[MFS LOGO]
MFS [RegTM] Government Markets Income Trust
Semiannual Report
May 31, 1998
[ILLUSTRATION OF MAN AND WOMAN TALKING IN AN OFFICE]
<PAGE>
In Memoriam
A. Keith Brodkin
1935 - 1998
Chairman and Chief Executive Officer
MFS[RegTM] Investment Management(SM)
[Photo of A. Keith Brodkin]
On February 2, 1998, Keith Brodkin, a friend and leader
to everyone at MFS, died unexpectedly at age 62. His
thoughtful letters to shareholders on the markets and
economy have been an integral part of MFS shareholder
reports like this one for many years.
Keith joined MFS in 1970 as the firm's first
fixed-income manager, managing the bond portion of
MFS[RegTM] Total Return Fund. He went on to manage our
first pure bond fund, MFS[RegTM] Bond Fund, when it was
introduced in 1974, and he was considered a pioneer in
the art of active bond management.
Keith was named President and Chief Investment Officer of MFS in 1987 and four
years later became Chairman and Chief Executive Officer. During his
stewardship, MFS has achieved significant growth in total assets under
management, rising from some $25 billion in 1991 to the over $80 billion today
entrusted to us by three million individual and institutional investors
worldwide. Under Keith's leadership, MFS has carefully but steadily built its
domestic and international investment capabilities through the introduction of
a range of new products and a still-growing staff that now numbers over 100
equity and fixed-income professionals.
Throughout his career, Keith was very active in a wide range of charitable
endeavors. He is survived by his wife and three children. His leadership,
friendship, and wise counsel will be sorely missed.
<PAGE>
Dear Shareholders:
To most investors, the surprise of this past year has been that robust economic
growth, especially this late in the economic cycle, has coincided with a
dramatic improvement in inflation trends and an overall decline in interest
rates. Even though economic activity for much of the year exceeded a level that
the Federal Reserve Board (the Fed) would consider noninflationary, and in
spite of the fact that the Fed increased the federal funds rate to 5.50% in
March of 1997, two trends worked in favor of the market and helped lower rates
during the year. The first was the sharp decline in the U.S. government's
borrowing needs. In fact, for the 12-month period ended May 31, the government
was running a surplus of about $60 billion, and for the fiscal year ending this
October the surplus may be significantly higher. The second favorable trend was
the decline in inflation. Much to the surprise of most economists, inflation
fell significantly over the course of the year, with the Consumer Price Index,
for example, declining to 1.70% in 1997 from 3.30% in 1996.
The Trust's stock market price, which stood at $6.69 on November 28, 1997,
decreased to $6.50 on May 29, 1998, the last day of market trading in the
period, while its net asset value (NAV) over the same period increased from
$7.41 to $7.46, representing a total return of -0.30% based on market price and
4.23% based on NAV. For comparative purposes, the Salomon Brothers Treasury
Government Sponsored Index, an unmanaged index of medium-term U.S. Treasury and
government agency securities, appreciated by 4.16% over this period, while the
J.P. Morgan Non-Dollar Government Bond Index, an unmanaged index of actively
traded government bonds issued by 12 countries (excluding the United States)
with remaining maturities of at least one year, declined by 2.03% in local
currency terms.
U.S. Government Sector
The fixed-income environment, although at times volatile, was generally
positive over the past six months. With the general decline in interest rates,
coupon income was augmented by opportunities for capital appreciation,
particularly in longer-maturity securities. For example, an investment in the
two-year sector would have returned 2.68%, whereas the total return in the
10-year sector was 3.69%. With household income, job growth, and consumer
confidence quite strong, the rally in shorter maturities was somewhat limited
by concerns that the Fed would again find it necessary to raise short-term
interest rates. The very favorable performance on the inflation and fiscal
fronts, however, provided a very positive underpinning for Treasuries, one from
which longer maturities were able to benefit. This environment benefited the
Trust, given our overweighting in longer-maturity Treasury and agency
securities.
For most of the year, the portfolio's duration, or sensitivity to changes in
interest rates, was 5% to 10% longer than that of the appropriate bench-mark.
Strength in employment and overall economic activity, along with the risk that
the Fed might raise interest rates, argued for caution. Thus, we did not
position duration more aggressively. The many positive underpinnings to the
market, however, did suggest that we should position the portfolio to benefit
from opportunities for capital appreciation as fears of Fed action receded.
Looking ahead, prospects for the fixed-income market are positive. The
supply-side nature of the economic expansion (with growth in supply
outstripping that of demand) and the boom in global production capacity have
helped suppress inflation. Declining inflation at this stage of the economic
expansion is remarkable, and any slowdown in economic growth could quickly
trigger even lower inflation expectations. Investors have yet to embrace the
idea that the economy is at or close to price stability. Although the economy
shows few signs of weakening, interest rates will have considerable room to
fall after economic activity cools and the view that we are indeed close to the
long-term objective of price stability becomes more broadly accepted.
2
<PAGE>
International Sector
Over the past six months, we have been shifting assets from the developed
foreign government bond markets back into the United States because the latter
has become increasingly attractive based on both real and nominal rates.
Presently, only 3% of total assets are allocated to these foreign markets. We
have continued to emphasize the higher-yielding European markets such as the
United Kingdom, Denmark, and Italy, all of which continue to outperform the
U.S. bond market measured in local currency terms. The Trust has also benefited
from our hedging virtually all of its foreign assets back into the U.S. dollar,
which has appreciated against almost all major currencies. Away from Europe, we
increased our weighting in New Zealand bonds, which initially underperformed
U.S. Treasuries but by the end of May had significantly outperformed U.S.
bonds.
The situation in Asia still dominates the global outlook. Thus far, the crisis
has only modestly impacted economies outside the region. We believe the
potential for slower global growth and lower inflation should support the
European and U.S. bond markets. Although global inflation is presently not a
problem, in some countries, such as the United States and the United Kingdom,
asset inflation (real estate and equity valuations) continues to be a concern.
The risk that the long-awaited impact from Southeast Asia won't sufficiently
tame the vibrant U.S. economy might cause the Fed to raise interest rates later
in the year. Meanwhile, the emerging markets remain vulnerable to the ups and
downs of the Asian recovery process. We have slowly been adding to this sector
as these markets have weakened.
While the dollar has been strong versus other major foreign currencies for
roughly three years, this trend may be coming to an end as investors gain
confidence that the new European currency, the Euro, will be strong. Presently,
interest rates, economic growth, and productivity differentials still favor the
dollar. The Trust remains almost fully hedged into U.S. dollars, but we will be
monitoring this situation closely.
We appreciate your support 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
/s/ Stephen C. Bryant
Stephen C. Bryant
Portfolio Manager
/s/ Steven E. Nothern
Steven E. Nothern
Portfolio Manager
June 12, 1998
The opinions expressed in this report are those of the portfolio managers and
are only through the end of the period of the report as stated on the cover.
The managers' views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
- --------------------------------------------------------------------------------
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.
3
<PAGE>
Performance Summary
(For the six months ended May 31, 1998)
<TABLE>
<S> <C>
Net Asset Value Per Share
November 30, 1997 $ 7.41
May 31, 1998 $ 7.46
New York Stock Exchange Price
November 30, 1997 $ 6.688
March 26, 1998 (high)* $ 6.875
May 7, 1998 (low)* $ 6.375
May 31, 1998 $ 6.500
</TABLE>
*For the period December 1, 1997, through May 31, 1998.
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,
nondiversified, management investment company and has no employees.
Number of Shareholders
As of May 31, 1998, our records indicate that there are 10,495 registered
shareholders and approximately 48,600 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
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MGF.
Investment Objective and Policies
The investment objective of MFS[RegTM] 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, interest
rate swaps, 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.
4
<PAGE>
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.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
5
<PAGE>
Portfolio of Investments -- May 31, 1998
Bonds -- 95.1%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- 85.8%
U.S. Treasury Obligations -- 41.9%
U.S. Treasury Bonds, 6.125s,
2027 ............................................................ $41,250 $ 43,099,650
U.S. Treasury Bonds, 8.875s,
2017 ............................................................ 16,000 21,471,984
U.S. Treasury Bonds, 10.375s,
2009 ............................................................ 14,600 18,906,646
U.S. Treasury Bonds, 11.25s,
2015 ............................................................ 13,050 20,594,466
U.S. Treasury Notes, 5.5s,
2003 ............................................................ 17,000 16,931,920
U.S. Treasury Notes, 5.625s,
2008 ............................................................ 19,500 19,594,380
U.S. Treasury Notes, 8s, 2001 ..................................... 35,000 37,269,400
U.S. Treasury Notes, 8.5s,
2000 ............................................................ 37,000 38,740,110
------------
$216,608,556
------------
U.S. Federal Agencies -- 23.4%
FHA, 10.375s, 2030+ ............................................... $ 2,448 $ 2,452,889
FICO, 9.8s, 2018 .................................................. 5,000 7,057,800
FICO, 10.7s, 2017 ................................................. 8,500 12,846,985
Federal Home Loan Mortgage
Corp., 6.79s, 2005 .............................................. 4,500 4,717,969
Federal National Mortgage
Assn., 5s, 2023 ................................................. 6,000 5,079,360
Federal National Mortgage
Assn., 6.55s, 2007 .............................................. 3,972 3,962,060
Federal National Mortgage
Assn., 7.5s, 2003 ............................................... 7,657 7,795,374
Federal National Mortgage
Assn., 7.875s, 2006 ............................................. 30,000 30,717,300
Federal National Mortgage
Assn., 8.5s, 2027 ............................................... 10,100 11,384,518
Federal National Mortgage
Assn., 7.5s, 2009, TBA .......................................... 33,875 34,890,841
------------
$120,905,096
------------
Government National Mortgage
Association -- 19.1%
GNMA, 7s, 2023 .................................................... $16,060 $ 16,334,558
GNMA, 7.5s, 2022 .................................................. 1,406 1,451,410
GNMA, 6.5s, 2028, TBA ............................................. 18,234 18,148,352
GNMA, 7s, 2011, TBA ............................................... 18,933 19,308,006
GNMA, 7.5s, 2002, TBA ............................................. 42,406 43,736,198
------------
$ 98,978,524
------------
Small Business Administration -- 0.7%
SBA, 8.875s, 2011 ................................................. $ 3,383 $ 3,689,951
------------
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds -- continued
U.S. Government
Guaranteed -- 0.7%
Private Export Funding Corp.,
7.01s, 2004 ..................................................... $ 3,380 $ 3,588,174
------------
Total U.S. Bond ................................................... $443,770,301
------------
Foreign Bonds -- 9.3%
Argentina -- 0.4%
Republic of Argentina, 8.762s,
2005 ............................................................ $ 2,100 $ 2,115,750
------------
Brazil -- 1.0%
Federal Republic of Brazil, 5s,
2014 ............................................................ $ 3,481 $ 2,697,488
Federal Republic of Brazil,
9.375s, 2008 .................................................... 2,800 2,619,400
------------
$ 5,316,888
------------
Bulgaria -- 0.4%
National Republic of Bulgaria,
6.563s, 2024 .................................................... $ 2,750 $ 2,179,375
------------
Denmark -- 0.3%
Nykredit, 6s, 2026 ................................................ DKK 5,559 $ 810,035
Nykredit, 7s, 2024 ................................................ 5,414 808,410
------------
$ 1,618,445
------------
Germany -- 0.5%
Federal Republic of Germany,
6.25s, 2006 ..................................................... DEM 1,497 $ 917,386
Treuhandanstalt, 6.625s, 2003 ..................................... 1,004 614,706
Federal Republic of Germany,
6s, 2007 ........................................................ 1,298 784,893
------------
$ 2,316,985
------------
Italy -- 0.3%
Republic of Italy, 5.75s, 2002 .................................... ITL 1,345,000 $ 793,870
Republic of Italy, 7.75s, 2006 .................................... 1,155,000 777,482
------------
$ 1,571,352
------------
Mexico -- 2.4%
United Mexican States,
8.625s, 2008 .................................................... $ 2,800 $ 2,761,500
United Mexican States,
9.875s, 2007 .................................................... 9,200 9,660,000
------------
$ 12,421,500
------------
New Zealand -- 0.9%
Government of New Zealand,
8s, 2001 ........................................................ NZD 7,640 $ 4,289,579
Government of New Zealand,
10s, 2002 ....................................................... 730 430,181
------------
$ 4,719,760
------------
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds -- continued
Panama -- 0.5%
Republic of Panama, 8.25s,
2008 ......................... $2,400 $ 2,361,000
------------
Russia -- 0.8%
Ministry of Finance, 10s, 2007.. $3,200 $ 2,888,000
Vnesheconombank, 6.719s,
2015 ......................... 2,000 1,295,000
------------
$ 4,183,000
------------
South Korea -- 0.9%
Republic of Korea, 8.875s,
2008 ......................... $4,600 $ 4,289,914
------------
United Kingdom -- 0.9%
United Kingdom Treasury, 7s,
2001 ......................... GBP 703 $ 1,177,631
United Kingdom Treasury, 9s,
2008 ......................... 1,037 2,125,702
United Kingdom Treasury,
9.75s, 2002 .................. 750 1,390,449
------------
$ 4,693,782
------------
Total Foreign Bonds .............................. $ 47,787,751
------------
Total Bonds (Identified Cost,
$488,357,039) .................................. $491,558,052
------------
Warrants
Shares
Republic of Venezuela*,
(Identified Cost, $0) ......... 37,500 $ --
------------
Rights
United Mexican States*,
(Identified Cost, $0) ......... 1,000 $ --
------------
Short-Term
Obligations -- 6.8%
</TABLE>
<TABLE>
<CAPTION>
Principal Amount
(000 Omitted)
<S> <C> <C>
Federal Home Loan Mortgage
Discount Notes, due
6/01/98-6/15/98, at
Amortized Cost ......... $ 35,340 $35,319,103
---------- -----------
</TABLE>
Call Options Purchased
<TABLE>
<CAPTION>
Principal Amount
of Contracts
Description/Expiration Month/Strike Price (000 Omitted) Value
<S> <C> <C>
Japanese Government Bond/
June/102.121 (Premiums
Paid, $7,827) ........................... JPY 113,200 $ 20,493
------------
Put Options Purchased
Japanese Yen/Deutsche
Marks/August/68.4
(Premiums Paid, $58,600) ................ JPY 259,106 $ 240,450
------------
Total Investments (Identified Cost,
$523,742,569) ............................................ $527,138,098
------------
Put Options Written
</TABLE>
<TABLE>
<CAPTION>
Description/Expiration Month/Strike Price
<S> <C> <C>
Japanese Government Bonds/
August/101.800 .......................... JPY 56,700 $ (680)
Japanese Government Bonds/
August/101.801 .......................... JPY 56,700 (624)
Canadian Dollars/July/1.43 ................ CAD 2,243 (28,699)
-------------
Total Put Options Written (Premiums
Received, $10,972) ....................................... $ (30,003)
-------------
Call Options Written
Japanese Government Bonds/
June/104.247 ............................ JPY 113,200 $ (6,000)
Japanese Yen/Deutsche
Marks/August/66.52 ...................... JPY 251,984 (252)
-------------
Total Call Options Written (Premiums
Received, $60,339) ....................................... $ (6,252)
-------------
Other Assets,
Less Liabilities -- (1.9)% ................................. (9,954,071)
-------------
Net Assets -- 100.0% ......................................... $517,147,772
-------------
</TABLE>
* Non-income producing security.
+ Restricted security.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than U.S. dollar. A list of abbreviations is shown below.
<TABLE>
<S> <C> <C>
CAD = Canadian Dollars
DEM = Deutsche Marks
DKK = Danish Kroner
GBP = British Pounds
ITL = Italian Lire
JPY = Japanese Yen
NZD = New Zealand Dollars
</TABLE>
See notes to financial statements
7
<PAGE>
Statement of Assets and Liabilities -- May 31, 1998
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $523,742,569) ................................... $ 527,138,098
Cash .................................................................................... 59,528
Net receivable for forward foreign currency exchange contracts to sell .................. 31,248
Net receivable for foreign currency exchange contracts closed or subject to master
netting agreements ..................................................................... 43,872
Receivable for investments sold ......................................................... 25,812,858
Interest receivable ..................................................................... 5,520,800
Other assets ............................................................................ 4,753
--------------
Total assets .......................................................................... $ 558,611.157
--------------
Liabilities:
Payable to dividend disbursing agent .................................................... $ 210,396
Payable for investments purchased ....................................................... 40,778,507
Written options outstanding, at value (premiums received, $71,311) ...................... 36,255
Net payable for forward foreign currency exchange contracts to purchase ................. 14,273
Payable to affiliates -
Management fee ......................................................................... 29,435
Transfer agent fee ..................................................................... 16,362
Administrative fee ..................................................................... 635
Accrued expenses and other liabilities .................................................. 377,522
--------------
Total liabilities ..................................................................... $ 41,463,385
--------------
Net assets ............................................................................... $ 517,147,772
==============
Net assets consist of:
Paid-in capital ......................................................................... $ 548,605,172
Unrealized appreciation on investments and translation of assets and liabilities in
foreign currencies ..................................................................... 3,492,128
Accumulated net realized loss on investments and foreign currency transactions .......... (32,484,284)
Accumulated distributions in excess of net investment income ............................ (2,465,244)
--------------
Total ................................................................................. $ 517,147,772
==============
Shares of beneficial interest outstanding (97,911,555 shares authorized, less 28,597,500
treasury shares) ....................................................................... 69,314,055
Net asset value per share (net assets of $517,147,772 [divided by] 69,314,055 shares of
beneficial interest outstanding) ....................................................... $ 7.46
==============
</TABLE>
See notes to financial statements
8
<PAGE>
Statement of Operations -- Six Months Ended May 31, 1998
<TABLE>
<S> <C>
Net investment income:
Interest income ............................................................ $ 18,803,482
------------
Expenses --
Management fee ............................................................ $ 1,836,041
Trustees' compensation .................................................... 78,203
Transfer and dividend disbursing agent fee ................................ 97,472
Administrative fee ........................................................ 34,295
Custodian fee ............................................................. 84,313
Auditing fees ............................................................. 41,528
Postage ................................................................... 24,556
Printing .................................................................. 8,362
Legal fees ................................................................ 1,240
Miscellaneous ............................................................. 186,366
------------
Total expenses ........................................................... $ 2,392,376
Fees paid indirectly ...................................................... (44,557)
------------
Net expenses ............................................................. $ 2,347,819
------------
Net investment income ................................................... $ 16,455,663
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions .................................................. $ 3,319,147
Written option transactions .............................................. (327,758)
Foreign currency transactions ............................................ 2,607,346
Interest rate swap transactions .......................................... 30,924
------------
Net realized gain on investments and foreign currency transactions ...... $ 5,629,659
------------
Change in unrealized appreciation (depreciation) --
Investments .............................................................. $ (1,412,134)
Written options .......................................................... 583,758
Translation of assets and liabilities in foreign currencies .............. (2,140,260)
Interest rate swaps ...................................................... (55,263)
------------
Net unrealized loss on investments and foreign currency transactions .... $ (3,023,899)
------------
Net realized and unrealized gain on investments and foreign currency ... $ 2,605,760
------------
Increase in net assets from operations ................................ $ 19,061,423
============
</TABLE>
See notes to financial statements
9
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended Year Ended
May 31, 1998 November 30, 1997
----------------- ------------------
<S> <C> <C>
Increase (Decrease) in net assets:
From operations --
Net investment income ................................................................... $ 16,455,663 $ 34,660,278
Net realized gain (loss) on investments and foreign currency transactions ............... 5,629,659 (6,065,965)
Net unrealized loss on investments and foreign currency translation ..................... (3,023,899) (3,847,810)
------------- -------------
Increase in net assets from operations ................................................. $ 19,061,423 $ 24,746,503
------------- -------------
Distributions declared to shareholders --
From net investment income .............................................................. $ (16,455,663) $ (34,660,278)
In excess of net investment income ...................................................... (279,824) (2,305,112)
------------- -------------
Total distributions declared to shareholders .......................................... $ (16,735,487) $ (36,965,390)
------------- -------------
Trust share (principal) transactions --
Cost of Treasury shares acquired ........................................................ $ (9,758,634) $ (17,696,661)
------------- -------------
Total decrease in net assets .......................................................... $ (7,432,698) $ (29,915,548)
Net assets:
At beginning of period .................................................................. 524,580,470 554,496,018
------------- -------------
At end of period (including accumulated distributions in excess of net investment income
of $2,465,244 and $2,185,420, respectively) ............................................ $ 517,147,772 $ 524,580,470
============= =============
</TABLE>
See notes to financial statements
10
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended
May 31, 1998
------------------
<S> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ........................ $ 7.41
---------
Income from investment operations# --
Net investment income ........................................ $ 0.24
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ............................... 0.04
---------
Total from investment operations ............................ $ 0.28
---------
Less distributions declared to shareholders --
From net investment income ................................... $ (0.24)
From net realized gain on investments and foreign
currency transactions ....................................... --
In excess of net investment income+++ ........................ 0.00
Tax return of capital ........................................ --
---------
Total distributions declared to shareholders ................ $ (0.24)
---------
Net increase from repurchase of capital shares ................ $ 0.01
----------
Net asset value -- end of period .............................. $ 7.46
=========
Per share market value -- end of period ....................... $ 6.500
Total return .................................................. (0.30)%++
Ratios (to average net assets)/Supplemental data
Expenses ## ................................................. 0.92%+
Net investment income ....................................... 6.32%+
Portfolio turnover ........................................... 157%
Net assets at end of period
(000 omitted) ............................................... $ 517,148
#Per share data for the periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
+Annualized.
++Not annualized.
+++For the period ended May 31, 1998, the per share distribution in excess of
net investment income was less than $0.01.
<CAPTION>
Year Ended November 30,
---------------------------------------------------------
1997 1996 1995 1994
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ....................... $ 7.56 $ 7.62 $ 6.90 $ 7.83
-------- -------- ------- --------
Income from investment operations# --
Net investment income ....................................... $ 0.49 $ 0.49 $ 0.49 $ 0.48
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .............................. (0.14) (0.07) 0.64 (0.88)
-------- -------- ------- ---------
Total from investment operations ........................... $ 0.35 $ 0.42 $ 1.13 $ (0.40)
-------- -------- ------- ---------
Less distributions declared to shareholders --
From net investment income .................................. $ (0.49) $ (0.49) $ (0.49) $ (0.14)
From net realized gain on investments and foreign
currency transactions ...................................... -- -- -- (0.05)
In excess of net investment income+++ ....................... $ (0.03) $ (0.05) -- $ (0.02)
Tax return of capital ....................................... -- -- -- (0.32)
-------- -------- ------- --------
Total distributions declared to shareholders ............... $ (0.52) $ (0.54) $ (0.49) $ (0.53)
-------- -------- ------- --------
Net increase from repurchase of capital shares ............... $ 0.02 $ 0.06 $ 0.08 --
-------- -------- ------- --------
Net asset value -- end of period ............................. $ 7.41 $ 7.56 $ 7.62 $ 6.90
======== ======== ======= ========
Per share market value -- end of period ...................... $ 6.688 $ 6.750 $ 6.500 $ 6.313
Total return ................................................. 6.91% 12.61% 10.96% (3.90)%
Ratios (to average net assets)/Supplemental data
Expenses ## ................................................ 0.94% 1.00% 0.99% 0.97%
Net investment income ...................................... 6.56% 6.63% 6.84% 6.51%
Portfolio turnover .......................................... 248% 249% 318% 295%
Net assets at end of period
(000 omitted) .............................................. $524,580 $554,496 $606,135 $617,789
#Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
+Annualized.
++Not annualized.
+++For the period ended May 31, 1998, the per share distribution in excess of net investment income was less than $0.01.
<CAPTION>
Year Ended November 30,
-----------------------
1993
-------------
<S> <C>
Per share data (for a share outstanding throughout
each period):
Net asset value -- beginning of period ........................ $ 7.59
--------
Income from investment operations# --
Net investment income ........................................ $ 0.52
Net realized and unrealized gain (loss) on investments and
foreign currency transactions ............................... 0.38
--------
Total from investment operations ............................ $ 0.90
--------
Less distributions declared to shareholders --
From net investment income ................................... $ (0.44)
From net realized gain on investments and foreign
currency transactions ....................................... (0.22)
In excess of net investment income+++ ........................ --
Tax return of capital ........................................ --
--------
Total distributions declared to shareholders ................ $ (0.66)
--------
Net increase from repurchase of capital shares ................ --
--------
Net asset value -- end of period .............................. $ 7.83
========
Per share market value -- end of period ....................... $ 7.125
Total return .................................................. 7.32%
Ratios (to average net assets)/Supplemental data
Expenses ## ................................................. 0.93%
Net investment income ....................................... 6.61%
Portfolio turnover ........................................... 453%
Net assets at end of period
(000 omitted) ............................................... $744,448
#Per share data for the periods subsequent to November 30, 1993, are based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
+Annualized.
++Not annualized.
+++For the period ended May 31, 1998, the per share distribution in excess of
net investment income was less than $0.01.
</TABLE>
See notes to financial statements
11
<PAGE>
<TABLE>
<CAPTION>
Year Ended November
30,
---------------------------
1992 1991
Per share data (for a share outstanding throughout each period): ------------- -------------
<S> <C> <C>
Net asset value --
beginning of period ............................................. $ 8.08 $ 8.41
-------- -------
Income from investment operations --
Net investment income[sec] ...................................... $ 0.61 $ 0.69
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .................................. (0.23) 0.16
-------- --------
Total from investment operations ............................... $ 0.38 $ 0.85
-------- --------
Less distributions declared to shareholders --
From net investment income ...................................... $ (0.57) $ (0.64)
From net realized gain on investments and
foreign currency transactions ................................. -- --
From paid-in capital ............................................ (0.30) (0.54)
-------- --------
Total distributions declared to shareholders ................... $ (0.87) $ (1.18)
-------- --------
Net asset value -- end of period ................................. $ 7.59 $ 8.08
======== ========
Per share market value--end of period ............................ $ 7.250 $ 8.000
Total return .................................................... 1.11% 13.73%
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ....................................................... 1.03% 1.04%
Net investment income .......................................... 7.80% 8.38%
Portfolio turnover .............................................. 245% 805%
Net assets at end of period (000 omitted) ....................... $743,103 $785,992
<CAPTION>
Year Ended November 30,
------------------------------------------
1990 1989 1988
Per share data (for a share outstanding throughout each period): -------------- ------------- -------------
<S> <C> <C> <C>
Net asset value --
beginning of period ............................................. $ 8.92 $ 9.18 $ 9.33
-------- -------- -------
Income from investment operations --
Net investment income[sec] ...................................... $ 0.78 $ 0.82 $ 0.94
Net realized and unrealized gain (loss) on investments and
foreign currency transactions .................................. (0.11) 0.09 0.12
-------- -------- --------
Total from investment operations ............................... $ 0.67 $ 0.91 $ 1.06
-------- -------- --------
Less distributions declared to shareholders --
From net investment income ...................................... $ (0.68) $ (0.90) $ (0.88)
From net realized gain on investments and
foreign currency transactions ................................. -- -- (0.17)
From paid-in capital ............................................ (0.50) ( 0.27) (0.16)
-------- -------- --------
Total distributions declared to shareholders ................... $ (1.18) $ (1.17) $ (1.21)
-------- -------- --------
Net asset value -- end of period ................................. $ 8.41 $ 8.92 $ 9.18
======== ======== ========
Per share market value--end of period ............................ $ 8.125 $ 10.000 $ 10.125
Total return .................................................... (6.82)% 11.83% 15.77%
Ratios (to average net assets)/Supplemental data[sec]:
Expenses ....................................................... 1.05% 1.08% 1.11%
Net investment income .......................................... 9.16% 9.23% 9.87%
Portfolio turnover .............................................. 535% 640% 307%
Net assets at end of period (000 omitted) ....................... $813,978 $857,252 $873,503
</TABLE>
[sec]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
12
<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, forward 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.
Equity securities listed on securities exchanges or reported through the NASDAQ
system are reported at market value using last sale prices. Unlisted equity
securities or listed equity securities for which last sale prices are not
available are reported at market value using last quoted bid 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. Futures
contracts, 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 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 collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Trust to obtain those
securities in the event of a default under the repurchase agreement. The Trust
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the Trust
under each such repurchase agreement. The Trust, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a joint
trading account for the purpose of entering into one or more repurchase
agreements.
Foreign Currency Translation -- Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction gains
13
<PAGE>
Notes to Financial Statements -- continued
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 options 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.
Futures Contracts -- The Trust may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the Trust is
required to deposit with the broker either in cash or securities an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the Trust each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes as
unrealized gains or losses by the Trust. The Trust's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Investments 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.
Investments in equity index contracts or contracts on related options for
purposes other than hedging, may be made when the Trust has cash on hand and
wishes to participate in anticipated market appreciation while the cash is
being invested. 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. The Trust may also use contracts in a manner intended to protect
foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Trust may
enter into contracts with the intent of changing the relative exposure of the
Trust's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains or
losses are recorded as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
14
<PAGE>
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 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 discount is amortized or 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.
Fees Paid Indirectly -- The Trust's custody fee is calculated as a percentage
of the Trust's month end net assets. The 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 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.
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 net realized gains.
At November 30, 1997, the Trust, for federal income tax purposes, had a capital
loss carryforward of $37,592,355 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) November 30, 2004, ($196,662),
and November 30, 2005, ($8,818,381).
(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
average daily net assets and 5.33% of investment income.
15
<PAGE>
Notes to Financial Statements -- continued
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's average daily net assets:
<TABLE>
<S> <C>
First $1 billion.................. 0.0150%
Next $1 billion................... 0.0125%
Next $1 billion................... 0.0100%
In excess of $3 billion........... 0.0000%
</TABLE>
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
renumeration 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). The Trust has an unfunded defined benefit plan for all of its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a
net periodic pension expense of $20,886 for the period ended May 31, 1998.
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:
<TABLE>
<CAPTION>
Purchases Sales
-----------------------------------------------------------------------------------------
<S> <C> <C>
U.S. government securities ............................ $729,842,111 $702,620,827
============ ============
Investments (non-U.S. government securities) .......... $ 80,226,631 $ 73,914,929
============ ============
</TABLE>
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:
<TABLE>
<S> <C>
Aggregate cost ........................ $523,742,569
============
Gross unrealized appreciation ......... $ 6,517,019
Gross unrealized depreciation ......... (3,121,490)
------------
Net unrealized appreciation .......... $ 3,395,529
============
</TABLE>
(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 (without par
value). Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
May 31, 1998 November 30, 1997
---------------------------------------------------------------------------------------------
Shares Amount Shares Amount
----------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Treasury Shares acquired ......... 1,439,200 $9,758,634 2,631,200 $17,696,661
--------- ---------- --------- -----------
</TABLE>
In accordance with the provisions of the Trust's prospectus, 1,439,200 shares
of beneficial interest were purchased by the Trust during the period ended May
31, 1998, at an average price per share of $6.78 and a weighted average
discount of 9.05% per share. The Trust reacquired 2,631,200 shares of
beneficial interest during the year ended November 30, 1997, at an average
price per share of $6.73 and a weighted average discount of 9.6% per share.
16
<PAGE>
(6) Line of Credit
The Trust and other affiliated Trusts participate in a $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the acquisition of
Treasury shares. Interest is charged to each Trust, 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 Trusts at the end of each quarter. The commitment fee allocated
to the Trust for the period ended May 31, 1998, was $1,194.
(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, forward foreign currency exchange
contracts, swap agreements, and futures 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
- ---------------------------
<TABLE>
<CAPTION>
1997 Calls 1997 Puts
-----------------------------------------------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period --
Swiss Francs/Deutsche Marks .................. 19,084 $ 133,083 -- $ --
Options written --
Canadian Dollars ............................. -- -- 2,243 8,392
Deutsche Marks ............................... -- -- 5,808 33,389
Japanese Government Bonds .................... 113,200 1,739 226,600 6,406
Japanese Yen/Deutsche Marks .................. 251,984 58,600
Options terminated in closing transactions -
Deutsche Marks ............................... -- -- (5,808) (33,389)
Japanese Government Bonds .................... -- -- (113,200) (3,826)
Swiss Francs/Deutsche Marks .................. (19,084) (133,083) -- --
---------- ---------
Outstanding, end of period ..................... $ 60,339 $ 10,972
========== =========
Options outstanding at end of period consist of:
Canadian Dollars ............................. -- $ -- 2,243 $ 8,392
Japanese Government Bonds .................... 113,200 1,739 113,400 2,580
Japanese Yen/Deutsche Marks .................. 251,984 58,600 -- --
---------- ---------
Outstanding, end of period ..................... $ 60,339 $ 10,972
========== =========
</TABLE>
At May 31, 1998, the Trust had sufficient cash and/or securities at least equal
to the value of the written options.
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>
Sales 09/25/1998 .......... DKK 11,066,036 $1,628,316 $1,635,057 $ (6,741)
09/25/1998 .......... JPY 109,889,120 843,905 805,916 37,989
---------- ---------- ---------
$2,472,221 $2,440,973 $ 31,248
========== ========== =========
Purchases 09/25/1998 .......... CAD 1,321,322 $ 923,078 $ 909,425 $ (13,653)
09/25/1998 .......... JPY 1,792,070 13,762 13,142 (620)
---------- ---------- ---------
$ 936,840 $ 922,567 $ (14,273)
========== ========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $14,958 with Deutschebank and
$33,206 with Merrill Lynch, and a net payable of $4,292 with Bankers Trust at
May 31, 1998.
At May 31, 1998, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
(8) Restricted Securities
The Trust may invest not more than 10% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At May 31, 1998,
the Trust owned the following restricted securities (constituting 0.47% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Trust does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
<TABLE>
<CAPTION>
Principal
Date of Amount
Description Acquisition (000 omitted) Cost Value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHA, 10.375s, 2030 8/16/1993 $2,448 $2,633,451 $2,452,889
</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 May
31, 1998, the related statement of operations for the six months then ended, the
statement of changes in net assets for the six months ended May 31, 1998 and the
year ended November 30, 1997, and the financial highlights for the six months
ended May 31, 1998 and for each of the years in the ten-year period ended
November 30, 1997. 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 May
31, 1998 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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Markets Income Trust at May 31, 1998, 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
July 10, 1998
19
<PAGE>
MFS[RegTM] Government Markets Income Trust
Trustees
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991), MFS Investment Management
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.
Abby M. O'Neill (2)
Private Investor
Walter E. Robb, III (1)
President and Treasurer,
Benchmark Advisors, Inc.
(corporate financial consultants);
President, Benchmark Consulting
Group, Inc. (office services)
Arnold D. Scott*
Senior Executive Vice President,
Director, and Secretary,
MFS Investment Management
Jeffrey L. Shames*
Chairman, Chief Executive Officer,
and Director, MFS Investment
Management
J. Dale Sherratt(1)
President, Insight Resources, Inc.
(acquisition planning specialists)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries (holding company)
* Affiliated with the Investment Adviser.
(1) Member of Audit Committee.
(2) Member of Portfolio Trading Committee.
[Recycle symbol] This report is printed on recycled paper.
Portfolio Managers
Stephen C. Bryant*
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar, and Dividend
Disbursing Agent
State Street Bank and
Trust Company
c/o MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Independent Auditors
Deloitte & Touche LLP
Investment Adviser
Massachusetts Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
MGFCE-3 7/98 66M
