restricted Securities
The trust may invest not more than 15% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At November 30,
2002, the trust owned the following restricted security, excluding securities
issued under Rule 144A, constituting 0.5% of net assets which may not be
publicly sold without registration under the Securities Act of 1933. The trust
does not have the right to demand that such securities be registered. The value
of these securities is determined by valuations furnished by dealers or by a
pricing service, or if not available, in good faith at the direction of the
Trustees.
DATE OF PRINCIPAL
DESCRIPTION ACQUISITION AMOUNT COST VALUE
-------------------------------------------------------------------------------
Federal Housing Admin/
USGI Spring Hill,
10.375%, 2030 8/16/93 2,044,000 $2,198,843 $2,044,247
----------
(9) Change in Accounting Principle
As required, effective December 1, 2001 the fund adopted the provisions of the
AICPA Audit and Accounting Guide for Investment Companies and began amortizing
premium on debt securities. Prior to December 1, 2001, the fund did not
amortize premium on debt securities. The cumulative effect of this accounting
change had no impact on total net assets of the fund, but resulted in a
$4,368,448 decrease in cost of securities and a corresponding $4,368,448
increase in net unrealized appreciation, based on securities held by the fund
on December 1, 2001.
The effect of this change for the year ended November 30, 2002 was to decrease
net investment income by $1,420,001, increase net unrealized appreciation by
$418,264, and increase net realized gains by $1,001,737. The Statement of
Changes in Net Assets and Financial Highlights for prior periods has not been
restated to reflect this change in presentation.
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Government Markets Income Trust:
We have audited the accompanying statement of assets and liabilities of MFS
Government Markets Income Trust, including the portfolio of investments, as of
November 30, 2002, 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 Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of November 30, 2002,
by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Government Markets Income Trust as of November 30, 2002, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the 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
January 8, 2003
-------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (Unaudited)
-------------------------------------------------------------------------------
IN JANUARY 2003, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 2002.
-------------------------------------------------------------------------------
MFS(R) GOVERNMENT MARKETS INCOME TRUST
The following tables present certain information regarding the Trustees and
officers of the Trust, including their principal occupations, which, unless
specific dates are shown, are of more than five years' duration, although the
titles may not have been the same throughout.
NAME, AGE, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION, AND OTHER DIRECTORSHIPS(1)
TRUSTEES
JEFFREY L. SHAMES* (born 06/02/55) Trustee, ABBY M. O'NEILL (born 04/27/28) Trustee
Chairman Private investor; Rockefeller Financial Services,
Massachusetts Financial Services Company, Chairman Inc. (investment advisers), Chairman and Chief
Executive Officer
JOHN W. BALLEN* (born 09/12/59) Trustee and
President LAWRENCE T. PERERA (born 06/23/35) Trustee
Massachusetts Financial Services Company, Chief Hemenway & Barnes (attorneys), Partner
Executive Officer and Director
WILLIAM J. POORVU (born 04/10/35) Trustee
KEVIN J. PARKE* (born 12/14/59) Trustee Private investor; Harvard University Graduate
Massachusetts Financial Services Company, Chief School of Business Administration, Class of 1961,
Investment Officer, President and Director Adjunct Professor in Entrepreneurship Emeritus;
CBL & Associates Properties, Inc. (real estate
LAWRENCE H. COHN, M.D. (born 03/11/37) Trustee investment trust), Director
Brigham and Women's Hospital, Chief of Cardiac
Surgery; Harvard Medical School, Professor of J. DALE SHERRATT (born 09/23/38) Trustee
Surgery Insight Resources, Inc. (acquisition planning
specialists), President; Wellfleet Investments
THE HON. SIR J. DAVID GIBBONS, KBE (born 06/15/27) (investor in health care companies), Managing
Trustee General Partner (since 1993); Cambridge
Edmund Gibbons Limited (diversified holding Nutraceuticals (professional nutritional
company), Chief Executive Officer; Colonial products), Chief Executive Officer (until May
Insurance Company Ltd., Director and Chairman; 2001); Paragon Trade Brands, Inc. (disposable
Bank of Butterfield, Chairman (until 1997) consumer products), Director
WILLIAM R. GUTOW (born 09/27/41) Trustee ELAINE R. SMITH (born 04/25/46) Trustee
Private investor and real estate consultant; Independent health care industry consultant
Capitol Entertainment Management Company (video
franchise), Vice Chairman WARD SMITH (born 09/13/30) Trustee
Private investor; Sundstrand Corporation
J. ATWOOD IVES (born 05/01/36) Trustee (manufacturer of highly engineered products for
Private investor; KeySpan Corporation (energy industrial and aerospace applications), Director
related services), Director; Eastern Enterprises (until June 1999)
(diversified services company), Chairman, Trustee
and Chief Executive Officer (until November 2000)
(1) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
* "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the 1940
Act) which is the principal federal law governing investment companies like the Trust. The address of MFS is
500 Boylston Street, Boston, Massachusetts 02116.
OFFICERS
JEFFREY L. SHAMES (born 06/02/55) Trustee, RICHARD M. HISEY (born 08/29/58) Treasurer
Chairman Massachusetts Financial Services Company, Senior
Massachusetts Financial Services Company, Chairman Vice President (since July 2002); The Bank of New
York, Senior Vice President (September 2000 to
JOHN W. BALLEN (born 9/12/59) Trustee and July 2002); Lexington Global Asset Managers, Inc.,
President Executive Vice President and General Manager
Massachusetts Financial Services Company, Chief (prior to September 2000)
Executive Officer and Director
ELLEN MOYNIHAN (born 11/13/57) Assistant Treasurer
JAMES R. BORDEWICK, JR. (born 03/06/59) Assistant Massachusetts Financial Services Company, Vice
Secretary and Assistant Clerk President
Massachusetts Financial Services Company, Senior
Vice President and Associate General Counsel JAMES O. YOST (born 06/12/60) Assistant Treasurer
Massachusetts Financial Services Company, Senior
STEPHEN E. CAVAN (born 11/06/53) Secretary and Vice President
Clerk
Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Secretary
ROBERT R. FLAHERTY (born 09/18/63)
Assistant Treasurer Massachusetts Financial
Services Company, Vice President (since August
2000); UAM Fund Services, Senior Vice President
(prior to August 2000)
The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are elected for
fixed terms. This means that each Trustee will be elected to hold office until his or her successor is chosen
and qualified or until his or her earlier death, resignation, retirement or removal. Each officer will hold
office until his or her successor is chosen and qualified, or until he or she retires, resigns or is removed
from office.
Messrs. Shames, Cohn, Gibbons, Sherratt and Smith, and Ms. O'Neill have served in their capacity as Trustee of
the Trust continuously since originally elected or appointed. Messrs. Ballen, Gutow, Ives, Perera and Poorvu,
and Ms. Smith were elected by shareholders and have served as Trustees of the Trust since January 1, 2002. Mr.
Parke has served as Trustee of the Trust since January 1, 2002.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 117 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request, by calling 1-800-225-2606.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGER
Peter C. Vaream+
CUSTODIANS
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
JP Morgan Chase Bank
One Chase Manhattan Plaza
New York, NY 10081
AUDITORS
Deloitte & Touche LLP
TRANSFER AGENT, REGISTRAR AND DIVIDEND
DISBURSING AGENT
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-8016
1-800-637-2304
+ MFS Investment Management
MFS(R) GOVERNMENT MARKETS ---------------
INCOME TRUST PRSRT STD
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
---------------
500 Boylston Street
Boston, MA 02116-3741
(C)2003 MFS Investment Management(R).
500 Boylston Street, Boston, MA 02116.
MGF-ANN 1/03 42M