[MFS INVESTMENT MANAGEMENT LOGO]
MFS(R) Government Markets Income Trust
Annual Report
for Year Ended
November 30, 1996
<PAGE>
Dear Shareholders:
While the United States enjoyed an environment of strong employment and growth
during the past 12 months, many of our major trading partners experienced
generally weak economic conditions. These conditions, coupled with favorable
fiscal and political developments, particularly in Europe, led to declining
interest rates and created opportunities for attractive total returns in many of
the international fixed-income markets in which the Trust has the flexibility to
invest. Whereas U.S. interest rates rose during the past year, interest rates in
many foreign economies declined sharply. For example, two-year U.S. Treasury
yields, which were at 5.37% on December 1, 1995, increased to 5.59% by November
30, 1996, while yields on 10-year Treasuries rose from 5.75% to 6.05%. Yields on
10-year government bonds in Italy, by way of comparison, declined from 11.43% to
7.56% over the same period. The ability to allocate up to 35% of its assets in
international fixed-income markets greatly benefited the Trust, diversifying
the risk in U.S. Treasury securities and adding to its strong total return.
The Trust's stock market price, which stood at $6.50 on November 30, 1995,
increased to $6.75 on November 30, 1996, while its net asset value (NAV)
decreased from $7.62 to $7.56, representing a total return of 12.61% based on
market price and 7.58% based on NAV.
We believe the difference in the Trust's strong market price total return
relative to its NAV return resulted in part from the Trust's innovative share
repurchase program. This program, which was implemented in April 1996,
authorizes the Trust to repurchase annually up to 10% of its outstanding shares.
The Trust pays to its shareholders with its regular monthly distribution the
difference between its NAV and its market price, which it then recaptures when
it repurchases its shares. The extra distribution paid to shareholders has added
approximately 75 basis points (0.75%) to the Trust's distribution rate at both
NAV and market price. We believe this higher distribution rate has helped
attract new investors to the Trust, which in turn has helped increase its market
price.
For much of the year, the portion of the portfolio allocated to international
securities has been maintained close to the maximum allocation of 30%. In the
portion of the portfolio allocated to the U.S. market, our strategy has been to
shift the emphasis away from Treasuries in favor of agency and mortgage-backed
securities, as we have been able to add attractive incremental yield to the
portfolio in these sectors.
U.S. Government Sector
Within the U.S. portion of the portfolio, the allocation to government-agency
and mortgage-backed pass-through securities was increased to 42%. Over the past
year, mortgage-backed securities have returned 7.15%, approximately 1.90%
greater than Treasury and government-sponsored securities with similar
maturities (although principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity). We believe there are
several factors which have helped this sector's performance. First, issues held
in the portfolio yield approximately 1.0% to 1.4% greater than their Treasury
counterparts. Given that yield spreads have remained somewhat constant over the
past year, the yield advantage has flowed through to portfolio returns. Second,
the mortgage universe is less price-sensitive than the Treasury universe, which
helped the sector maintain value during the bond market sell-off that occurred
in the early part of the year. Finally, mortgage refinancings have remained
quite low despite the strong housing market. Low refinancings give investors
confidence that expected yields will be realized for their portfolios.
Moving forward, we remain optimistic about the mortgage sector. Yield spreads
versus U.S. Treasuries are attractive relative to other sectors, foreign buyers
have emerged, and U.S. agencies continue to be aggressive and opportunistic
buyers. One factor to monitor closely is a new and vigorous refinancing wave, a
possibility that exists in an
1
<PAGE>
environment in which 10-year U.S. Treasury yields could decline below 6.0%.
Our ability to invest in both Treasury and mortgage-backed securities within a
range of maturities has proven helpful in this rapidly changing environment. The
Trust will, however, continue to adhere to its policy of avoiding any exposure
to the more volatile mortgage-derivative securities.
International Sector
Foreign bond markets turned in a very strong performance over the past year,
with each of the 15 developed foreign markets tracked by the J.P. Morgan indices
outperforming the U.S. market by a substantial margin in local currency terms.
The high-yielding European markets, including Italy (up 26.47%), Spain (up
23.41%), and Sweden (up 18.58%), led the pack, with Canada close behind. Most
yield curves steepened over the year, reflecting official rate cuts induced by
slow growth and benign inflation. The U.S. dollar appreciated sharply against
the German mark and the Japanese yen but lost ground against the Australian,
Canadian, and New Zealand dollars, as well as against the Italian lira.
The Trust's ability to invest up to 35% of its assets in foreign markets allowed
it to reap substantial benefits from their strength, with emphasis on four of
the five best-performing markets -- Italy, Spain, Australia, and Canada. The
Trust also benefited from our decision to limit exposure to foreign currencies
with the exception of the Canadian, Australian, and New Zealand dollars.
We anticipate that European markets will continue to offer the best
opportunities for capital appreciation going forward. However, this view is
becoming more balanced as European growth has accelerated and U.S. growth
appears to be slowing somewhat. Efforts to meet the fiscal austerity criteria of
the proposed European Monetary Union (EMU) imply that continental central banks
seem likely to retain a bias toward accommodative monetary policy. In this
environment, we believe the higher-yielding markets should continue to
outperform as long as the prospect of membership in the EMU remains alive. The
dollar should also remain well supported versus European currencies. Canada and
Australia continue to be attractive by virtue of their high real
(inflation-adjusted) yields and improving fundamentals. Firmer growth in the
Japanese economy makes Japanese bonds unattractive at present yield levels.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
- -----------------------
A. Keith Brodkin
Chairman and President
/s/ Stephen C. Bryant
- -----------------------
/s/ Steven E. Nothern
- -----------------------
Stephen C. Bryant and Steven E. Nothern
Portfolio Managers
December 12, 1996
2
<PAGE>
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.
Performance Summary
(For the year ended November 30, 1996)
Net Asset Value Per Share
November 30, 1995 $7.62
November 30, 1996 $7.56
New York Stock Exchange Price
November 30, 1995 $6.500
April 9, 1996 (low)* $6.125
November 25, 1996 (high)* $6.875
November 30, 1996 $6.750
*For the period December 1, 1995 through November 30, 1996.
Number of Shareholders
As of November 30, 1996, our records indicate that there are 12,956 registered
shareholders and approximately 42,000 shareholders owning Trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
Results of Shareholder Meeting
At the annual meeting of shareholders of MFS Government Markets Income Trust,
which was held on October 23, 1996, the following actions were taken:
Item 1. The election of Lawrence H. Cohn, M.D., Walter E. Robb, III, and J.
Dale Sherratt as Trustees of the Trust.
Number of Shares
Nominee For Withhold Authority
Lawrence H. Cohn, M.D. 66,882,173.920 1,306,939.296
Walter E. Robb, III 66,960,300.927 1,228,812.289
J. Dale Sherratt 66,858,029.308 1,331,083.908
Trustees continuing in office who were not subject to re-election at this
meeting are A. Keith Brodkin, Richard B. Bailey, Arnold D. Scott, Jeffrey L.
Shames, Marshall N. Cohan, The Honorable Sir J. David Gibbons, KBE, Abby M.
O'Neill, and Ward Smith.
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, 1996.
Number of Shares
For 66,933,993.964
Against 459,654.114
Abstain 795,465.138
Number of Employees
The Trust is organized as a Massachusetts business trust and is registered under
the Investment Company Act of 1940, as amended, as a closed-end,
non-diversified, management investment company and has no employees.
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MGF.
3
<PAGE>
Investment Objective and Policy
The investment objective of MFS(R) Government Markets Income Trust is to provide
a high level of current income.
The Trust will attempt to achieve this objective by investing at least 65% of
its assets in U.S. government securities and by engaging in transactions
involving related options. The Trust may invest up to 35% of its total assets in
foreign government securities. In pursuing its objective, the Trust will
consider the preservation of capital by balancing the yields of various
fixed-income securities against their attendant risks. However, the Trust will
not purchase securities with the goal of achieving capital appreciation.
For defensive purposes, the Trust may invest in cash (including foreign
currency) and cash equivalents. The Trust may also enter into options and
futures transactions and forward foreign currency exchange contracts and
purchase securities on a "when-issued" basis.
Dividend Reinvestment and
Cash Purchase Plan
The Trust offers a Dividend Reinvestment and Cash Purchase Plan which allows you
to reinvest either all of the distributions or only the long-term capital gains
paid by the Trust. Unless the shares are trading at a premium (exceeding net
asset value), purchases are made at the market price. Otherwise, purchases will
be made at a discounted price of either the net asset value or 95% of the market
price, whichever is greater. You can also buy shares of the Trust. Investments
from $100 to $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. A service fee of $0.75 is charged for
each cash purchase as well as a pro rata share of the brokerage commissions, if
any. 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 to receive a brochure providing a
complete description of the Plan, please contact the Dividend Disbursing Agent
at the address and telephone number located on the back cover of this report.
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. When you withdraw from the Plan, 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.
4
<PAGE>
Portfolio of Investments -- November 30, 1996
Bonds -- 94.0%
Principal Amount
Issuer (000 Omitted) Value
U.S. Bonds -- 69.1%
U.S. Federal Agencies -- 26.6%
FHA (Kimberly Woods Project
Loan), 8.25s, 2027+ $ 6,265 $ 6,916,512
FHA (USGI 986 Spring Hill),
10.375s, 2030+ 2,461 2,716,074
Federal Home Loan Mortgage
Corp., 6.5s, 2025 - 2026 12,722 12,363,899
Federal National Mortgage Assn.,
7s, 2023 - 2026 43,965 38,638,775
Federal National Mortgage Assn.,
7.5s, 2010 - 2011 21,226 21,670,660
Federal National Mortgage Assn.,
7.8s, 2002 15,000 15,152,400
Federal National Mortgage Assn.,
7.85s, 2004 30,000 31,120,200
Financing Corp., 10.7s, 2017 8,500 12,201,495
Financing Corp., 9.8s, 2018 5,000 6,697,650
------------
$147,477,665
------------
Government National Mortgage Association -- 17.4%
GNMA, 7s, 2022 - 2025 $ 42,674 $ 42,420,985
GNMA, 7.5s, 2002 - 2026 37,796 38,469,617
GNMA, 8.5s, 2026 14,775 15,430,266
------------
$ 96,320,868
------------
Small Business Administration -- 0.8%
SBA, 8.875s, 2011 $ 4,039 $ 4,462,390
------------
U.S. Treasury Obligations -- 24.3%
U.S. Treasury Bonds, 6.75s, 2026 $ 15,000 $ 15,646,800
U.S. Treasury Bonds, 8.125s,
2019 20,250 24,154,402
U.S. Treasury Bonds, 10.375s,
2012 27,000 35,661,060
U.S. Treasury Bonds, 12.375s,
2004 15,500 21,375,430
U.S. Treasury Notes, 6.25s, 2001 24,900 25,324,047
U.S. Treasury Notes, 6.5s, 2006 3,100 3,201,711
U.S. Treasury Notes, 8.5s, 2000 3,000 3,240,000
U.S. Treasury Notes, 9.125s,
1999 6,000 6,470,640
------------
$135,074,090
------------
Total U.S. Bonds $383,335,013
------------
Foreign -- U.S. Dollar Denominated -- 0.9%
Mexico -- 0.9%
United Mexican States, 7.563s,
2001## $ 5,000 $ 5,008,500
United Mexican States 1 --
------------
$ 5,008,500
------------
Total Foreign --
U.S. Dollar Denominated $ 5,008,500
------------
Foreign Bonds -- 24.0%
Australia -- 6.5%
Commonwealth of Australia,
8.75s, 2001 AUD 6,550 $ 5,705,319
Commonwealth of Australia,
9.75s, 2002 1,000 914,247
Commonwealth of Australia, 10s,
2002 9,900 9,216,487
Commonwealth of Australia, 9.5s,
2003 22,050 20,293,953
------------
$ 36,130,006
------------
Canada -- 3.3%
Government of Canada, 7.5s, 2003 CAD 3,875 $ 3,179,723
Government of Canada, 9s, 2004 8,050 7,182,536
Government of Canada, 8.75s,
2005 8,100 7,174,320
Government of Canada, 7s, 2006 1,000 795,968
------------
$ 18,332,547
------------
Denmark -- 6.4%
Kingdom of Denmark, 6s, 1999 DKK 32,159 $ 5,652,565
Kingdom of Denmark, 9s, 2000 35,860 6,917,562
Kingdom of Denmark, 8s, 2001 105,737 19,858,458
Kingdom of Denmark, 7s, 2007 15,620 2,697,769
------------
$ 35,126,354
------------
Ireland -- 1.7%
Republic of Ireland, 8s, 2000 IEP 5,300 $ 9,571,626
------------
Spain -- 1.8%
Government of Spain, 10.1s, 2001 ESP 550,000 $ 4,839,627
Government of Spain, 10.9s, 2003 549,620 5,178,101
------------
$ 10,017,728
------------
5
<PAGE>
Portfolio of Investments - continued
Bonds -- Continued
Foreign Bonds -- continued
Sweden -- 0.5%
Kingdom of Sweden, 10.25s, 2000 SEK 15,800 $ 2,682,025
------------
United Kingdom -- 3.8%
United Kingdom Treasury, 9s,
2000 GBP 2,100 $ 3,743,000
United Kingdom Treasury, 7s,
2001 8,000 13,427,021
United Kingdom Treasury, 9.75s,
2002 2,100 3,952,618
------------
$ 21,122,639
------------
Total Foreign Bonds $132,982,925
------------
Total Bonds
(Identified Cost, $510,109,912) $521,326,438
------------
Short-Term Obligations -- 3.2%
Eurolira Deposit, due
04/21/97 ITL 13,300,000 $ 8,814,421
Eurolira Deposit, due
05/12/97 13,320,000 8,801,309
------------
Total Short-Term Obligations
(Identified Cost, $17,381,817) $ 17,615,730
------------
Repurchase Agreement -- 1.8%
Investments in repurchase
agreements with Goldman
Sachs, in a joint trading
account ($143,939,000 par),
dated 11/29/96, due 12/02/96,
total to be received by the
Trust, $9,994,712
collateralized by various U.S.
Treasury Obligations (with
$141,990,000 par and
valued at $146,817,903),
at Cost $ 9,990 $ 9,990,000
------------
Total Investments
(Identified Cost, $537,481,729) $548,932,168
Other Assets,
Less Liabilities -- 1.0% 5,563,850
------------
Net Assets -- 100.0% $554,496,018
============
+ Restricted 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
CAD = Canadian Dollars
CHF = Swiss Francs
DEM = Deutsche Marks
DKK = Danish Kroner
ESP = Spanish Pesetas
GBP = British Pounds
IEP = Irish Punts
ITL = Italian Lire
JPY = Japanese Yen
NZD = New Zealand Dollars
SEK = Swedish Kronor
THB = Thai Bahts
See notes to financial statements
6
<PAGE>
Statement of Assets and Liabilities -- November 30, 1996
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $537,481,729) $ 548,932,168
Cash 1,062,949
Receivable for interest rate swaps 586,312
Net receivable for forward foreign currency exchange contracts sold 638,359
Interest receivable 7,886,367
Other assets 6,606
----------------
Total assets $ 559,112,761
----------------
Liabilities:
Payable to dividend disbursing agent $ 283,925
Payable for Treasury shares reacquired 1,381,000
Net payable for forward foreign currency exchange contracts purchased 225,565
Net payable for closed forward foreign currency exchange contracts 2,112,604
Payable to affiliates --
Management fee 32,784
Transfer and dividend disbursing agent fee 19,000
Accrued expenses and other liabilities 561,865
----------------
Total liabilities $ 4,616,743
----------------
Net assets $ 554,496,018
================
Net assets consist of:
Paid-in capital $ 576,060,467
Unrealized appreciation on investments and translation of assets and liabilities in foreign currencies 10,363,837
Accumulated net realized loss on investments and foreign currency transactions (28,892,369)
Accumulated distributions in excess of net investment income (3,035,917)
----------------
Total $ 554,496,018
================
Shares of beneficial interest outstanding 73,384,455
================
Net asset value per share (net assets / shares of beneficial interest outstanding) $ 7.56
================
</TABLE>
See notes to financial statements
7
<PAGE>
Statement of Operations -- Year Ended November 30, 1996
<TABLE>
<S> <C>
Net investment income:
Interest income $43,850,218
------------
Expenses --
Management fee $ 4,188,509
Trustees' compensation 159,772
Investor communication expense 457,042
Custodian fee 348,731
Transfer and dividend disbursing agent fee 226,663
Auditing fees 73,107
Postage 65,438
Printing 52,802
Legal fees 18,758
Miscellaneous 153,543
------------
Total expenses $ 5,744,365
Fees paid indirectly (27,143)
------------
Net expenses $ 5,717,222
------------
Net investment income $38,132,996
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $ 2,332,707
Written option transactions 161,551
Foreign currency transactions (347,217)
Futures contracts (1,478,466)
Interest rate swaps 641,656
------------
Net realized gain on investments $ 1,310,231
------------
Change in unrealized appreciation (depreciation) --
Investments $(3,605,511)
Written options (76,609)
Translation of assets and liabilities in foreign currencies (5,110,175)
Interest rate swaps 586,312
------------
Net unrealized loss on investments $(8,205,983)
------------
Net realized and unrealized loss on investments and foreign currency $(6,895,752)
------------
Increase in net assets from operations $31,237,244
============
</TABLE>
See notes to financial statements
8
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations --
Net investment income $ 38,132,996 $ 41,386,070
Net realized gain on investments and foreign currency transactions 1,310,231 7,785,537
Net unrealized gain (loss) on investments and foreign currency translation (8,205,983) 45,334,620
--------------- ---------------
Increase in net assets from operations $ 31,237,244 $ 94,506,227
--------------- ---------------
Distributions declared to shareholders --
From net investment income $(38,132,996) $(40,982,400)
In excess of net investment income (3,801,845) --
--------------- ---------------
Total distributions declared to shareholders $(41,934,841) $(40,982,400)
--------------- ---------------
Trust share (principal) transactions --
Cost of Treasury shares acquired $(40,941,119) $(65,178,037)
--------------- ---------------
Total decrease in net assets $(51,638,716) $(11,654,210)
Net assets:
At beginning of period 606,134,734 617,788,944
--------------- ---------------
At end of period (including accumulated distributions in excess of net investment income of
$3,035,917 and $1,916,012, respectively) $554,496,018 $ 606,134,734
=============== ===============
</TABLE>
See notes to financial statements
9
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------------------------------
Per share data (for a
share outstanding
throughout each period): 1996 1995 1994 1993 1992 1991
----------- ----------- ---------------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value -- beginning of period $ 7.62 $ 6.90 $ 7.83 $ 7.59 $ 8.08 $ 8.41
----------- ----------- ---------------------- ----------- ----------
Income from investment operations# --
Net investment income $ 0.49 $ 0.49 $ 0.48 $ 0.52 $ 0.61 $ 0.69
Net realized and unrealized gain (loss)
on investments and foreign currency transactions (0.07) 0.64 (0.88) 0.38 (0.23) 0.16
----------- ----------- ---------------------- ----------- ----------
Total from investment operations $ 0.42 $ 1.13 $ (0.40) $ 0.90 $ 0.38 $ 0.85
----------- ----------- ---------------------- ----------- ----------
Less distributions declared to shareholders --
From net investment income $ (0.49) $ (0.49) $ (0.14) $ (0.44) $ (0.57) $ (0.64)
In excess of net investment income (0.05) -- (0.02) -- -- --
From net realized gain on investments and
foreign currency transactions -- -- (0.05) (0.22) -- --
From paid-in capital -- -- -- -- (0.30) (0.54)
Tax return of capital -- -- (0.32) -- -- --
----------- ----------- ---------------------- ----------- ----------
Total distributions declared to shareholders $ (0.54) $ (0.49) $ (0.53) $ (0.66) $ (0.87) $ (1.18)
----------- ----------- ---------------------- ----------- ----------
Net increase from repurchase of capital shares $ -- $ -- $ -- $ --
$ 0.06 $ 0.08
----------- ----------- ---------------------- ----------- ----------
Net asset value -- end of period $ 7.56 $ 7.62 $ 6.90 $ 7.83 $ 7.59 $ 8.08
=========== =========== ====================== =========== ==========
Per share market value -- end of period $ 6.750 $ 6.500 $ 6.313 $ 7.125 $ 7.250 $ 8.000
Total return 12.61% 10.96% (3.90)% 7.32% 1.11% 13.73%
Ratios (to average net assets)/ Supplemental data:
Expenses## 1.00% 0.99% 0.97% 0.93% 1.03% 1.04%
Net investment income 6.63% 6.84% 6.51% 6.61% 7.80% 8.38%
Portfolio turnover 249% 318% 295% 453% 245% 805%
Net assets at end of period (000 omitted) $554,496 $606,135 $617,789 $744,448 $743,103 $785,992
</TABLE>
# Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Trust's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
10
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Year Ended November 30,
---------------------------------------------
Per share data (for a
share outstanding
throughout each period): 1990 1989 1988 1987*
----------- ----------- ---------------------
<S> <C> <C> <C> <C>
Net asset value -- beginning of period $ 8.92 $ 9.18 $ 9.33 $ 9.40
----------- ----------- ---------------------
Income from investment operations --
Net investment incomeS. $ 0.78 $ 0.82 $ 0.94 $ 0.45
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.11) 0.09 0.12 (0.03)
----------- ----------- ---------------------
Total from investment operations $ 0.67 $ 0.91 $ 1.06 $ 0.42
----------- ----------- ---------------------
Less distributions declared to shareholders --
From net investment income $ (0.68) $ (0.90) $ (0.88) $ (0.44)
From net realized gain on investments and foreign
currency transactions -- -- (0.17) (0.05)
From paid-in capital (0.50) (0.27) (0.16) --
Total distributions declared to shareholders $ (1.18) $ (1.17) $ (1.21) $ (0.49)
----------- ----------- ---------------------
Net asset value -- end of period $ 8.41 $ 8.92 $ 9.18 $ 9.33
=========== =========== =====================
Per share market value -- end of period 8.125 10.000 10.125 9.875
Total return (6.82)% 11.83% 15.77% 8.10%+
Ratios (to average net assets)/ Supplemental dataS.:
Expenses 1.05% 1.08% 1.11% 1.01%+
Net investment income 9.16% 9.23% 9.87% 9.91%+
Portfolio turnover 535% 640% 307% 88%
Net assets at end of period (000 omitted) $813,978 $857,252 $873,503 $879,686
</TABLE>
*For the period from the commencement of investment operations, May 28, 1987 to
November 30, 1987.
+Annualized.
S.The investment adviser did not impose a portion of its adviser fee amounting
to $0.0013 per share for the year ended November 30, 1990. If this fee had
been incurred by the Trust, the ratio of expenses to average net assets and
net investment income to average net assets would have been 1.07% and 9.14%,
respectively.
See notes to financial statements
11
<PAGE>
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. 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 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 base currency and translated into U.S.
dollars at the closing daily exchange rate. Futures contracts, options and
options on futures contracts listed on commodities exchanges are valued at
closing settlement prices. Over-the-counter options are valued by brokers
through the use of a pricing model which takes into account closing bond
valuations, implied volatility and short-term repurchase rates. Securities for
which there are no such quotations or valuations are valued at fair value as
determined in good faith by or 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 purchased 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 securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Trust under each such repurchase agreement. The
Trust, along with other affiliated entities of Massachusetts Financial Service
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.
12
<PAGE>
Written Options -- The Trust may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a 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.
Futures Contracts -- The Trust may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Trust is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Trust
each day, depending on the daily fluctuations in value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Trust. The Trust's investment in futures contracts is designed
to hedge against anticipated future changes in interest or exchange rates or
securities prices. Investment in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Trust's relative position in one or more currencies
without buying and selling portfolio assets. Should interest or exchange rates
or securities prices move unexpectedly, the Trust may not achieve the
anticipated benefits of the futures contracts and may realize a loss.
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 will enter into
forward 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. It 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 for financial statement purposes as unrealized until the contract
settlement date.
Swap Agreements -- The Trust may enter into swap agreements. A swap is an
exchange of cash payments between the Trust and another party which is based on
a specific financial index. Cash payments are exchanged at specified intervals
and the expected income or expense is recorded on the accrual basis. The value
of the swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Trust uses swaps for both
hedging and non-hedging purposes. For hedging purposes, the Trust
13
<PAGE>
Notes to Financial Statements -- continued
may use swaps to reduce its exposure to interest and foreign exchange rate
fluctuations. For non-hedging purposes, the Trust may use swaps to take a
position on anticipated changes in the underlying financial index.
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly -- The Trust's custodian bank calculates its fee based on
the Trust's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Trust. This amount is shown as a reduction of 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 taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Trust files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Trust's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest income earned on foreign investments in
accordance with the applicable country's tax rates and to the extent
unrecoverable are recorded as a reduction of investment income. 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 requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a tax return of
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 accumulated net realized
gains. During the year ended November 30, 1996, $2,681,940 was reclassified from
accumulated net realized loss to accumulated distributions in excess of net
investment income due to differences between book and tax accounting for
mortgage-backed securities and currency transactions. This change had no effect
on the net assets or net asset value per share.
At November 30, 1996, the Trust, for federal income tax purposes, had a capital
loss carryforward of $28,773,975, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2002 ($28,577,312) and November 30, 2004 ($196,663).
(3) Transactions with Affiliates
Investment Adviser -- The Trust has an investment advisory agreement with 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 average daily net assets and 5.33% of investment income.
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 of the officers
and Trustees of the Trust are officers or directors of MFS and MFS Service
Center, Inc. (MFSC). The Trust has an unfunded defined benefit plan for all its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a net
periodic pension expense of $43,847 for the year ended November 30, 1996.
14
<PAGE>
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 and a dividend services fee and will reimburse MFSC for
reasonable out-of-pocket expenses.
The account maintenance fee is computed as follows:
Total Number of Accounts Annual Account Fee
---------------------------------------------------
Less than 75,000 $9.00
75,000 and over $8.00
The dividend services fee is $0.75 per dividend reinvestment and $0.75 per cash
infusion.
(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 $952,597,437 998,472,203
=============== ==============
Investments (non-U.S. government securities) $348,729,591 374,723,857
=============== ==============
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Trust, as computed on a federal income tax basis,
are as follows:
Aggregate cost $537,515,706
===============
Gross unrealized appreciation $ 15,175,777
Gross unrealized depreciation (3,759,315)
---------------
Net unrealized appreciation $ 11,416,462
===============
(5) Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest (without par value).
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
Year Ended November 30,
-------------------------------------------------------
1996 1995
--------------------------- ---------------------------
Shares Amount Shares Amount
---------------------------------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Treasury shares reacquired 6,154,700 $40,941,119 10,013,000 $65,178,037
============ ============== ============= =============
</TABLE>
In accordance with the provisions of the Trust's prospectus, 6,154,700 shares of
beneficial interest were purchased by the Trust during the year ended November
30, 1996 at an average price per share of $6.65 and a weighted average discount
of 9.7% per share. The Trust repurchased 10,013,000 shares of beneficial
interest during the year ended November 30, 1995 at an average price per share
of $6.51 and a weighted average discount of 9.0% per share. Shares held in
Treasury were repurchased in an attempt to return the market value of the
discount to shareholders in the form of higher monthly distributions.
15
<PAGE>
Notes to Financial Statements -- continued
(6) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Net Realized and Net Increase (Decrease)
Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period Ended Investment Income Net Investment Income on Investments from Operations
- ------------------------ ---------------------- ------------------------------------------------- --------------------------
Per Per Per Per
Fiscal 1996 Amount Share Amount Share Amount Share Amount Share
- ------------------------ -------------- ------- -------------- ----------------------- ------------------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
February 29 $11,154,975 $0.13 $ 9,686,176 $0.12 $(11,159,323) $(0.14) $(1,473,147) $(0.02)
May 31 11,060,989 0.15 9,595,620 0.12 (15,304,186) (0.19) (5,708,566) (0.07)
August 31 11,084,186 0.14 9,659,873 0.13 (1,079,673) (0.01) 8,580,200 0.11
November 30 10,550,068 0.14 9,191,327 0.12 20,647,430 0.27 29,838,757 0.40
-------------- ------- -------------- ----------------------- ------------------------ ----------
$43,850,218 $0.56 $38,132,996 $0.49 $ (6,895,752) $(0.07) $31,237,244 $ 0.42
============== ======= ============== ======================= ======================== ==========
Fiscal 1995
- ------------------------
February 28 $12,162,338 $0.13 $10,700,322 $0.12 $ 13,491,579 $ 0.22 $24,191,901 $ 0.35
May 31 12,446,705 0.15 10,938,166 0.13 25,867,253 0.24 36,805,419 0.37
August 31 11,733,564 0.15 10,233,221 0.13 (1,867,003) (0.02) 8,366,218 0.09
November 30 11,035,555 0.13 9,514,361 0.11 15,628,328 0.20 25,142,689 0.32
-------------- ------- -------------- ----------------------- ------------------------ ----------
$47,378,162 $0.56 $41,386,070 $0.49 $ 53,120,157 $ 0.64 $94,506,227 $ 1.13
============== ======= ============== ======================= ======================== ==========
</TABLE>
(7) Line of Credit
The Trust entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Trust shares. 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, 1996 was $5,993.
16
<PAGE>
(8) 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, forward foreign currency exchange contracts
and swap agreements. The notional or contractual amounts of these 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. A summary of
obligations under these financial instruments at November 30, 1996 is as
follows:
Written Option Transactions
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
------------------------------ ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
----------------------------------------------- ----------------------------- ----------------- ------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period --
Australian Dollars 3,672 $ 23,358 8,233 $ 82,283
Deutsche Marks/British Pounds 13,660 82,866 -- --
Japanese Yen -- -- 797,000 102,122
Options written --
Australian Dollars 5,087 27,571 -- --
Canadian Dollars -- -- 9,091 20,347
Deutsche Marks/British Pounds 12,000 53,354 -- --
Japanese Yen -- -- 390,000 47,987
Option terminated in closing transactions --
Australian Dollars (8,759) (50,929) (3,467) (21,190)
Deutsche Marks/British Pounds (19,660) (109,543) -- --
Japanese Yen -- -- (1,187,000) (150,109)
Options expired --
Australian Dollars -- -- (4,766) (61,093)
Canadian Dollars (9,091) (20,347)
Deutsche Marks/British Pounds (6,000) (26,677) -- --
----------------------------- ----------------- ------------
Outstanding, end of period -- $ -- -- $ --
============================= ================= ============
</TABLE>
17
<PAGE>
Notes to Financial Statements -- continued
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
---------------------------- ----- ---------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Purchases 02/03/97 SEK 19,502,538 $ 2,906,970 $ 2,951,218 $ (44,248)
12/12/96 DEM 19,610,975 12,758,097 12,939,414 (181,317)
---------------- -------------- ----------------
$15,665,067 $15,890,632 $(225,565)
================ ============== ================
Sales 12/12/96 ESP 2,438,000,402 $18,782,356 $19,196,854 $ 414,498
02/07/97 CHF 9,798,862 7,555,520 7,775,763 220,243
02/03/97 SEK 34,745,067 5,178,961 5,276,396 97,435
02/20/97 AUD 4,367,664 3,552,920 3,459,103 (93,817)
---------------- -------------- ----------------
$35,069,757 $35,708,116 $ 638,359
================ ============== ================
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts, excluded from above,
amounted to a net payable of $2,112,604 at November 30, 1996.
At November 30, 1996, the Trust had sufficient cash and/or securities to cover
any commitments under these contracts.
Interest Rate Swaps
<TABLE>
<CAPTION>
Notional Principal Cash Flows Cash Flows Unrealized
Expiration Amount of Contract Paid by the Trust Received by the Trust Appreciation
------------- ------------------- ------------------ ---------------------- ---------------
<S> <C> <C> <C> <C>
4/19/97 ITL 13,300,000,000 Fixed -- 8.055% Floating -- 6M Libor $586,312
</TABLE>
At November 30, 1996, the Trust has segregated sufficient cash and/or securities
to cover margin requirements on open interest rate swaps.
(9) Restricted Securities
The Trust may invest not more than 10% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At November 30, 1996,
the Trust owned the following restricted securities (constituting 1.74% of its
net assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). The Trust does not have the right to
demand that such securities be registered. The value of these securities is
determined by valuations supplied by a pricing service or brokers or, if not
available, in good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of
Description Acquisition Par Amount Cost Value
- --------------------------------------------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
FHA (Kimberly Woods Project Loan), 8.25s, 2027 3/29/93 $6,265,184 $6,453,139 $6,916,512
FHA (USGI 986 Spring Hill), 10.375s, 2030 8/16/93 2,461,460 2,647,608 2,716,074
-------------
$9,632,586
=============
</TABLE>
18
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders of MFS Government Markets Income Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Government Markets Income Trust as of
November 30, 1996, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended November 30, 1996 and
1995, and the financial highlights for each of the years in the ten-year period
ended November 30, 1996. 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 generally accepted auditing
standards. 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 the securities owned at
November 30, 1996 by correspondence with the custodian. 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Markets Income Trust at November 30, 1996, the results of its operations, the
changes in its net assets, and its financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 3, 1997
19
<PAGE>
MFS(R) Government Markets Income Trust
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), Massachusetts
Financial Services Company;
Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Marshall N. Cohan(1)
Private Investor
Lawrence H. Cohn, M.D.(2)
Chief of Cardiac Surgery,
Brigham and Women's Hospital;
Professor of Surgery, Harvard
Medical School
The Hon. Sir J. David
Gibbons, KBE(2)
Chief Executive Officer,
Edmund Gibbons Ltd.;
Chairman, Bank of N.T.
Butterfield & Son Ltd.
Abby M. O'Neill(2)
Private Investor; Director,
Rockefeller Financial Services, Inc.
(investment advisers)
Walter E. Robb, III(1)
President and Treasurer,
Benchmark Advisors, Inc.
(corporate financial consultants);
President, Benchmark Consulting
Group, Inc. (office services);
Trustee, Landmark Funds
(mutual funds)
Arnold D. Scott*
Senior Executive Vice President, Director
and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames*
President and Director, Massachusetts
Financial Services Company
J. Dale Sherratt(1)
President, Insight Resources, Inc.
(acquisition planning specialists)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
*Affiliated with the Investment Adviser
(1)Member of Audit Committee
(2)Member of Portfolio Trading Committee
Portfolio Managers
Stephen C. Bryant*
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar and Dividend
Disbursing Agent
MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Auditors
Deloitte & Touche LLP
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
MGFCE-2-1/97 78M
