[logo] M F S(R)
INVESTMENT MANAGEMENT
MFS(R) GOVERNMENT
MARKETS INCOME TRUST
ANNUAL REPORT o NOVEMBER 30, 2001
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Results of Shareholder Meeting ............................................ 10
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 15
Notes to Financial Statements ............................................. 19
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
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
As I write this letter, it's been just over three months since the events of
September 11, among the most tragic events ever to occur on U.S. soil. The
human dimensions of September 11 have rightfully overshadowed all else, but
the terrorist attacks were also unprecedented in terms of a market event.
POTENTIAL RECOVERY PUSHED OUT
Prior to September 11, we felt that the market was approaching bottom and
might be on a slow, uneven, but upward trend toward recovery. On September 11
political uncertainty was added to the issues buffeting the economy, and the
market subsequently hit new lows. Due largely to a decrease in air travel and
the ripple effects in a large number of industries, companies announced a huge
number of employee layoffs in the weeks following the attacks.
In late November, the National Bureau of Economic Research validated what many
of us had sensed for some time: it declared that the U.S. economy had been in
a recession since last March. (A recession is generally defined as two or more
consecutive quarters of declining growth in the gross domestic product, or
GDP.) As I write this, the consensus among corporate financial officers seems
to be that GDP growth will remain negative in the fourth quarter and through
the middle of 2002.(1)
We think the implication for investors is that the current economic downturn may
last longer than we had previously expected, with a potential recovery pushed
out farther into the future. However, it is important to note that the equity
market had experienced a significant downturn prior to September 11, with many
stocks already factoring in a slow growth environment.
ENCOURAGING SIGNS AMID A DOWNTURN
We do, however, have a strong belief that the U.S. economy and economies
around the globe will indeed recover over time and perhaps emerge even
stronger. In our view, the U.S. economy is already demonstrating a tremendous
resiliency. After an initial slide when the market reopened after September
11, we witnessed a market rally that seemed amazing in light of the enormity
of the tragedy: as of December 17, the Dow Jones Industrial Average is up
20.1%, the Standard & Poor's 500 Stock Index is up 17.5%, and the NASDAQ
Composite Index is up 39.6%, compared to their post-September 11 lows. And all
three indices are above their September 10 levels.(2)
Prior to September 11, corporations were responding to the economic slowdown
by trimming capacity, expenses, and payrolls, and the attacks accelerated that
trend. Our experience in previous downturns has been that this type of
environment, although painful in the short term, allows the best firms in
various industries to emerge leaner and stronger, setting the stage for a
healthier economy. A recent example is the economic slowdown of 1990-1991, a
period that included the Gulf War. Corporate earnings fell, and the markets
witnessed a large selloff; yet a short time later we began a nearly decade-
long climb to all-time highs in both earnings and stock prices.
GOVERNMENT IS DOING ITS PART
Also encouraging is the urgency with which the U.S. government has stepped in to
bolster the economy. As of December 17, the Federal Reserve Board (the Fed) has
cut interest rates four times since the attacks, bringing rates to their lowest
levels in four decades. By decreasing the cost of borrowing money, rate cuts
encourage buying by both corporations and consumers. Rate cuts also make
interest rates on money market funds and certificates of deposit less
attractive. This may stimulate investors to move money off the sidelines and
into potentially higher-yielding investments -- such as corporate bonds and
stocks -- that may do more to drive the economy.
President Bush and Congress also seem determined to help bolster the economy,
as an economic stimulus package has been proposed and appears to be working
its way through the legislative process as of mid-December.
INVESTING IN UNCERTAIN TIMES
The events of September 11 have not changed what we do on a day-to-day basis.
Our investment approach is still based on our own in-depth, fundamental research
into companies and other issuers of securities. We remain bottom-up investors,
building our portfolios one stock or bond at a time. In equity investing, we
continue to believe that, over the long term, stock prices follow earnings. We
also remain convinced that valuation, or a stock's price in relation to factors
such as earnings and cash flow, is important. In our view, a good company
selling at an overly high price is not a good stock.
If anything, we think our investment approach is more valid than ever in the
current environment. Although September 11 changed the near-term outlook for
many companies, our experience has been that companies we believed were good
investments before that date are still, for the most part, good investments.
By lowering valuations somewhat indiscriminately across the market, the post-
attack downturn made some stocks even more attractive. From a long-term
valuation standpoint, one could argue that it may be less risky to be in the
market today than it has been in a long time.
Presently, we still see economic markets in the midst of tremendous short-term
uncertainty. But we also see the seeds of economic recovery beginning to take
root, and we believe that our fundamental, bottom-up investment process
continues to benefit long-term investors. For further guidance in these
difficult times, we believe it is critical for you to consult with your
investment professional. 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 and Chief Executive Officer
MFS Investment Management(R)
December 17, 2001
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
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(1) Source: The Wall Street Journal Online December 14, 2001.
(2) Source: Lipper Inc. and MFS research. The Dow Jones Industrial Average
(DJIA) is a price-weighted average of 30 blue-chip stocks that are
generally the leaders in their industry. The NASDAQ Composite Index is an
unmanaged, market-weighted index of all over-the-counter common stocks
traded on the National Association of Securities Dealers Automated
Quotation system. The Standard & Poor's 500 Stock Index is an unmanaged but
commonly used measure of common stock total return performance. It is not
possible to invest directly in an index.
MANAGEMENT REVIEW AND OUTLOOK
Dear Shareholders,
For the 12 months ended November 30, 2001, the trust provided a total return
of 13.56% based on its beginning and ending stock market prices and assuming
the reinvestment of any distributions paid during the period. The trust's
total return based on its net asset value (NAV) was 11.34%. During the same
period, the Salomon Brothers Medium Term (1- to 10-year) Treasury Government
Sponsored Index (the Salomon Index), an unmanaged index which includes bonds
issued by the U.S. government or by government agencies with a maturity range
greater than or equal to one year and less than 10 years, returned 8.97%. The
J.P. Morgan Non-Dollar Government Bond Index (Morgan Index), an unmanaged
aggregate of actively traded government bonds issued by 12 countries
(excluding the United States) with remaining maturities of at least one year,
returned 7.00% over the same period.
Throughout this 12-month period the Federal Reserve Board (the Fed) became
more aggressive in trying to support economic growth with a series of short-
term interest rate cuts. These moves were in response to the gradual
deceleration of the economy that began about a year ago and was further
weakened after the tragic events of September 11. These sharp declines in
short-term interest rates caused the yield curve -- a representation of the
difference between short- and long-term rates -- to steepen.
As interest rates dropped, most bond yields, in particular short-maturity bond
yields, followed suit, and their prices, which move in the opposite direction
from their yields, rose. Bond performance also was positively impacted by
strong demand as investors sought a relatively safer haven from a
disappointing stock market.
We now think negative economic factors will force the Fed to keep interest
rates lower for a period of time; therefore, yields across the entire U.S.
curve, in our opinion, are expected to go lower than present levels, with
longer maturities benefiting the most. Given this expectation, we have
invested the bulk of the Treasury portion of the trust in intermediate-term
(three- to- seven year) securities. We feel that this approach has helped the
trust's performance because, as interest rates have fallen, short- and
intermediate-term bond yields have also declined, but longer-term bond yields
have drifted a bit higher. In general, we have tended to increase duration
when interest rates have been falling and bond prices rising in order to
potentially benefit from those rising prices. Looking forward, we will
continue to evaluate our strategy as interest rates change.
Government agency securities -- those issued by the Federal National Mortgage
Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal Home
Loan Bank (FHLB), and Sallie Mae -- were also strong performers during the
period. Agency securities had come under pressure late last year and early this
year when some government officials questioned the implicit government backing
enjoyed by some agencies. However, agency securities recovered and offered solid
performance once some of the issues were addressed. We had anticipated that
these concerns would lessen and were able to buy agency securities at attractive
prices and yields.
Outside the United States, most developed countries have experienced global
economic weakness, with Japan suffering the most. We've invested primarily in
the dollar-bloc countries, including New Zealand, and Canada, all of which
offered more-attractive, higher yields than did the United States. In
addition, we've invested a small portion of the portfolio in Western Europe,
where economic growth has weakened considerably, with inflation finally
beginning to fall. We view our European holdings as a defensive position in
the unlikelihood that U.S. interest rates move significantly higher.
Emerging market bonds have been a strong-performing sector over the period,
but we have become more cautious with regard to this sector, given the overall
global economic slowdown and the decline in oil prices. We continued to put
our small emerging market holdings in countries that have performed well
because their geopolitical situations were improving and, as a result, they
became upgrade candidates. Russia and Mexico are two examples in this
category. (When a bond's rating is upgraded the bond is considered less risky
and, therefore may its price rises.)
Going forward, we may continue to favor Treasuries and government agencies. We
do not anticipate increasing mortgaged-backed securities in the near future
because we see them as less attractive, given expected increases in
refinancings and their more defensive nature. We believe the U.S. economic
recovery will take longer than initially anticipated and that inflation will
remain low because of this. An economic recovery would suggest a change in our
interest-rate outlook, and we could expect to make portfolio changes
accordingly. While the timing of an economic recovery is difficult to
pinpoint, we will continue to monitor the situation closely and make changes
to our strategy as necessary.
Respectfully,
/s/ Stephen C. Bryant /s/ Steven E. Nothern
Stephen C. Bryant Steven E. Nothern
Portfolio Manager Portfolio Manager
The opinions expressed in this report are those of MFS 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 MANAGERS' PROFILES
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STEPHEN C. BRYANT IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R) (MFS(R)) AND PORTFOLIO MANAGER OF OUR GLOBAL FIXED-INCOME
INSTITUTIONAL PRODUCTS AND THE GLOBAL GOVERNMENTS PORTFOLIOS OF OUR
MUTUAL FUNDS, VARIABLE ANNUITY PRODUCTS, AND CLOSED-END FUNDS. HE JOINED
MFS IN 1987 AS ASSISTANT VICE PRESIDENT. HE WAS NAMED VICE PRESIDENT IN
1989, PORTFOLIO MANAGER IN 1992, AND SENIOR VICE PRESIDENT IN 1993.
STEVE IS A GRADUATE OF WESLEYAN UNIVERSITY.
STEVEN E. NOTHERN, CFA, IS SENIOR VICE PRESIDENT OF MFS INVESTMENT
MANAGEMENT(R) (MFS(R)). HE IS PORTFOLIO MANAGER OF THE GOVERNMENT
SECURITIES PORTFOLIOS OF OUR MUTUAL FUNDS, VARIABLE ANNUITIES, OFFSHORE
INVESTMENT PRODUCTS, AND CLOSED-END FUNDS. STEVE JOINED MFS IN 1986 IN
THE FIXED INCOME DEPARTMENT AND WAS NAMED VICE PRESIDENT IN 1989,
PORTFOLIO MANAGER IN 1991, AND SENIOR VICE PRESIDENT IN 1993. HE IS A
GRADUATE OF MIDDLEBURY COLLEGE AND HOLDS A MASTER OF BUSINESS
ADMINISTRATION DEGREE FROM BOSTON UNIVERSITY. HE HOLDS THE CHARTERED
FINANCIAL ANALYST (CFA) DESIGNATION AND IS A MEMBER OF THE BOSTON
SECURITY ANALYSTS SOCIETY, INC.
ALL PORTFOLIO MANAGERS AT MFS ARE SUPPORTED BY AN INVESTMENT STAFF OF
OVER 160 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A GLOBAL,
SECURITY-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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NUMBER OF SHAREHOLDERS
As of November 30, 2001, our records indicate that there are 6,925 registered
shareholders and approximately 24,500 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the trust, please write
or call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
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: Seeks 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, 2001)
NET ASSET VALUE PER SHARE
November 30, 2000 $7.01
November 30, 2001 $7.32
NEW YORK STOCK EXCHANGE PRICE
November 30, 2000 $6.19
March 20, 2001 (high)* $6.80
December 4, 2000 (low)* $6.25
November 30, 2001 $6.59
* For the year December 1, 2000, through November 30, 2001.
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RISK CONSIDERATIONS
Investments in foreign 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.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
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.
The portfolio may invest in derivative securities, which may include futures
and options. These types of instruments can increase price fluctuation.
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 from $100 to
$2,500 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 MEETING (Unaudited)
At the annual meeting of shareholders of MFS Government Markets
Income Trust, which was held on October 31, 2001, 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 90,629,394.638 2,012,133.846
John W. Ballen 90,645,430.184 1,996,098.300
Lawrence H. Cohn 90,626,888.617 2,014,639.867
Marshall N. Cohan 90,557,312.638 2,084,215.846
J. David Gibbons 90,564,917.945 2,076,610.539
William R. Gutow 90,641,208.638 2,000,319.846
J. Atwood Ives 90,630,597.806 2,010,930.678
Abby M. O'Neill 90,567,666.399 2,073,862.085
Lawrence T. Perera 90,619,040.184 2,022,488.300
William J. Poorvu 90,625,891.184 2,015,637.300
Arnold D. Scott 90,653,731.380 1,987,797.104
J. Dale Sherratt 90,645,340.304 1,996,188.180
Elaine R. Smith 90,619,687.926 2,021,840.558
Ward Smith 90,585,896.380 2,055,632.104
ITEM 2. The authorization of the Trustees to adopt an Amended and Restated
Declaration of Trust.
NUMBER OF SHARES
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For 66,607,065.140
Against 11,241,540.086
Abstain 1,054,378.946
Broker Non-votes 14,714,025.000
ITEM 3. The amendment or removal of certain fundamental investment policies.
NUMBER OF SHARES
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For 63,835,236.872
Against 10,969,784.554
Abstain 989,318.058
Broker Non-votes 16,847,189.000
ITEM 4. The approval to change the trust's investment policy relating to
investments in U.S. government securities from fundamental
to nonfundamental.
NUMBER OF SHARES
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For 63,430,985.920
Against 11,279,403.474
Abstain 1,083,950.090
Broker Non-Votes 16,847,189.000
ITEM 5. The approval of a new investment advisory agreement with Massachusetts
Financial Services Company.
NUMBER OF SHARES
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For 89,326,439.063
Against 2,360,772.945
Abstain 954,316.476
ITEM 6. 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, 2001.
NUMBER OF SHARES
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For 90,410,456.189
Against 1,648,427.896
Abstain 582,644.399
PORTFOLIO OF INVESTMENTS -- November 30, 2001
Bonds - 98.9%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Bonds - 87.9%
Financial Services - 0.1%
Pemex Project Funding Master Trust, 8.5s, 2008 $ 600 $ 624,750
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U.S. Government Agencies - 52.6%
FHA/USGI Spring Garden, 10.375s, 2030 $ 2,097 $ 2,097,222
FHLB, 4.875s, 2004 7,500 7,736,700
FHLMC, 4.5s, 2004 2,500 2,555,850
FHLMC, 5.5s, 2006 21,100 21,960,458
FHLMC, 5.75s, 2010 2,500 2,380,044
FHLMC, 7.5s, 2027 - 2028 2,707 2,817,492
Financing Corp., 9.8s, 2018 5,000 6,981,250
Financing Corp., 10.35s, 2018 9,500 13,855,180
Financing Corp., 10.7s, 2017 8,500 12,581,360
FNMA, 6s, 2008 - 2099 8,000 8,317,170
FNMA, 6.5s, 2016 - 2031 19,464 19,944,929
FNMA, 6.956s, 2007 5,647 6,094,211
FNMA, 7s, 2029 - 2099 21,600 22,238,280
FNMA, 7.5s, 2015 - 2015 11,512 12,091,969
FNMA, 8.5s, 2027 10,100 10,939,512
GNMA, 6.5s, 2028 - 2029 20,417 20,760,921
GNMA, 7s, 2022 - 2029 13,371 13,857,778
GNMA, 7.5s, 2022 - 2027 14,162 14,774,851
GNMA TBA, 7s, 2022 - 2025 762 786,104
Private Export Funding Corp., 7.01s, 2004 3,380 3,639,787
Sallie Mae, 5s, 2004 5,000 5,165,600
SBA, 6.34s, 2021 1,969 2,029,912
SBA, 6.35s, 2021 2,564 2,645,659
SBA, 6.44s, 2021 2,000 2,072,206
SBA, 6.625s, 2021 2,000 2,090,871
SBA, 8.875s, 2011 1,413 1,565,997
U.S. Department of Housing & Urban Development, 6.36s, 2016 1,580 1,612,340
U.S. Department of Housing & Urban Development, 6.59s, 2016 5,612 5,711,501
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$229,305,154
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U.S. Treasury Obligations - 35.2%
U.S. Treasury Bonds, 5.375s, 2031 $ 10,250 $ 10,413,385
U.S. Treasury Bonds, 6.25s, 2030 3,000 3,353,430
U.S. Treasury Bonds, 6.875s, 2025 17,500 20,505,100
U.S. Treasury Bonds, 8.875s, 2017 6,000 8,162,820
U.S. Treasury Bonds, 10.375s, 2009 14,600 18,270,698
U.S. Treasury Bonds, 11.875s, 2003 17,000 19,887,280
U.S. Treasury Bonds, 12s, 2013 12,500 17,712,875
U.S. Treasury Bonds, 9.875s, 2015 26,000 37,513,060
U.S. Treasury Notes, 5.75s, 2010 1,215 1,302,140
U.S. Treasury Notes, 5.875s, 2004 15,500 16,560,820
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$153,681,608
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Total U.S. Bonds $383,611,512
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Foreign Bonds - 11.0%
Bulgaria - 0.4%
National Republic of Bulgaria, 4.562s, 2011 $ 74 $ 62,129
National Republic of Bulgaria, 4.563s, 2012 234 201,532
National Republic of Bulgaria, 4.563s, 2024 1,879 1,580,709
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$ 1,844,370
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Canada - 4.1%
Government of Canada, 5.75s, 2006 CAD 5,929 $ 3,976,193
Government of Canada, 5.25s, 2008 9,661 9,766,566
Government of Canada, 5.5s, 2009 6,344 4,147,770
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$ 17,890,529
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Dominican Republic - 0.3%
Dominican Republic, 9.5s, 2006## $ 1,091 $ 1,092,366
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Germany - 3.0%
Federal Republic of Germany, 4.5s, 2009 EUR 3,390 $ 3,035,844
Federal Republic of Germany, 4.75s, 2008 11,142 10,163,062
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$ 13,198,906
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Kazakhstan - 0.1%
KazTransOil Co., 8.5s, 2006 (Oil)## $ 288 $ 273,600
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Mexico - 0.9%
BBVA Bancomer Capital Tust I, 10.5s, 2011 (Banks &
Credit Cos.)## $ 872 $ 959,200
Bepensa S.A., 9.75s, 2004 (Food & Beverage Products) 221 227,078
Petroleos Mexicanos, 9.375s, 2008 1,072 1,165,800
United Mexican States, 8.375s, 2011 666 685,647
United Mexican States, 11.5s, 2026 707 884,103
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$ 3,921,828
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New Zealand - 0.4%
Government of New Zealand, 8s, 2006 NZD 3,999 $ 1,806,270
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Panama - 0.1%
Republic of Panama, 4.625s, 2016 $ 505 $ 398,367
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Peru - 0.1%
Republic of Peru, 4s, 2017 $ 656 $ 453,545
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Russia - 0.3%
Ministry of Finance Russia, 3s, 2003 $ 1,346 $ 1,211,400
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South Korea - 0.4%
Hanvit Bank, 12.75s, 2010 (Banks and Credit Cos.)## $ 1,608 $ 1,760,760
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Spain - 0.9%
Kingdom of Spain, 7s, 2005 $ 3,600 $ 3,921,329
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United Kingdom
United Kingdom Treasury, 6.75s, 2004 GBP 5 $ 7,565
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Total Foreign Bonds $ 47,780,835
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Total Bonds (Identified Cost, $425,349,758) $431,392,347
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Warrants
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SHARES
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Republic of Venezuela* 37,500 $ --
United Mexican States* 1,354,000 4,739
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Total Warrants (Identified Cost, $0) $ 4,739
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Short-Term Obligations - 5.7%
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PRINCIPAL AMOUNT
(000 OMITTED)
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mm
American General Corp., due 12/03/01 $ 162 $ 161,981
American General Finance Corp., due 12/03/01 193 192,977
Bank of America Corp., due 12/03/01 661 661,000
Edison Asset Securitization LLC, due 12/03/01 590 589,930
FHLB, due 12/12/01 7,450 7,445,538
Ford Motor Credit Corp., due 12/13/01 8,900 8,892,702
General Electric Capital Corp., due 12/03/01 773 772,909
New Center Asset Trust, due 12/03/01 708 707,916
Sallie Mae Discount Note, due 12/11/01 5,250 5,247,215
--------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 24,672,168
--------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $450,021,926) $456,069,254
Other Assets, Less Liabilities - (4.6)% (19,895,996)
--------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $436,173,258
--------------------------------------------------------------------------------------------------------
* Non-income producing security.
## SEC Rule 144A restriction.
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.
AUD = Australian Dollars GBP = British Pounds
CAD = Canadian Dollars JPY = Japanese Yen
DKK = Danish Kroner NZD = New Zealand Dollars
EUR = Euro
See notes to financial statements.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
-------------------------------------------------------------------------------
NOVEMBER 30, 2001
-------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $450,021,926) $456,069,254
Investment of cash collateral for securities loaned
(identified cost, $97,712,328) 97,712,328
Cash 245
Net receivable for forward foreign currency exchange
contracts 1,960,819
Receivable for investments sold 4,758,693
Interest receivable 4,597,389
------------
Total assets $565,098,728
------------
Liabilities:
Payable for investments purchased $ 26,650,503
Payable for fund shares reacquired 554,585
Collateral for securities loaned, at value 97,712,328
Payable to dividend disbursing agent 1,911,380
Net payable for forward foreign currency exchange
contracts 83,763
Net payable for forward foreign currency exchange
contracts subject to master netting agreements 1,532,026
Payable to affiliates -
Management fee 8,035
Transfer and dividend disbursing agent fee 25,301
Accrued expenses and other liabilities 447,549
------------
Total liabilities $128,925,470
------------
Net assets $436,173,258
============
Net assets consist of:
Paid-in capital $466,309,391
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 6,402,379
Accumulated net realized loss on investments and foreign
currency transactions (35,627,617)
Accumulated net investment loss (910,895)
------------
Total $436,173,258
============
Shares of beneficial interest outstanding (63,046,686
shares authorized, less 3,423,931 treasury shares) 59,622,755
==========
Net asset value per share (net assets / shares of
beneficial interest outstanding) $7.32
=====
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Operations
-------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 2001
-------------------------------------------------------------------------------
Net investment income:
Interest income $ 28,877,922
Dividends 26,148
------------
Total investment income $ 28,904,070
------------
Expenses -
Management fee $ 2,916,377
Trustees' compensation 139,610
Transfer and dividend disbursing agent fee 155,645
Administrative fee 47,333
Investor communication expense 211,426
Custodian fee 177,441
Postage 33,396
Auditing fees 37,600
Printing 48,260
Legal fees 11,243
Miscellaneous 109,538
------------
Total expenses $ 3,887,869
Fees paid indirectly (35,777)
------------
Net expenses $ 3,852,092
------------
Net investment income $ 25,051,978
------------
Realized and unrealized gain on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 12,614,923
Written option transactions 105,965
Foreign currency transactions (1,987,480)
------------
Net realized gain on investments and foreign currency
transactions $ 10,733,408
------------
Change in unrealized appreciation -
Investments $ 5,883,820
Written options 245,330
Translation of assets and liabilities in foreign currencies 1,710,562
------------
Net unrealized gain on investments and foreign currency
translation $ 7,839,712
------------
Net realized and unrealized gain on investments and
foreign currency $ 18,573,120
------------
Increase in net assets from operations $ 43,625,098
============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
----------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 2001 2000
----------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 25,051,978 $ 27,209,398
Net realized gain (loss) on investments and foreign
currency transactions 10,733,408 (14,346,045)
Net unrealized gain on investments and foreign currency
translation 7,839,712 17,939,494
------------ ------------
Increase in net assets from operations $ 43,625,098 $ 30,802,847
------------ ------------
Distributions declared to shareholders -
From net investment income $(25,582,314) $(18,111,821)
From paid-in capital --
(12,251,962)
------------ ------------
Total distributions declared to shareholders $(25,582,314) $(30,363,783)
------------ ------------
Cost of shares reacquired $ (3,894,610) $(25,591,692)
------------ ------------
Total increase (decrease) in net assets $ 14,148,174 $(25,152,628)
Net assets:
At beginning of year 422,025,084 447,177,712
------------ ------------
At end of year (including accumulated undistributed net
investment income (loss) of $(910,895) and $947,831,
respectively) $436,173,258 $422,025,084
============ ============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 2001 2000 1999 1998 1997
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each year):
Net asset value - beginning of year $ 7.01 $ 6.94 $ 7.50 $ 7.41 $ 7.56
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.42 $ 0.44 $ 0.43 $ 0.46 $ 0.49
Net realized and unrealized gain (loss)
on investments and foreign currency 0.31 0.06 (0.58) 0.08 (0.14)
------ ------ ------ ------ ------
Total from investment operations $ 0.73 $ 0.50 $(0.15) $ 0.54 $ 0.35
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.43) $(0.29) $(0.40) $(0.46) $(0.49)
In excess of net investment income -- -- -- (0.01) (0.03)
From paid in capital -- (0.20) (0.06) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.43) $(0.49) $(0.46) $(0.47) $(0.52)
------ ------ ------ ------ ------
Net increase from repurchase of
capital shares $ 0.01 $ 0.06 $ 0.05 $ 0.02 $ 0.02
------ ------ ------ ------ ------
Net asset value - end of year $ 7.32 $ 7.01 $ 6.94 $ 7.50 $ 7.41
------ ------ ------ ------ ------
Per share market value - end of year $6.590 $6.188 $5.813 $6.563 $6.688
====== ====== ====== ====== ======
Total return at market value 13.56% 15.24% (4.80)% 4.21% 6.91%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.90% 0.94% 0.92% 0.89% 0.94%
Net investment income 5.82% 6.35% 6.00% 6.14% 6.56%
Portfolio turnover 105% 151% 102% 253% 248%
Net assets at end of year (000 Omitted) $436,173 $422,025 $447,178 $511,861 $524,580
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Government Markets Income Trust (the trust) is organized as a
Massachusetts business trust and is registered under the Investment Company
Act of 1940, as amended, as a non-diversified closed-end management investment
company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The trust
can invest in 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, forward foreign
currency exchange contracts, and swap agreements, 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. Options, and options on futures contracts listed on commodities
exchanges are reported at market value using closing settlement prices. Over-
the-counter options on securities are valued by brokers. Over-the-counter
currency options are valued through the use of a pricing model which takes
into account foreign currency exchange spot and forward rates, implied
volatility, and short-term repurchase rates. Securities for which there are no
such quotations or valuations are valued in good faith at the direction of the
Trustees.
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.
Written Options - The trust may write call or put options in exchange for a
premium. The premium is initially recorded as a liability, which is
subsequently adjusted to the current value of the option contract. When a
written option expires, the trust realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the trust. The trust, as writer of an
option, may have no control over whether the underlying securities may be sold
(call) or purchased (put) and, as a result, bears the market risk of an
unfavorable change in the price of the securities underlying the written
option. In general, written call options may serve as a partial hedge against
decreases in value in the underlying securities to the extent of the premium
received. Written options may also be used as part of an income producing
strategy reflecting the view of the trust's management on the direction of
interest rates.
Security Loans - State Street Bank and Trust Company ("State Street") and
Chase Manhattan Bank ("Chase"), as lending agents, 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 and Chase 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 agents. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust and the lending agents. 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, 2001, the value of securities loaned was $95,766,676. These
loans were collateralized by cash of $97,712,328, which was invested in the
following short-term obligations:
PRINCIPAL AMORTIZED COST
AMOUNT AND VALUE
-------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio $97,712,328 $97,712,328
-----------
Total investments of cash collateral for
securities loaned $97,721,328
-----------
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 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 discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. 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 trust's 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 will adopt the provisions of the AICPA Audit and Accounting Guide
for Investment Companies, as revised, effective for fiscal years beginning
after December 15, 2000. As required, the trust will begin amortizing premiums
on debt securities effective December 1, 2001. Prior to this date, the trust
did not amortize premiums on debt securities. The cumulative effect of this
accounting change will have no impact on the total net assets of the trust.
The impact of this accounting change has not been determined, but will result
in a decrease to cost of securities and a corresponding increase in net
unrealized appreciation.
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, derivatives,
real estate investment trusts, defaulted bonds, capital losses, and
amortization and accretion on debt securities. During the year ended
November 30, 2001, accumulated net investment loss increased by $1,328,392,
accumulated undistributed net realized loss on investments and foreign
currency transactions decreased by $2,122,004, and paid-in capital decreased
by $793,612 due to differences between book and tax accounting for currency
transactions. This change had no effect on the net assets or net asset value
per share.
At November 30, 2001, the trust, for federal income tax purposes, had a
capital loss carryforward of $35,625,238 which may be applied against any net
taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on:
EXPIRATION DATE AMOUNT
------------------------------------------------------
November 30, 2002 $ 9,027,808
November 30, 2004 196,662
November 30, 2005 8,818,381
November 30, 2007 11,594,208
November 30, 2008 5,988,179
-----------
Total $35,625,238
===========
(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, or
0.85% per annum of average daily net assets. The effective rate for the year
ended November 30, 2001 was 0.68%.
The trust 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). Included in Trustees' compensation is a net periodic pension
expense of $46,160 for the year ended November 30, 2001.
Administrator - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder servicing,
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 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 $408,906,495 $391,698,699
------------ ------------
Investments (non-U.S. government securities) $ 60,288,840 $ 51,324,399
------------ ------------
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 $450,024,306
------------
Gross unrealized appreciation $ 10,027,696
Gross unrealized depreciation (3,982,748)
------------
Net unrealized appreciation $ 6,044,948
============
(5) Shares of Beneficial Interest
The trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. The Trustees have
authorized 63,046,686 full and fractional shares of beneficial interest.
Transactions in trust shares were as follows:
YEAR ENDED NOVEMBER 30, 2001 YEAR ENDED NOVEMBER 30, 2000
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------
Shares issued to
shareholders in $ $
reinvestment of
distributions -- -- -- --
Treasury shares
reacquired (600,200) (3,894,610) (4,231,200) (25,591,692)
-------- ----------- ---------- ------------
Net decrease (600,200) $(3,894,610) (4,231,200) $(25,591,692)
======== =========== ========== ============
In accordance with the provisions of the trust's prospectus, 600,200 shares of
beneficial interest were purchased by the trust during year ended November 30,
2001, at an average price per share of $6.49 and a weighted average discount
of 9.09% per share. The trust repurchased 4,231,200 shares of beneficial
interest during the year ended November 30, 2000, at an average price per
share of $6.05 and a weighted average discount of 12.26% per share.
(6) Line of Credit
The trust and other affiliated funds participate in a $1.225 billion unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. A commitment fee of $4,868 which is based on the average daily unused
portion of the line of credit is included in miscellaneous expense. The trust,
series had no significant borrowings during the year.
(7) Financial Instruments
The trust trades financial instruments with off-balance-sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates. These
financial instruments include written options and forward foreign currency
exchange contracts. The notional or contractual amounts of these instruments
represent the investment the trust has in particular classes of financial
instruments and does not necessarily represent the amounts potentially subject
to risk. The measurement of the risks associated with these instruments is
meaningful only when all related and offsetting transactions are considered.
Written Option Transactions
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
-----------------------------------------------------------------------------
Outstanding, beginning of year 2 $ 264,232
Options written 3 522,475
Options terminated in closing transactions (3) (487,056)
Options exercised -- --
Options expired (2) (299,651)
-- ---------
Outstanding, end of year -- $ --
-- ---------
At November 30, 2001, the trust had sufficient cash and/or securities at least
equal to the value of the written options.
Forward Foreign Currency Exchange Contracts
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------
Sales 12/18/01 AUD 108,815 $ 55,822 $ 56,544 $ (722)
12/18/01 EUR 22,358,723 20,626,299 20,012,684 613,615
12/18/01 GBP 73,154 107,156 104,145 3,011
12/18/01 JPY 3,503,548,805 29,813,649 28,469,456 1,344,193
----------- ----------- ----------
$50,602,926 $48,642,829 $1,960,097
=========== =========== ==========
Purchases 12/18/01 AUD 108,815 $ 56,845 $ 56,544 $ (301)
12/18/01 CAD 2,104,161 1,343,160 1,339,309 (3,851)
12/18/01 DKK 3,648,503 444,614 438,859 (5,755)
12/18/01 - 3/19/02 EUR 7,489,032 6,771,865 6,698,913 (72,952)
12/18/01 NZD 39,709 16,678 16,496 (182)
----------- ----------- ----------
$ 8,633,162 $ 8,550,121 $ (83,041)
=========== =========== ==========
At November 30, 2001, forward foreign currency purchases and sales under
master netting agreements excluded above amounted to a net payable of $469,358
with CS First Boston, $1,005,432 with DB Clearing Services, $41,711 with
Merrill Lynch, Pierce, Fenner & Smith and with $15,525 with UBS Warburg.
At November 30, 2001, the trust had sufficient cash and/or securities to cover
any commitments under these contracts.
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, 2001, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States 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, 2001,
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, 2001, 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 10, 2002
-------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
-------------------------------------------------------------------------------
IN JANUARY 2002, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 2001.
-------------------------------------------------------------------------------
MFS(R) GOVERNMENT MARKETS INCOME TRUST
TRUSTEES INVESTMENT ADVISER
John W. Ballen* - President, MFS Investment Massachusetts Financial
Management Services Company
500 Boylston Street
Lawrence H. Cohn, M.D.+(2) - Chief of Cardiac Boston, MA 02116-3741
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School CHAIRMAN AND PRESIDENT
Jeffrey L. Shames*
The Hon. Sir J. David Gibbons, KBE+ (2) - Chief
Executive Officer, Edmund Gibbons Ltd.; PORTFOLIO MANAGERS
Chairman, Colonial Insurance Company, Ltd. Stephen C. Bryant*
Steven E. Nothern*
William R. Gutow+(1) - Private Investor and
Real Estate Consultant; Vice Chairman, TREASURER
Entertainment Management Company (video James O. Yost*
franchise)
ASSISTANT TREASURERS
J. Atwood Ives+(2) - Private Investor Mark E. Bradley*
Robert R. Flaherty*
Abby M. O'Neill+(2) - Private Investor Ellen Moynihan*
Kevin R. Parke* - Chief Investment Officer and SECRETARY
Executive Vice President, MFS Investment Stephen E. Cavan*
Management
ASSISTANT SECRETARY
Lawrence T. Perera+(2) - Partner, Hemenway & James R. Bordewick, Jr.*
Barnes (attorneys)
TRANSFER AGENT, REGISTRAR AND
William J. Poorvu+(1) - Adjunct Professor, DIVIDEND DISBURSING AGENT
Harvard University Graduate School of Business State Street Bank and Trust Company
Administration c/o MFS Service Center, Inc.
P.O. Box 9024
Jeffrey L. Shames* - Chairman and Chief Boston, MA 02205-9824
Executive Officer, MFS Investment Management 1-800-637-2304
J. Dale Sherratt+(1) - President, Insight CUSTODIAN
Resources, Inc. (acquisition planning State Street Bank and Trust Company
specialists)
AUDITORS
Elaine R. Smith+(1) - Independent Consultant Deloitte & Touche LLP
Ward Smith+(1) - Private Investor
* MFS Investment Management
+ Independent Trustee
(1) Member of Audit Committee
(2) Member of Portfolio Trading Committee
MFS(R) GOVERNMENT MARKETS INCOME TRUST ------------
PRSRT STD
[logo] M F S(R) U.S. Postage
INVESTMENT MANAGEMENT Paid
MFS
500 Boylston Street ------------
Boston, MA 02116-3741
(C)2002 MFS Investment Management(R).
500 Boylston Street, Boston, MA 02116.
MGFCE-2 1/02 38.5M