-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JtwQyvy40xk3M6e6hjoSqFPjS1PUqoqh3n4og0jyHGHy6HipiCgk2An/8lEedWxs Ofh6noTbp2TilwAUGY/emg== 0000950156-07-000071.txt : 20070202 0000950156-07-000071.hdr.sgml : 20070202 20070202085907 ACCESSION NUMBER: 0000950156-07-000071 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20061130 FILED AS OF DATE: 20070202 DATE AS OF CHANGE: 20070202 EFFECTIVENESS DATE: 20070202 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MFS GOVERNMENT MARKETS INCOME TRUST CENTRAL INDEX KEY: 0000811922 IRS NUMBER: 046565627 STATE OF INCORPORATION: MA FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-05078 FILM NUMBER: 07574439 BUSINESS ADDRESS: STREET 1: 500 BOYLSTON ST STREET 2: 15TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 18006372929 MAIL ADDRESS: STREET 1: 500 BOYLSTON STREET STREET 2: 15TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 N-CSR 1 d662001.txt GOVERNMENT MARKETS INCOME TRUST UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-5078 - ------------------------------------------------------------------------------- MFS GOVERNMENT MARKETS INCOME TRUST - ------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 500 Boylston Street, Boston, Massachusetts 02116 - ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Susan S. Newton Massachusetts Financial Services Company 500 Boylston Street Boston, Massachusetts 02116 - ------------------------------------------------------------------------------- (Name and address of agents for service) Registrant's telephone number, including area code: (617) 954-5000 - ------------------------------------------------------------------------------- Date of fiscal year end: November 30 - ------------------------------------------------------------------------------- Date of reporting period: November 30, 2006 - ------------------------------------------------------------------------------- ITEM 1. REPORTS TO STOCKHOLDERS. MFS(R) GOVERNMENT MARKETS INCOME TRUST M F S(R) INVESTMENT MANAGEMENT [graphic omitted] ANNUAL REPORT 11/30/06 MGF-ANN MFS(R) GOVERNMENT MARKETS INCOME TRUST LETTER FROM THE CEO 1 - -------------------------------------------------------------- PORTFOLIO COMPOSITION 2 - -------------------------------------------------------------- MANAGEMENT REVIEW 3 - -------------------------------------------------------------- PORTFOLIO MANAGER'S PROFILE 4 - -------------------------------------------------------------- PERFORMANCE SUMMARY 5 - -------------------------------------------------------------- DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN 7 - -------------------------------------------------------------- PORTFOLIO OF INVESTMENTS 8 - -------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES 15 - -------------------------------------------------------------- STATEMENT OF OPERATIONS 16 - -------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS 17 - -------------------------------------------------------------- FINANCIAL HIGHLIGHTS 18 - -------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS 19 - -------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 27 - -------------------------------------------------------------- RESULTS OF SHAREHOLDER MEETING 28 - -------------------------------------------------------------- TRUSTEES AND OFFICERS 29 - -------------------------------------------------------------- BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT 35 - -------------------------------------------------------------- PROXY VOTING POLICIES AND INFORMATION 39 - -------------------------------------------------------------- QUARTERLY PORTFOLIO DISCLOSURE 39 - -------------------------------------------------------------- FEDERAL TAX INFORMATION 39 - -------------------------------------------------------------- MFS(R) PRIVACY NOTICE 40 - -------------------------------------------------------------- CONTACT INFORMATION BACK COVER - -------------------------------------------------------------- TRUST OBJECTIVE: The Trust seeks to provide a high level of current income. New York Stock Exchange Symbol: MGF -------------------------------------------------------- NOT FDIC INSURED o MAY LOSE VALUE o NO BANK OR CREDIT UNION GUARANTEE o NOT A DEPOSIT o NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY OR NCUA/NCUSIF -------------------------------------------------------- LETTER FROM THE CEO [Photo of Robert J. Manning] Dear Shareholders: What a difference a year can make. By the end of 2005, the Dow Jones Industrial Average had lost value over the course of the year, as stocks were beaten back by a myriad of investor worries, including a spike in oil prices, a rise in interest rates, and political uncertainty in the Middle East. Fast forward to 2006, and we have seen a dramatically different picture. While there were some fluctuations in the global markets in the first half of the year, the second half of 2006 has, so far, been good to many investors. Oil prices retreated, boosting consumer confidence, and interest rates have held steady. U.S. stock markets responded favorably to this news, as the Dow reached a record high in October, passing the 12,000 mark. What does all of this mean for you? If you're focused on a long-term investment strategy, the high points in the road -- and the bumps -- should not necessarily dictate portfolio action on your part. Markets are inherently cyclical, and we firmly believe that investors who remain committed to a long- term investment strategy are more likely to achieve their goals than those who consistently chase short-term performance. At MFS(R), our unique teamwork approach to managing money and our global research platform support an unwavering focus on helping you realize your long-term financial goals. We believe in a three-pronged investment strategy of allocating your holdings across major asset classes, diversifying within each class, and rebalancing regularly. Of course, these strategies cannot guarantee a profit or protect against a loss. Investing and planning for the long term require diligence and patience -- two traits that are essential to capitalizing on the many opportunities the financial markets can offer. Respectfully, /s/ Robert J. Manning Robert J. Manning Chief Executive Officer and Chief Investment Officer MFS Investment Management(R) January 16, 2007 The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed. PORTFOLIO COMPOSITION PORTFOLIO STRUCTURE (i) Bonds 95.8% Cash & Other Net Assets 4.2% FIXED INCOME SECTORS (i) Mortgage-Backed Securities 48.2% ------------------------------------------------ U.S. Government Agencies 22.7% ------------------------------------------------ U.S. Treasury Securities 14.0% ------------------------------------------------ Non-U.S. Government Bonds 8.2% ------------------------------------------------ Emerging Market Bonds 2.2% ------------------------------------------------ Commercial Mortgage-Backed Securities 0.5% ------------------------------------------------ CREDIT QUALITY OF BONDS (r) AAA 97.1% ------------------------------------------------ AA 0.1% ------------------------------------------------ A 0.3% ------------------------------------------------ BBB 1.7% ------------------------------------------------ BB 0.8% ------------------------------------------------ PORTFOLIO FACTS Average Duration (d) 4.1 ------------------------------------------------ Average Life (m) 6.9 yrs. ------------------------------------------------ Average Maturity (m) 14.5 yrs. ------------------------------------------------ Average Credit Quality of Rated Securities (long-term) (a) AAA ------------------------------------------------ Average Credit Quality of Rated Securities (short-term) (a) A-1 ------------------------------------------------ (a) The average credit quality of rated securities is based upon a market weighted average of portfolio holdings that are rated by public rating agencies. (d) Duration is a measure of how much a bond's price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value. (i) For purposes of this graphical presentation, the bond component includes both accrued interest amounts and the equivalent exposure from any derivative holdings, if applicable. (m) The average maturity shown is calculated using the final stated maturity on the portfolio's holdings without taking into account any holdings which have been pre- refunded or pre-paid to an earlier date or which have a mandatory put date prior to the stated maturity. The average life shown takes into account these earlier dates. (r) Each security is assigned a rating from Moody's Investors Service. If not rated by Moody's, the rating will be that assigned by Standard & Poor's. Likewise, if not assigned a rating by Standard & Poor's, it will be based on the rating assigned by Fitch, Inc. For those portfolios that hold a security which is not rated by any of the three agencies, the security is considered Not Rated. Holdings in U.S. Treasuries and government agency mortgage-backed securities, if any, are included in the "AAA"-rating category. Percentages are based on the total market value of investments as of 11/30/06. Percentages are based on net assets as of 11/30/06, unless otherwise noted. The portfolio is actively managed and current holdings may be different. MANAGEMENT REVIEW SUMMARY OF RESULTS For the twelve months ended November 30, 2006, the MFS Government Markets Income Trust provided a total return of 5.74%, at net asset value. This compares with a return of 5.85% for the trust's benchmark, the Lehman Brothers U.S. Government/Mortgage Bond Index. DETRACTORS FROM PERFORMANCE Over the reporting period, the trust's yield curve(y) positioning held back relative results. CONTRIBUTORS TO PERFORMANCE The trust's foreign currency exposure contributed to relative performance. Our positioning in agency related securities and some sovereign debt securities of Ireland, the Netherlands, and Spain also generated positive results. Respectfully, Geoffrey Schechter Portfolio Manager Note to Shareholders: Effective April 1, 2006, Geoffrey Schechter became portfolio manager of the trust replacing Peter Vaream. (y) A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates. The views expressed in this report are those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market and other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any MFS fund. References to specific securities are not recommendations of such securities and may not be representative of any MFS fund's current or future investments. PORTFOLIO MANAGER'S PROFILE Geoffrey L. Schechter, CFA, CPA, is a Senior Vice President of MFS Investment Management (MFS) and a government bond portfolio manager. He also manages several other municipal and bond portfolios for MFS. He joined MFS as a portfolio manager in 1993, and named Senior Vice President in 2002. Geoffrey is a graduate of the University of Texas and has an M.B.A. degree from Boston University. He holds the Chartered Financial Analyst (CFA) and Certified Public Accountant (CPA) designations. Note to Shareholders: Effective April 1, 2006, Geoffrey Schechter became portfolio manager of the trust replacing Peter Vaream. PERFORMANCE SUMMARY THROUGH 11/30/06 All results are historical. Investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than their original cost. More recent returns may be more or less than those shown. Past performance is no guarantee of future results. PRICE SUMMARY Year ended 11/30/06 Date Price - ------------------------------------------------------------------------------ Net Asset Value 11/30/06 $7.28 - ------------------------------------------------------------------------------ 11/30/05 $7.27 - ------------------------------------------------------------------------------ New York Stock Exchange Price 11/30/06 $6.60 - ------------------------------------------------------------------------------ 1/11/06 (high) (t) $6.62 - ------------------------------------------------------------------------------ 6/29/06 (low) (t) $6.23 - ------------------------------------------------------------------------------ 11/30/05 $6.39 - ------------------------------------------------------------------------------ TOTAL RETURNS VS BENCHMARK Year ended 11/30/06 New York Stock Exchange Price (r) 9.06% - ------------------------------------------------------------------------------ Net Asset Value (r) 5.74% - ------------------------------------------------------------------------------ Lehman Brothers U.S. Government/Mortgage Bond Index (f) 5.85% - ------------------------------------------------------------------------------ (f) Source: FactSet Research Systems Inc. (r) Includes reinvestment of dividends and capital gain distributions. (t) For the period December 1, 2005 through November 30, 2006. INDEX DEFINITION Lehman Brothers U.S. Government/Mortgage Bond Index - measures debt issued by the U.S. Government as well as mortgage-backed pass-through securities of Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). It is not possible to invest directly in an index. NOTES TO PERFORMANCE SUMMARY The trust's shares may trade at a discount to net asset value. Shareholders do not have the right to cause the trust to repurchase their shares at net asset value. When trust shares trade at a premium, buyers pay more than the asset value underlying trust shares, and shares purchased at a premium would receive less than the amount paid for them in the event of the trust's liquidation. As a result, the total returns that are calculated based on the net asset value and New York Stock Exchange prices can be different. The trust's monthly distributions may include a return of capital to shareholders. Distributions that are treated for federal income tax purposes as a return of capital will reduce each shareholder's basis in his or her shares and, to the extent the return of capital exceeds such basis, will be treated as gain to the shareholder from a sale of shares. Returns of shareholder capital have the effect of reducing the trust's assets and may increase the trust's expense ratio. From time to time the trust may receive proceeds from litigation settlements, without which performance would be lower. KEY RISK CONSIDERATIONS The portfolio's yield and share prices change daily based on the credit quality of its investments and changes in interest rates. In general, the value of debt securities will decline when interest rates rise and will increase when interest rates fall. Debt securities with longer maturity dates will be subject to greater price fluctuations than those with shorter maturities. Mortgage securities are subject to prepayment risk which can offer less potential for gains in a declining interest rate environment and greater potential for loss in a rising interest rate environment. Derivatives involve risks that may be different from, and potentially greater than, those of the underlying indicator's in whose value the derivative is based. The value of the derivative can move in unexpected ways and result in unanticipated losses and increased volatility if the value of the underlying indicator(s) does not move in the direction or the extent anticipated. Interest payments on inflation adjusted debt instruments can be unpredictable and vary based on the level of inflation. The value of floating rate loans depends on the credit quality and adequacy of the collateral securing the loan. Enforcing rights against the collateral may be difficult or insufficient if the borrower of the floating rate loan defaults. Foreign investments can be more volatile than U.S. investments. Changes in currency exchange rates may affect the portfolio's net asset value, the value of dividends and interest earned and gains and losses realized on the sale of securities. Investing in emerging markets can involve risks in addition to those generally associated with investing in more developed foreign markets. When you sell your shares, they may be worth more or less than the amount you paid for them. Please see the prospectus for further information regarding these and other risk considerations. These risks may increase share price volatility. 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. DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN The trust offers a Dividend Reinvestment and Cash Purchase Plan that allows you to reinvest either all of the distributions paid by the trust or only the long-term capital gains. Purchases are made at the market price unless that price exceeds the net asset value (the shares are trading at a premium). If the shares are trading at a premium, purchases will be made at a discounted price of either the net asset value or 95% of the market price, whichever is greater. Twice each year you can also buy shares. Investments may be made in any amount over $100 in January and July on the 15th of the month or shortly thereafter. If your shares are in the name of a brokerage firm, bank, or other nominee, you can ask the firm or nominee to participate in the plan on your behalf. If the nominee does not offer the plan, you may wish to request that your shares be re-registered in your own name so that you can participate. There is no service charge to reinvest distributions, nor are there brokerage charges for shares issued directly by the trust. However, when shares are bought on the New York Stock Exchange or otherwise on the open market, each participant pays a pro rata share of the commissions. The automatic reinvestment of distributions does not relieve you of any income tax that may be payable (or required to be withheld) on the distributions. To enroll in or withdraw from the plan, or if you have any questions, call 1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. Please have available the name of the trust and your account and Social Security numbers. For certain types of registrations, such as corporate accounts, instructions must be submitted in writing. Please call for additional details. When you withdraw 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. The trust has amended the plan to appoint Computershare Trust Company, N.A. (the Transfer Agent for the trust as of December 18, 2006) as agent for the plan. The effective date for the amendment is May 1, 2007. Under the terms of the plan, if you do not withdraw from the plan prior to May 1, 2007, you will be deemed to accept the appointment of Computershare Trust Company, N.A. as your agent under the plan. PORTFOLIO OF INVESTMENTS 11/30/06 The Portfolio of Investments is a complete list of all securities owned by your trust. It is categorized by broad-based asset classes. Bonds - 95.9% - --------------------------------------------------------------------------------------------------------
ISSUER SHARES/PAR VALUE ($) - -------------------------------------------------------------------------------------------------------- U.S. Bonds - 85.7% - -------------------------------------------------------------------------------------------------------- Agency - Other - 7.9% - -------------------------------------------------------------------------------------------------------- Financing Corp., 10.7%, 2017 $ 4,095,000 $ 6,089,810 Financing Corp., 9.4%, 2018 3,085,000 4,277,115 Financing Corp., 9.8%, 2018 4,350,000 6,192,503 Financing Corp., 10.35%, 2018 6,820,000 10,100,986 Financing Corp., STRIPS, 0%, 2017 5,000,000 2,943,740 ------------ $ 29,604,154 - -------------------------------------------------------------------------------------------------------- Asset Backed & Securitized - 0.5% - -------------------------------------------------------------------------------------------------------- Prudential Securities Secured Financing Corp., FRN, 7.4504%, 2013(z) $ 1,819,000 $ 1,953,916 - -------------------------------------------------------------------------------------------------------- Mortgage Backed - 48.0% - -------------------------------------------------------------------------------------------------------- Fannie Mae, 7.056%, 2007 $ 267,703 $ 268,332 Fannie Mae, 4.79%, 2012 3,522,804 3,439,236 Fannie Mae, 4.543%, 2013 854,495 837,005 Fannie Mae, 4.8%, 2013 411,315 407,228 Fannie Mae, 4.845%, 2013 1,009,870 998,094 Fannie Mae, 5%, 2013 - 2027 11,345,776 11,280,989 Fannie Mae, 5.06%, 2013 404,183 403,342 Fannie Mae, 5.369%, 2013 744,712 761,003 Fannie Mae, 4.45%, 2014 1,213,651 1,177,272 Fannie Mae, 4.519%, 2014 1,156,569 1,128,325 Fannie Mae, 4.6%, 2014 485,535 474,784 Fannie Mae, 4.667%, 2014 2,943,157 2,895,629 Fannie Mae, 4.77%, 2014 495,403 486,843 Fannie Mae, 4.847%, 2014 3,389,087 3,367,905 Fannie Mae, 4.871%, 2014 1,813,965 1,805,616 Fannie Mae, 5.1%, 2014 528,703 531,595 Fannie Mae, 4.56%, 2015 626,713 609,887 Fannie Mae, 4.62%, 2015 697,204 681,263 Fannie Mae, 4.665%, 2015 422,689 414,018 Fannie Mae, 4.69%, 2015 345,492 339,026 Fannie Mae, 4.7%, 2015 484,883 475,930 Fannie Mae, 4.74%, 2015 390,000 382,099 Fannie Mae, 4.815%, 2015 543,000 534,326 Fannie Mae, 4.82%, 2015 1,467,993 1,447,535 Fannie Mae, 4.85%, 2015 345,180 341,954 Fannie Mae, 4.87%, 2015 365,934 362,920 Fannie Mae, 4.89%, 2015 409,968 407,131 Fannie Mae, 4.925%, 2015 1,357,623 1,355,178 Fannie Mae, 5.471%, 2015 951,850 984,349 Fannie Mae, 5.423%, 2016 806,283 831,812 Fannie Mae, 6.5%, 2016 - 2036 9,189,979 9,416,726 Fannie Mae, 5.5%, 2017 - 2035 67,601,914 67,528,216 Fannie Mae, 6%, 2017 - 2034 11,949,566 12,129,650 Fannie Mae, 4.5%, 2019 14,797,936 14,421,147 Fannie Mae, 4.88%, 2020 360,293 358,216 Freddie Mac, 4.5%, 2013 - 2015 2,254,574 2,235,987 Freddie Mac, 4.375%, 2015 2,033,564 1,991,330 Freddie Mac, 5%, 2016 - 2025 12,710,422 12,675,184 Freddie Mac, 6%, 2021 - 2035 1,854,116 1,877,812 Freddie Mac, 5.5%, 2025 - 2035 10,923,080 10,907,839 Ginnie Mae, 5.5%, 2033 6,344,505 6,362,258 ------------ $179,334,991 - -------------------------------------------------------------------------------------------------------- U.S. Government Agencies - 14.5% - -------------------------------------------------------------------------------------------------------- Aid-Egypt, 4.45%, 2015 $ 1,755,000 $ 1,719,918 Aid-Israel, 0%, 2021 - 2024 7,830,000 3,415,493 Fannie Mae, 4.625%, 2013 736,000 731,047 Farmer Mac, 5.5%, 2011 (n) 3,010,000 3,094,217 Federal Home Loan Bank, 4.5%, 2007 2,250,000 2,243,165 Federal Home Loan Bank, 4.625%, 2008 9,090,000 9,055,922 Freddie Mac, 4.2%, 2007 4,358,000 4,323,005 Overseas Private Investment Corp., 0%, 2007 1,713,000 1,800,791 Small Business Administration, 8.875%, 2011 148,543 155,168 Small Business Administration, 6.34%, 2021 1,079,623 1,126,607 Small Business Administration, 6.35%, 2021 1,244,233 1,298,060 Small Business Administration, 6.44%, 2021 1,155,448 1,206,616 Small Business Administration, 6.625%, 2021 1,264,655 1,332,391 Small Business Administration, 4.98%, 2023 840,352 841,839 Small Business Administration, 4.34%, 2024 1,212,944 1,173,225 Small Business Administration, 4.72%, 2024 2,185,259 2,160,281 Small Business Administration, 4.77%, 2024 2,102,339 2,082,607 Small Business Administration, 4.86%, 2024 - 2025 2,630,075 2,615,203 Small Business Administration, 4.87%, 2024 1,463,750 1,456,613 Small Business Administration, 5.52%, 2024 1,355,284 1,388,046 Small Business Administration, 4.76%, 2025 2,126,518 2,097,602 Small Business Administration, 5.11%, 2025 1,283,900 1,292,124 U.S. Department of Housing & Urban Development, 6.36%, 2016 1,580,000 1,651,283 U.S. Department of Housing & Urban Development, 6.59%, 2016 5,612,000 5,728,174 ------------ $ 53,989,397 - -------------------------------------------------------------------------------------------------------- U.S. Treasury Obligations - 14.8% - -------------------------------------------------------------------------------------------------------- U.S. Treasury Bonds, 6.5%, 2010(f) $ 19,994,000 $ 21,181,144 U.S. Treasury Bonds, 10.375%, 2012 8,400,000 8,828,207 U.S. Treasury Bonds, 12%, 2013 3,036,000 3,398,186 U.S. Treasury Bonds, 8.75%, 2017 6,100,000 8,232,615 U.S. Treasury Bonds, 4.5%, 2036 6,301,000 6,238,481 U.S. Treasury Bonds, TIPS, 3.875%, 2009 2,717,330 2,797,576 U.S. Treasury Notes, 4.25%, 2015 4,400,000 4,335,549 ------------ $ 55,011,758 - -------------------------------------------------------------------------------------------------------- TOTAL U.S. BONDS $319,894,216 - -------------------------------------------------------------------------------------------------------- Foreign Bonds - 10.2% - -------------------------------------------------------------------------------------------------------- Australia - 0.1% - -------------------------------------------------------------------------------------------------------- Commonwealth of Australia, 6%, 2017 AUD 235,000 $ 191,303 - -------------------------------------------------------------------------------------------------------- Austria - 0.6% - -------------------------------------------------------------------------------------------------------- Republic of Austria, 4.65%, 2018 EUR 1,546,000 $ 2,215,805 - -------------------------------------------------------------------------------------------------------- Brazil - 0.0% - -------------------------------------------------------------------------------------------------------- Federative Republic of Brazil, 8%, 2018 $ 102,000 $ 113,781 - -------------------------------------------------------------------------------------------------------- Canada - 0.7% - -------------------------------------------------------------------------------------------------------- Canada Housing Trust, 4.6%, 2011 CAD 695,000 $ 626,468 Government of Canada, 5.5%, 2009 CAD 655,000 596,322 Government of Canada, 4.5%, 2015 CAD 1,120,000 1,024,050 Government of Canada, 8%, 2023 CAD 243,000 314,280 Government of Canada, 5.75%, 2033 CAD 60,000 67,511 ------------ $ 2,628,631 - -------------------------------------------------------------------------------------------------------- Chile - 0.4% - -------------------------------------------------------------------------------------------------------- HQI Transelec Chile S.A., 7.875%, 2011 $ 314,000 $ 335,880 Republic of Chile, FRN, 5.7763%, 2008 1,057,000 1,060,171 ------------ $ 1,396,051 - -------------------------------------------------------------------------------------------------------- Denmark - 0.4% - -------------------------------------------------------------------------------------------------------- Kingdom of Denmark, 4%, 2015 DKK 7,242,000 $ 1,319,019 - -------------------------------------------------------------------------------------------------------- Egypt - 0.0% - -------------------------------------------------------------------------------------------------------- Petroleum Export/Cayman, 5.265%, 2011(n) $ 92,881 $ 90,865 - -------------------------------------------------------------------------------------------------------- France - 1.0% - -------------------------------------------------------------------------------------------------------- Republic of France, 4.75%, 2012 EUR 301,000 $ 421,722 Republic of France, 5%, 2016 EUR 930,000 1,361,089 Republic of France, 6%, 2025 EUR 224,000 382,241 Republic of France, 4.75%, 2035 EUR 962,000 1,463,949 ------------ $ 3,629,001 - -------------------------------------------------------------------------------------------------------- Germany - 1.8% - -------------------------------------------------------------------------------------------------------- Federal Republic of Germany, 3.5%, 2008 EUR 1,058,000 $ 1,398,188 Federal Republic of Germany, 5.25%, 2010 EUR 825,000 1,151,215 Federal Republic of Germany, 3.75%, 2015 EUR 1,175,000 1,566,989 Federal Republic of Germany, 6.25%, 2030 EUR 856,000 1,541,125 KfW Bankengruppe, FRN, 3.164%, 2007 EUR 874,000 1,157,521 ------------ $ 6,815,038 - -------------------------------------------------------------------------------------------------------- Ireland - 1.0% - -------------------------------------------------------------------------------------------------------- Republic of Ireland, 3.25%, 2009 EUR 1,733,000 $ 2,276,037 Republic of Ireland, 4.6%, 2016 EUR 940,000 1,333,830 ------------ $ 3,609,867 - -------------------------------------------------------------------------------------------------------- Japan - 0.5% - -------------------------------------------------------------------------------------------------------- Development Bank of Japan, 1.05%, 2023 JPY 44,000,000 $ 324,829 Japan Finance Corp. Ltd., 2%, 2016 JPY 170,000,000 1,513,277 ------------ $ 1,838,106 - -------------------------------------------------------------------------------------------------------- Malaysia - 0.1% - -------------------------------------------------------------------------------------------------------- Petronas Capital Ltd., 7.875%, 2022 $ 433,000 $ 545,382 - -------------------------------------------------------------------------------------------------------- Mexico - 0.7% - -------------------------------------------------------------------------------------------------------- Pemex Project Funding Master Trust, 9.375%, 2008 $ 1,072,000 $ 1,150,256 United Mexican States, 8.125%, 2019 1,040,000 1,273,480 United Mexican States, 8.3%, 2031 128,000 164,480 ------------ $ 2,588,216 - -------------------------------------------------------------------------------------------------------- Netherlands - 0.7% - -------------------------------------------------------------------------------------------------------- Kingdom of Netherlands, 3.75%, 2009 EUR 1,693,000 $ 2,248,784 Kingdom of Netherlands, 3.75%, 2014 EUR 187,000 249,263 ------------ $ 2,498,047 - -------------------------------------------------------------------------------------------------------- Panama - 0.2% - -------------------------------------------------------------------------------------------------------- Republic of Panama, 9.375%, 2029 $ 677,000 $ 902,102 - -------------------------------------------------------------------------------------------------------- Russia - 0.4% - -------------------------------------------------------------------------------------------------------- Russian Federation, 3%, 2008 $ 1,474,000 $ 1,421,378 - -------------------------------------------------------------------------------------------------------- South Africa - 0.2% - -------------------------------------------------------------------------------------------------------- Republic of South Africa, 9.125%, 2009 $ 855,000 $ 928,188 - -------------------------------------------------------------------------------------------------------- Spain - 0.7% - -------------------------------------------------------------------------------------------------------- Kingdom of Spain, 6%, 2008 EUR 595,000 $ 808,490 Kingdom of Spain, 5.35%, 2011 EUR 1,250,000 1,779,805 ------------ $ 2,588,295 - -------------------------------------------------------------------------------------------------------- United Kingdom - 0.7% - -------------------------------------------------------------------------------------------------------- United Kingdom Treasury, 5.75%, 2009 GBP 325,000 $ 653,580 United Kingdom Treasury, 5%, 2012 GBP 249,000 495,457 United Kingdom Treasury, 8%, 2015 GBP 410,000 1,009,851 United Kingdom Treasury, 8%, 2021 GBP 94,000 254,609 United Kingdom Treasury, 4.25%, 2036 GBP 192,000 390,815 ------------ $ 2,804,312 - -------------------------------------------------------------------------------------------------------- TOTAL FOREIGN BONDS $ 38,123,387 - -------------------------------------------------------------------------------------------------------- TOTAL BONDS (IDENTIFIED COST, $357,503,651) $358,017,603 - -------------------------------------------------------------------------------------------------------- Repurchase Agreements - 3.5% - -------------------------------------------------------------------------------------------------------- Merrill Lynch, 5.31%, dated 11/30/06, due 12/01/06, total to be received $13,211,948 (secured by various U.S. Treasury and Federal Agency obligations and Mortgage Backed securities in a jointly traded account), at Cost $ 13,210,000 $ 13,210,000 - -------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS (IDENTIFIED COST, $370,713,651) (k) $371,227,603 - -------------------------------------------------------------------------------------------------------- Other Assets, Less Liabilities - 0.6% 2,277,153 - -------------------------------------------------------------------------------------------------------- NET ASSETS - 100.0% $373,504,756 - -------------------------------------------------------------------------------------------------------- (f) All or a portion of the security has been segregated as collateral for an open futures contract. (k) As of November 30, 2006, the trust held securities fair valued in accordance with the policies adopted by the Board of Trustees, aggregating $356,216,813 and 95.96% of market value. An independent pricing service provided an evaluated bid for 95.81% of the market value. (n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $3,185,082, representing 0.85% of net assets. (z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The trust holds the following restricted securities: CURRENT ACQUISITION ACQUISITION MARKET TOTAL % OF RESTRICTED SECURITIES DATE COST VALUE NET ASSETS - ----------------------------------------------------------------------------------------------------------- Prudential Securities Secured Financing Corp., FRN, 7.4504%, 2013 12/06/04 $2,019,445 $1,953,916 0.5% The following abbreviations are used in this report and are defined: FRN Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end. STRIPS Separate Trading of Registered Interest and Principal of Securities TIPS Treasury Inflation Protected Security Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below: AUD Australian Dollar GBP British Pound CAD Canadian Dollar JPY Japanese Yen DKK Danish Krone NOK Norwegian Krone EUR Euro NZD New Zealand Dollar FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS Sales and Purchases in the table below are reported by currency. NET UNREALIZED CONTRACTS TO CONTRACTS APPRECIATION DELIVER/RECEIVE SETTLEMENT DATE IN EXCHANGE FOR AT VALUE (DEPRECIATION) - -------------------------------------------------------------------------------------------------------- SALES AUD 157,907 12/06/06 $ 121,229 $124,609 $ (3,380) CAD 2,990,292 12/04/06 - 2/06/07 2,648,123 2,622,011 26,112 DKK 7,583,167 12/18/06 - 12/27/06 1,279,565 1,348,969 (69,404) EUR 17,430,903 12/18/06 21,949,252 23,113,423 (1,164,171) GBP 1,448,707 2/26/07 2,755,708 2,849,280 (93,572) JPY 174,412,212 1/18/07 - 1/23/07 1,490,036 1,516,985 (26,949) NOK 13,969 1/08/07 2,160 2,273 (113) - -------------------------------------------------------------------------------------------------------- $30,246,073 $31,577,550 $(1,331,477) - -------------------------------------------------------------------------------------------------------- PURCHASES AUD 54,801 12/06/06 $ 41,310 $43,245 $ 1,935 CAD 1,389,661 12/04/06 1,222,862 1,217,439 (5,423) EUR 3,500,003 12/18/06 4,501,591 4,641,014 139,423 NZD 12,155 12/06/06 8,018 8,319 301 - -------------------------------------------------------------------------------------------------------- $ 5,773,781 $5,910,017 $ 136,236 - -------------------------------------------------------------------------------------------------------- At November 30, 2006, forward foreign currency purchases and sales under master netting agreements excluded above amounted to a net payable of $62,849 with Goldman Sachs & Co. and a net receivable of $24,100 with Merrill Lynch International. FUTURES CONTRACTS OUTSTANDING AT NOVEMBER 30, 2006: UNREALIZED EXPIRATION APPRECIATION DESCRIPTION CONTRACTS VALUE DATE (DEPRECIATION) - -------------------------------------------------------------------------------------------------------------------- U.S. Treasury Note 10 yr (Long) 81 $8,844,188 Mar-07 $ 45,279 U.S. Treasury Note 5 yr (Short) 54 5,732,438 Mar-07 (16,642) U.S. Treasury Bond (Short) 59 6,748,125 Mar-07 (54,597) -------- $(25,960) -------- At November 30, 2006, the trust had sufficient cash and/or securities to cover any commitments under these derivative contracts. SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements STATEMENT OF ASSETS AND LIABILITIES At 11/30/06 This statement represents your trust's balance sheet, which details the assets and liabilities comprising the total value of the trust. ASSETS - ------------------------------------------------------------------------------------------------------ Investments, at value (identified cost, $370,713,651) $371,227,603 Cash 299 Receivable for forward foreign currency exchange contracts 167,771 Receivable for forward foreign currency exchange contracts subject to master netting agreements 24,100 Receivable for investments sold 1,285,937 Interest receivable 3,395,249 Other assets 16,596 - ------------------------------------------------------------------------------------------------------ Total assets $376,117,555 - ------------------------------------------------------------------------------------------------------ LIABILITIES - ------------------------------------------------------------------------------------------------------ Distributions payable $81,257 Payable for forward foreign currency exchange contracts 1,363,012 Payable for forward foreign currency exchange contracts subject to master netting agreements 62,849 Payable for daily variation margin on open futures contracts 22,000 Payable for investments purchased 734,474 Payable to affiliates Management fee 12,598 Transfer agent and dividend disbursing costs 34,659 Administrative services fee 405 Payable for independent trustees' compensation 180,522 Accrued expenses and other liabilities 121,023 - ------------------------------------------------------------------------------------------------------ Total liabilities $2,612,799 - ------------------------------------------------------------------------------------------------------ Net assets $373,504,756 - ------------------------------------------------------------------------------------------------------ NET ASSETS CONSIST OF - ------------------------------------------------------------------------------------------------------ Paid-in capital $401,546,887 Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies (724,282) Accumulated net realized gain (loss) on investments and foreign currency transactions (28,218,088) Undistributed net investment income 900,239 - ------------------------------------------------------------------------------------------------------ Net assets $373,504,756 - ------------------------------------------------------------------------------------------------------ Shares of beneficial interest outstanding (56,436,886 issued, less 5,104,331 treasury shares) 51,332,555 - ------------------------------------------------------------------------------------------------------ Net asset value per share (net assets of $373,504,756/ 51,332,555 shares of beneficial interest outstanding) $7.28 - ------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements STATEMENT OF OPERATIONS Year ended 11/30/06 This statement describes how much your trust earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by trust operations. NET INVESTMENT INCOME - ------------------------------------------------------------------------------------------------------ Interest income $18,835,367 - ------------------------------------------------------------------------------------------------------ Expenses Management fee $2,301,831 Transfer agent and dividend disbursing costs 144,464 Administrative services fee 65,927 Independent trustees' compensation 70,856 Custodian fee 141,938 Shareholder communications 51,508 Auditing fees 62,663 Legal fees 12,895 Miscellaneous 104,521 - ------------------------------------------------------------------------------------------------------ Total expenses $2,956,603 - ------------------------------------------------------------------------------------------------------ Fees paid indirectly (40,328) Reduction of expenses by investment adviser (946) - ------------------------------------------------------------------------------------------------------ Net expenses $2,915,329 - ------------------------------------------------------------------------------------------------------ Net investment income $15,920,038 - ------------------------------------------------------------------------------------------------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS - ------------------------------------------------------------------------------------------------------ Realized gain (loss) (identified cost basis) Investment transactions $(636,260) Futures contracts (11,726) Foreign currency transactions (1,193,413) - ------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments and foreign currency transactions $(1,841,399) - ------------------------------------------------------------------------------------------------------ Change in unrealized appreciation (depreciation) Investments $5,050,604 Futures contracts (10,608) Translation of assets and liabilities in foreign currencies (1,015,862) - ------------------------------------------------------------------------------------------------------ Net unrealized gain (loss) on investments and foreign currency translation $4,024,134 - ------------------------------------------------------------------------------------------------------ Net realized and unrealized gain (loss) on investments and foreign currency $2,182,735 - ------------------------------------------------------------------------------------------------------ Change in net assets from operations $18,102,773 - ------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements STATEMENTS OF CHANGES IN NET ASSETS These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.
YEARS ENDED 11/30 ------------------------------------ 2006 2005 CHANGE IN NET ASSETS FROM OPERATIONS - ------------------------------------------------------------------------------------------------------ Net investment income $15,920,038 $16,419,190 Net realized gain (loss) on investments and foreign currency transactions (1,841,399) 4,745,235 Net unrealized gain (loss) on investments and foreign currency translation 4,024,134 (14,151,436) - ------------------------------------------------------------------------------------------------------ Change in net assets from operations $18,102,773 $7,012,989 - ------------------------------------------------------------------------------------------------------ DISTRIBUTIONS DECLARED TO SHAREHOLDERS - ------------------------------------------------------------------------------------------------------ From net investment income $(18,296,971) $(16,936,571) - ------------------------------------------------------------------------------------------------------ TRUST SHARE (PRINCIPAL) TRANSACTIONS - ------------------------------------------------------------------------------------------------------ Change in net assets from trust share transactions $(5,014,933) $(10,423,312) - ------------------------------------------------------------------------------------------------------ Total change in net assets $(5,209,131) $(20,346,894) - ------------------------------------------------------------------------------------------------------ NET ASSETS - ------------------------------------------------------------------------------------------------------ At beginning of period 378,713,887 399,060,781 At end of period (including undistributed net investment income of $900,239 and $2,323,510, respectively) $373,504,756 $378,713,887 - ------------------------------------------------------------------------------------------------------ SEE NOTES TO FINANCIAL STATEMENTS
Financial Statements FINANCIAL HIGHLIGHTS The financial highlights table is intended to help you understand the trust's financial performance for the past 5 years. Certain information reflects financial results for a single trust share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the trust share class (assuming reinvestment of all distributions) held for the entire period. This information has been audited by the trust's independent registered public accounting firm, whose report, together with the trust's financial statements, are included in this report.
YEARS ENDED 11/30 ------------------------------------------------------------------------------- 2006 2005 2004 2003 2002 Net asset value, beginning of period $7.27 $7.43 $7.44 $7.49 $7.32 - ----------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM INVESTMENT OPERATIONS - ----------------------------------------------------------------------------------------------------------------------------- Net investment income (d) $0.31 $0.31 $0.31 $0.26 $0.37 Net realized and unrealized gain (loss) on investments and foreign currency 0.04 (0.17) (0.02) 0.02 0.20 - ----------------------------------------------------------------------------------------------------------------------------- Total from investment operations $0.35 $0.14 $0.29 $0.28 $0.57 - ----------------------------------------------------------------------------------------------------------------------------- LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS - ----------------------------------------------------------------------------------------------------------------------------- From net investment income $(0.35) $(0.32) $(0.33) $(0.36) $(0.42) - ----------------------------------------------------------------------------------------------------------------------------- Net increase from repurchase of capital shares $0.01 $0.02 $0.03 $0.03 $0.02 - ----------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $7.28 $7.27 $7.43 $7.44 $7.49 - ----------------------------------------------------------------------------------------------------------------------------- Per share market value, end of period $6.60 $6.39 $6.55 $6.71 $6.77 - ----------------------------------------------------------------------------------------------------------------------------- Total return at market value (%) (r)(s) 9.06 2.36 2.49 4.38 9.31 - ----------------------------------------------------------------------------------------------------------------------------- RATIOS (%) (TO AVERAGE NET ASSETS) AND SUPPLEMENTAL DATA: - ----------------------------------------------------------------------------------------------------------------------------- Expenses before expense reductions (f) 0.80 0.83 0.81 0.79 0.87 Expenses after expense reductions (f) 0.80 0.83 0.81 N/A N/A Net investment income 4.29 4.20 4.12 3.41 4.98 Portfolio turnover 26 68 71 108 123 Net assets at end of period (000 Omitted) $373,505 $378,714 $399,061 $414,095 $433,624 - ----------------------------------------------------------------------------------------------------------------------------- (d) Per share data are based on average shares outstanding. (f) Ratios do not reflect reductions from fees paid indirectly. (r) Certain expenses have been reduced without which performance would have been lower. (s) From time to time the trust may receive proceeds from litigation settlements, without which performance would be lower. SEE NOTES TO FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS (1) BUSINESS AND ORGANIZATION MFS Government Markets Income Trust (the trust) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940, as amended, as a closed-end diversified management investment company. (2) SIGNIFICANT ACCOUNTING POLICIES GENERAL - The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The trust can invest in foreign securities, including securities of emerging market issuers. Investments in foreign securities are vulnerable to the effects of changes in the relative values of the local currency and the U.S. dollar and to the effects of changes in each country's legal, political, and economic environment. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries. INVESTMENT VALUATIONS - Debt instruments (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as reported by an independent pricing service. Values of debt instruments obtained from pricing services can utilize both dealer-supplied valuations and electronic data processing techniques, which take into account factors such as institutional-size trading in similar groups of securities, yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Futures contracts are generally valued at last posted settlement price as reported by an independent pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as reported by an independent pricing service on the market on which they are primarily traded. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates reported by an independent pricing service for proximate time periods. Securities and other assets generally valued on the basis of information from an independent pricing service may also be valued at a broker-dealer bid quotation. The values of foreign securities and other assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates reported by an independent pricing service. The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the trust's investments (including any fair valuation) to the adviser pursuant to valuation policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures under the oversight of the Board of Trustees. Under the trust's valuation policies and procedures, market quotations are not considered to be readily available for many types of debt instruments. These investments are generally valued at fair value based on information from independent pricing services. In addition, investments may be valued at fair value if the adviser determines that an investment's value has been materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the trust's net asset value, or after the halting of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. Events that occur on a frequent basis after foreign markets close (such as developments in foreign markets and significant movements in the U.S. markets) and prior to the determination of the trust's net asset value may be deemed to have a material affect on the value of securities traded in foreign markets. Accordingly, the trust's foreign equity securities may often be valued at fair value. The adviser may rely on independent pricing services or other information (such as the correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the security; the business and financial condition of the issuer; and trading and other market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the trust's net asset value can differ depending on the source and method used to determine value. When fair valuation is used, the value of investments used to determine the trust's net asset value may differ from quoted or published prices for the same investments. In September 2006, FASB Statement No. 157, Fair Value Measurements (the "Statement") was issued, and is effective for fiscal years beginning after November 15, 2007 and for all interim periods within those fiscal years. This Statement provides a single definition of fair value, a hierarchy for measuring fair value and expanded disclosures about fair value measurements. Management is evaluating the application of the Statement to the trust, and believes the impact will be limited to expanded disclosures resulting from the adoption of this Statement in the trust's financial statements. 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. INFLATION-ADJUSTED DEBT SECURITIES - The trust invests in inflation-adjusted debt securities issued by the U.S. Treasury. The trust may also invest in inflation-adjusted debt securities issued by U.S. Government agencies and instrumentalities other than the U.S. Treasury and by other entities such as U.S. and foreign corporations and foreign governments. The principal value of these debt securities is adjusted by references to changes in the Consumer Price Index or another general price or wage index. These debt securities typically pay a fixed rate of interest, but this fixed rate is applied to the inflation-adjusted principal amount. The principal paid at maturity of the debt security is typically equal to the inflation-adjusted principal amount, or the security's original par value, whichever is greater. Other types of inflation-adjusted securities may use other methods to adjust for other measures of inflation. FOREIGN CURRENCY TRANSLATION - 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. DERIVATIVE RISK - The trust may invest in derivatives for hedging or non- hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the trust uses derivatives as an investment to gain market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative's original cost. Derivative instruments include forward foreign currency exchange contracts and futures contracts. 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. Upon entering into such contracts, the trust bears the risk of interest or exchange rates or securities prices moving unexpectedly, in which case, 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 the contract. The trust may enter into forward foreign currency exchange contracts for hedging purposes as well as for non-hedging purposes. For hedging purposes, the trust may enter into contracts to deliver or receive foreign currency it will receive from or require for its normal investment activities. The trust may also use contracts in a manner intended to protect foreign currency denominated securities from declines in value due to unfavorable exchange rate movements. For non-hedging purposes, the trust may enter into contracts with the intent of changing the relative exposure of the trust's portfolio of securities to different currencies to take advantage of anticipated changes. The forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any gains or losses are recorded as unrealized until the contract settlement date. On contract settlement date, the gains or losses are recorded as realized gains or losses on foreign currency transactions. INDEMNIFICATIONS - Under the trust's organizational documents, its officers and trustees may be indemnified against certain liabilities and expenses arising out of the performance of their duties to the trust. Additionally, in the normal course of business, the trust enters into agreements with service providers that may contain indemnification clauses. The trust's maximum exposure under these agreements is unknown as this would involve future claims that may be made against the trust that have not yet occurred. INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount is amortized or accreted for financial statement purposes in accordance with U.S. generally accepted accounting principles. All discount is accreted for tax reporting purposes as required by federal income tax regulations. The trust may receive proceeds from litigation settlements involving its portfolio holdings. Any proceeds received are reflected in realized gain/loss in the Statement of Operations, or in unrealized gain/loss if the security is still held by the trust. FEES PAID INDIRECTLY - The trust's custody fee is reduced according to an arrangement that measures the value of cash deposited with the custodian by the trust. This amount, for the year ended November 30, 2006, is shown as a reduction of total expenses on the Statement of Operations. TAX MATTERS AND DISTRIBUTIONS - The trust intends to qualify as a regulated investment company, as defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. Accordingly, no provision for federal income tax is required in the financial statements. Foreign taxes, if any, have been accrued by the trust in the accompanying financial statements. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at some time in the future. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes. Book/tax differences primarily relate to amortization and accretion of debt securities, straddle loss deferrals, and foreign currency transactions. The tax character of distributions declared to shareholders is as follows: 11/30/06 11/30/05 Ordinary income (including any short-term capital gains) $18,296,971 $16,936,571 The federal tax cost and the tax basis components of distributable earnings were as follows: AS OF 11/30/06 Cost of investments $376,126,857 --------------------------------------------------------- Gross appreciation $3,536,614 Gross depreciation (8,435,868) --------------------------------------------------------- Net unrealized appreciation (depreciation) $(4,899,254) Undistributed ordinary income 1,012,110 Capital loss carryforwards (22,831,879) Other temporary differences (1,323,108) As of November 30, 2006, the trust had capital loss carryforwards available to offset future realized gains. Such losses expire as follows: 11/30/07 $(11,594,208) 11/30/08 (5,988,179) 11/30/12 (3,637,025) 11/30/14 (1,612,467) ----------------------------------------------------- Total $(22,831,879) In June 2006, FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (the "Interpretation") was issued, and is effective for fiscal years beginning after December 15, 2006 and is to be applied to all open tax years as of no later than May 30, 2008. This Interpretation prescribes a minimum threshold for financial statement recognition of the benefit of a tax position taken or expected to be taken in a tax return, and requires certain expanded disclosures. Management is evaluating the application of the Interpretation to the trust, and has not at this time determined the impact, if any, resulting from the adoption of this Interpretation on the trust's financial statements. (3) TRANSACTIONS WITH AFFILIATES INVESTMENT ADVISER - The trust has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the trust. The management fee is computed daily and paid monthly at an annual rate of 0.32% of the trust's average daily net assets and 5.33% of gross income. Gross income is calculated based on tax elections that generally include the accretion of discount and exclude the amortization of premium, which may differ from investment income reported in the Statement of Operations. The management fee, from net assets and gross income, incurred for the year ended November 30, 2006 was equivalent to an annual effective rate of 0.62% of the trust's average daily net assets. TRANSFER AGENT - MFS Service Center, Inc. (MFSC), a wholly-owned subsidiary of MFS, receives a fee from the trust for its services as registrar and dividend- disbursing agent. Pursuant to a written agreement, the trust pays MFSC an account maintenance fee of no more than $9.00 and a dividend services fee of $0.75 per reinvestment. For the year ended November 30, 2006, these fees amounted to $90,342. MFSC also receives payment from the trust for out-of- pocket expenses paid by MFSC on behalf of the trust. For the year ended November 30, 2006, these costs amounted to $37,610. Computershare Trust Company, N.A. became the Transfer Agent and Registrar of the trust effective December 18, 2006, succeeding MFSC. ADMINISTRATOR - MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the trust. Under an administrative services agreement, the trust partially reimburses MFS the costs incurred to provide these services. The trust is charged a fixed amount plus a fee based on calendar year average net assets. From July 1, 2005 through March 31, 2006, the trust's annual fixed amount was $10,000. Effective April 1, 2006, the trust's annual fixed amount is $17,500. The administrative services fee incurred for the year ended November 30, 2006 was equivalent to an annual effective rate of 0.0178% of the trust average daily net assets. TRUSTEES' AND OFFICERS' COMPENSATION - The trust pays compensation to independent trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee chairpersons. The trust does not pay compensation directly to trustees or to officers of the trust who are also officers of the investment adviser, all of whom receive remuneration for their services to the trust from MFS. Certain officers and trustees of the trust are officers or directors of MFS and MFSC. The trust has an unfunded, defined benefit plan for certain retired independent trustees which resulted in a pension expense of $12,240. The trust also has an unfunded retirement benefit deferral plan for certain independent trustees which resulted in an expense of $2,927. Both amounts are included in independent trustees' compensation for the year ended November 30, 2006. The liability for deferred retirement benefits payable to certain independent trustees under both plans amounted to $167,487 at November 30, 2006, and is included in payable for independent trustees' compensation. DEFERRED TRUSTEE COMPENSATION - Under a Deferred Compensation Plan (the Plan) independent trustees previously were allowed to elect to defer receipt of all or a portion of their annual compensation. Trustees are no longer allowed to defer compensation under the Plan. Amounts previously deferred are treated as though equivalent dollar amounts had been invested in shares of the trust or other MFS funds selected by the trustee. Deferred amounts represent an unsecured obligation of the trust until distributed in accordance with the Plan. Included in other assets and payable for independent trustees' compensation is $12,906 of deferred trustees' compensation. OTHER - This trust and certain other MFS funds (the funds) have entered into a services agreement (the Agreement) which provides for payment of fees by the funds to Tarantino LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an officer of the funds and the sole member of Tarantino LLC. The funds can terminate the Agreement with Tarantino LLC at any time under the terms of the Agreement. For the year ended November 30, 2006, the fee paid to Tarantino LLC was $1,004. MFS has agreed to reimburse the trust for a portion of the payments made by the funds to Tarantino LLC in the amount of $946, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO. (4) PORTFOLIO SECURITIES Purchases and sales of investments, other than purchased option transactions and short-term obligations, were as follows: PURCHASES SALES U.S. government securities $48,778,050 $65,793,640 - ------------------------------------------------------------------------------- Investments (non-U.S. government securities) $44,183,481 $44,731,277 - ------------------------------------------------------------------------------- (5) SHARES OF BENEFICIAL INTEREST The trust's Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. The Trustees have authorized the repurchase by the trust of up to 10% annually of its own shares of beneficial interest. The trust repurchased and retired 782,600 shares of beneficial interest during the year ended November 30, 2006 at an average price per share of $6.41 and a weighted average discount of 10.50% per share. The trust repurchased and retired 1,578,900 shares of beneficial interest during the year ended November 30, 2005 at an average price per share of $6.60 and a weighted average discount of 10.85% per share. Transactions in trust shares were as follows: YEAR ENDED YEAR ENDED 11/30/06 11/30/05 SHARES AMOUNT SHARES AMOUNT Treasury shares reacquired (782,600) $(5,014,933) (1,578,900) $(10,423,312) (6) LINE OF CREDIT The trust and other funds managed by MFS participate in a $1 billion unsecured committed line of credit provided by a syndication of banks under a credit agreement. In addition, the trust and other funds managed by MFS have established uncommitted borrowing arrangements with certain banks. Borrowings may be made for temporary financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the Federal Reserve funds rate plus 0.35%. In addition, a commitment fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds at the end of each calendar quarter. For the year ended November 30, 2006, the trust's commitment fee and interest expense were $2,362 and $0, respectively, and are included in miscellaneous expense on the Statement of Operations. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To The Trustees and the 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 (the "Trust") as of November 30, 2006, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the five years in the period then ended. These financial statements and financial highlights are the responsibility of the Trust's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Trust is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Trust's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of November 30, 2006, by correspondence with the custodian and brokers; where replies were not received from brokers, we performed other auditing procedures. 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 as of November 30, 2006, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and its financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Boston, Massachusetts January 18, 2007 RESULTS OF SHAREHOLDER MEETING 11/30/06 (unaudited) At the annual meeting of shareholders of MFS Government Markets Income Trust, which was held on October 6, 2006, the following actions were taken: ITEM 1. To elect the following individuals as Trustees: NUMBER OF SHARES ---------------- NOMINEE AFFIRMATIVE WITHHOLD AUTHORITY ------- ----------- ------------------ Robert E. Butler 39,200,733.46 6,454,448.91 David H. Gunning 39,199,561.13 6,455,621.24 Robert C. Pozen 39,192,243.86 6,462,938.51 J. Dale Sherratt 39,176,882.47 6,478,299.90 TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND The Trustees and officers of the Trust, as of January 1, 2007, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS DURING POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS & NAME, DATE OF BIRTH WITH FUND SINCE(h) OTHER DIRECTORSHIPS(j) - ------------------- ---------------- --------------- ---------------------------- INTERESTED TRUSTEES Robert J. Manning(k) Trustee February 2004 Massachusetts Financial Services (born 10/20/63) Company, Chief Executive Officer, President, Chief Investment Officer and Director Robert C. Pozen(k) Trustee February 2004 Massachusetts Financial Services (born 8/08/46) Company, Chairman (since February 2004); Secretary of Economic Affairs, The Commonwealth of Massachusetts (January 2002 to December 2002); Fidelity Investments, Vice Chairman (June 2000 to December 2001); Fidelity Management & Research Company (investment adviser), President (March 1997 to July 2001); Bell Canada Enterprises (telecommunications), Director; Medtronic, Inc. (medical technology), Director; Telesat (satellite communications), Director INDEPENDENT TRUSTEES J. Atwood Ives Trustee and Chair February 1992 Private investor; Eastern (born 5/01/36) of Trustees Enterprises (diversified services company), Chairman, Trustee and Chief Executive Officer (until November 2000) Robert E. Butler(n) Trustee January 2006 Consultant - regulatory and (born 11/29/41) compliance matters (since July 2002); PricewaterhouseCoopers LLP (professional services firm), Partner (November 2000 until June 2002) Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's Hospital, (born 3/11/37) Senior Cardiac Surgeon, Chief of Cardiac Surgery (until 2005); Harvard Medical School, Professor of Surgery; Brigham and Women's Hospital Physicians' Organization, Chair (2000 to 2004) David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc. (mining (born 5/30/42) products and service provider), Vice Chairman/Director (since April 2001); Encinitos Ventures (private investment company), Principal (1997 to April 2001); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director William R. Gutow Trustee December 1993 Private investor and real estate (born 9/27/41) consultant; Capitol Entertainment Management Company (video franchise), Vice Chairman Michael Hegarty Trustee December 2004 Retired; AXA Financial (financial (born 12/21/44) services and insurance), Vice Chairman and Chief Operating Officer (until May 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until May 2001) Lawrence T. Perera Trustee July 1981 Hemenway & Barnes (attorneys), (born 6/23/35) Partner J. Dale Sherratt Trustee August 1993 Insight Resources, Inc. (born 9/23/38) (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner (since 1993); Cambridge Nutraceuticals (professional nutritional products), Chief Executive Officer (until May 2001) Laurie J. Thomsen Trustee March 2005 Private investor; Prism Venture (born 8/05/57) Partners (venture capital), Co- founder and General Partner (until June 2004); St. Paul Travelers Companies (commercial property liability insurance), Director Robert W. Uek Trustee January 2006 Retired (since 1999); (born 5/18/41) PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); Consultant to investment company industry (since 2000); TT International Funds (mutual fund complex), Trustee (2000 until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (2000 until 2005) OFFICERS Maria F. Dwyer(k) President November 2005 Massachusetts Financial Services (born 12/01/58) Company, Executive Vice President and Chief Regulatory Officer (since March 2004); Fidelity Management & Research Company, Vice President (prior to March 2004); Fidelity Group of Funds, President and Treasurer (prior to March 2004) Tracy Atkinson(k) Treasurer September 2005 Massachusetts Financial Services (born 12/30/64) Company, Senior Vice President (since September 2004); PricewaterhouseCoopers LLP, Partner (prior to September 2004) Christopher R. Bohane(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 1/18/74) and Assistant Clerk Company, Vice President and Senior Counsel (since April 2003); Kirkpatrick & Lockhart LLP (law firm), Associate (prior to April 2003) Ethan D. Corey(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 11/21/63) and Assistant Clerk Company, Special Counsel (since December 2004); Dechert LLP (law firm), Counsel (prior to December 2004) David L. DiLorenzo(k) Assistant Treasurer July 2005 Massachusetts Financial Services (born 8/10/68) Company, Vice President (since June 2005); JP Morgan Investor Services, Vice President (prior to June 2005) Timothy M. Fagan(k) Assistant Secretary September 2005 Massachusetts Financial Services (born 7/10/68) and Assistant Clerk Company, Vice President and Senior Counsel (since September 2005); John Hancock Advisers, LLC, Vice President and Chief Compliance Officer (September 2004 to August 2005), Senior Attorney (prior to September 2004); John Hancock Group of Funds, Vice President and Chief Compliance Officer (September 2004 to December 2004) Mark D. Fischer(k) Assistant Treasurer July 2005 Massachusetts Financial Services (born 10/27/70) Company, Vice President (since May 2005); JP Morgan Investment Management Company, Vice President (prior to May 2005) Brian E. Langenfeld(k) Assistant Secretary June 2006 Massachusetts Financial Services (born 3/07/73) and Assistant Clerk Company, Assistant Vice President and Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (May 2005 to April 2006); John Hancock Advisers, LLC, Attorney and Assistant Secretary (prior to May 2005) Ellen Moynihan(k) Assistant Treasurer April 1997 Massachusetts Financial Services (born 11/13/57) Company, Senior Vice President Susan S. Newton(k) Assistant Secretary May 2005 Massachusetts Financial Services (born 3/07/50) and Assistant Clerk Company, Senior Vice President and Associate General Counsel (since April 2005); John Hancock Advisers, LLC, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005); John Hancock Group of Funds, Senior Vice President, Secretary and Chief Legal Officer (prior to April 2005) Susan A. Pereira(k) Assistant Secretary July 2005 Massachusetts Financial Services (born 11/05/70) and Assistant Clerk Company, Vice President and Senior Counsel (since June 2004); Bingham McCutchen LLP (law firm), Associate (prior to June 2004) Mark N. Polebaum(k) Secretary and Clerk January 2006 Massachusetts Financial Services (born 5/01/52) Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (prior to January 2006) Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of (born 3/07/44) Compliance Officer compliance services), Principal (since June 2004); CRA Business Strategies Group (consulting services), Executive Vice President (April 2003 to June 2004); David L. Babson & Co. (investment adviser), Managing Director, Chief Administrative Officer and Director (prior to March 2003) James O. Yost(k) Assistant Treasurer September 1990 Massachusetts Financial Services (born 6/12/60) Company, Senior Vice President - ------------ (h) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. (j) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., "public companies"). (k) "Interested person" of the Trust within the meaning of the Investment Company Act of 1940 (referred to as the 1940 Act), which is the principal federal law governing investment companies like the fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116. (n) In 2004 and 2005, Mr. Butler provided consulting services to the independent compliance consultant retained by MFS pursuant to its settlement with the SEC concerning market timing and related matters. The terms of that settlement required that compensation and expenses related to the independent compliance consultant be borne exclusively by MFS and, therefore, MFS paid Mr. Butler for the services he rendered to the independent compliance consultant. In 2004 and 2005, MFS paid Mr. Butler a total of $351,119.29. The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are elected for fixed terms. The Board of Trustees is currently divided into three classes, each having a term of three years. Each year the term of one class expires. Each Trustee's term of office expires on the date of the third annual meeting following the election to office of the Trustee's class. Each Trustee and officer will serve until next elected or his or her earlier death, resignation, retirement or removal. Messrs. Butler, Gutow, Sherratt and Uek and Ms. Thomsen are members of the Trust's Audit Committee. Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain affiliates of MFS. As of January 1, 2006, the Trustees served as board members of 98 funds within the MFS Family of Funds. The Statement of Additional Information for the Trust and further information about the Trustees are available without charge upon request by calling 1-800-225-2606. On October 9, 2006, Maria F. Dwyer, as Chief Executive Officer of the Trust, certified to the New York Stock Exchange that as of the date of her certification she was not aware of any violation by the Trust of the corporate governance listing standards of the New York Stock Exchange. The Trust filed with the Securities and Exchange Commission the certifications of its principal executive officer and principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2003 as an exhibit to the Trust's Form N-CSR for the period covered by this report. - --------------------------------------------------------------------------------------------------------- INVESTMENT ADVISER CUSTODIAN Massachusetts Financial Services Company State Street Bank and Trust Company 500 Boylston Street, Boston, MA 02116-3741 225 Franklin Street, Boston, MA 02110 PORTFOLIO MANAGER INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Geoffrey L. Schechter Deloitte & Touche LLP 200 Berkeley Street, Boston, MA 02116
BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested ("independent") Trustees, voting separately, annually approve the continuation of the Fund's investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2006 ("contract review meetings") for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the "MFS Funds"). The independent Trustees were assisted in their evaluation of the Fund's investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds' Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees. In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund. In connection with their contract review meetings, the Trustees received and relied upon materials which included, among other items: (i) information provided by Lipper Inc. on the investment performance (based on net asset value) of the Fund for various time periods ended December 31, 2005 and the investment performance (based on net asset value) of a group of funds with substantially similar investment classifications/objectives (the "Lipper performance universe"), as well as the investment performance (based on net asset value) of a group of funds identified by objective criteria suggested by MFS ("MFS peer funds"), (ii) information provided by Lipper Inc. on the Fund's advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper (the "Lipper expense group"), as well as the advisory fees and other expenses of MFS peer funds, (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee "breakpoints" are observed for the Fund, (v) information regarding MFS' financial results and financial condition, including MFS' and certain of its affiliates' estimated profitability from services performed for the Fund and the MFS Funds as a whole, (vi) MFS' views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS' senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS. The Trustees' conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees' deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than others, and that the Trustees' conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years. Based on information provided by Lipper Inc. and MFS, the Trustees reviewed the Fund's total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund's common shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2005, which the Trustees believed was a long enough period to reflect differing market conditions. The Fund ranked 2nd out of a total of 2 funds in the Lipper performance universe for this three-year period (a ranking of 1st place out of the total number of funds in the performance universe indicating the best performer and a ranking of last place out of the total number of funds in the performance universe indicating the worst performer). The total return performance of the Fund's common shares ranked 3rd out of a total of 3 funds for the one-year period and 1st out of a total of 2 funds for the five-year period ended December 31, 2005. Given the size of the Lipper performance universe and information previously provided by MFS regarding differences between the Fund and other funds in its Lipper performance universe, the Trustees also reviewed the Fund's performance in comparison to a custom benchmark developed by MFS. The Fund had the same performance as its custom benchmark for the one-year period ended December 31, 2005 and out-performed its custom benchmark for each of the three- and five- year periods ended December 31, 2005. Because of the passage of time, these performance results may differ from the performance results for more recent periods, including those shown elsewhere in this report. In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund's performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS' responses and efforts relating to investment performance. In assessing the reasonableness of the Fund's advisory fee, the Trustees considered, among other information, the Fund's advisory fee and the total expense ratio of the Fund's common shares as a percentage of average net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. and MFS. The Trustees considered that, according to the Lipper data, the Fund's effective advisory fee rate and total expense ratio were each approximately at the Lipper expense group median. The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered information provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts. The Trustees considered that, as a closed-end fund, the Fund is unlikely to experience meaningful asset growth. As a result, the Trustees did not view the potential for realization of economies of scale as the Fund's assets grow to be a material factor in their deliberations. The Trustees noted that they would consider economies of scale in the future in the event the Fund experiences significant asset growth, such as through an offering of preferred shares (which is not currently contemplated) or a material increase in the market value of the Fund's portfolio securities. The Trustees also considered information prepared by MFS relating to MFS' costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS' methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability. After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund. In addition, the Trustees considered MFS' resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the entry into the industry of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser which also serves other investment companies as well as other accounts. The Trustees also considered the nature, quality, cost, and extent of administrative services provided to the Fund by MFS under agreements other than the investment advisory agreement. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund's behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS' interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Funds were satisfactory. The Trustees also considered benefits to MFS from the use of the Fund's portfolio brokerage commissions, if applicable, to pay for investment research (excluding third-party research, for which MFS pays directly) and various other factors. Additionally, the Trustees considered so-called "fall-out benefits" to MFS such as reputational value derived from serving as investment manager to the Fund. Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the Fund's investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2006. A discussion regarding the Board's most recent review and renewal of the Fund's investment advisory agreement is available by visiting the Closed-End section of the MFS Web site (mfs.com). PROXY VOTING POLICIES AND INFORMATION A general description of the MFS funds' proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. Information regarding how the trust voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC's Web site at http://www.sec.gov. QUARTERLY PORTFOLIO DISCLOSURE The trust will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The trust's Form N-Q may be reviewed and copied at the: Public Reference Room Securities and Exchange Commission 100 F Street, NE, Room 1580 Washington, D.C. 20549 Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-551-5850. The trust's Form N-Q is available on the EDGAR database on the Commission's Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address. A shareholder can also obtain the quarterly portfolio holdings report at mfs.com. FEDERAL TAX INFORMATION (unaudited) The trust will notify shareholders of amounts for use in preparing 2006 income tax forms in January 2007. MFS(R) PRIVACY NOTICE Privacy is a concern for every investor today. At MFS Investment Management(R) and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries. Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include o data from investment applications and other forms o share balances and transactional history with us, our affiliates, or others o facts from a consumer reporting agency We do not disclose any nonpublic personal information about our customers or former customers to anyone, except as permitted by law. We may share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements. Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you. If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time. Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours. CONTACT INFORMATION AND NUMBER OF SHAREHOLDERS INVESTOR INFORMATION Transfer Agent, Registrar and Dividend Disbursing Agent Call 1-800-637-2304 any business day from 9a.m. to 5p.m. Eastern time Write to: Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 Effective December 18, 2006, Computershare Trust Company, N.A. became the Transfer Agent and Registrar and Computershare Shareholder Services, Inc. became the Dividend Disbursing Agent, succeeding MFS Service Center, Inc. NUMBER OF SHAREHOLDERS As of November 30, 2006, our records indicate that there are 4,557 registered shareholders and approximately 17,474 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: Computershare Trust Company, N.A. P.O. Box 43078 Providence, RI 02940-3078 1-800-637-2304 M F S(R) INVESTMENT MANAGEMENT 500 Boylston Street, Boston, MA 02116 ITEM 2. CODE OF ETHICS. The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's principal executive officer and principal financial and accounting officer. The Registrant has not amended any provision in its Code of Ethics (the "Code") that relates to an element of the Code's definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR. A copy of the Code of Ethics is filed as an exhibit to this Form N-CSR. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. Messrs. Robert E. Butler and Robert W. Uek and Ms. Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of "audit committee financial expert" as such term is defined in Form N-CSR. In addition, Messrs. Butler, and Uek and Ms. Thomsen are "independent" members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. ITEMS 4(a) THROUGH 4(d) AND 4(g): The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve as independent accountants to the Registrant (hereinafter the "Registrant" or the "Fund"). The tables below set forth the audit fees billed to the Fund as well as fees for non-audit services provided to the Fund and/or to the Fund's investment adviser, Massachusetts Financial Services Company ("MFS") and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Fund ("MFS Related Entities"). For the fiscal years ended November 30, 2006 and 2005, audit fees billed to the Fund by Deloitte were as follows: Audit Fees FEES BILLED BY DELOITTE: 2006 2005 ---- ---- MFS Government Markets Income 43,663 44,463 Trust For the fiscal years ended November 30, 2006 and 2005, fees billed by Deloitte for audit-related, tax and other services provided to the Fund and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3) FEES BILLED BY DELOITTE: 2006 2005 2006 2005 2006 2005 ---- ---- ---- ---- ---- ---- To MFS Government 20,000 15,000 8,400 10,100 0 0 Markets Income Trust To MFS and MFS Related 1,047,925 729,371 0 30,000 429,071 858,675 Entities of MFS Government Markets Income Trust* AGGREGATE FEES FOR NON-AUDIT SERVICES: 2006 2005 ---- ---- To MFS Government Markets 1,648,581 1,685,542 Income Trust, MFS and MFS Related Entities# * This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Fund (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex). # This amount reflects the aggregate fees billed by Deloitte for non-audit services rendered to the Fund and for non-audit services rendered to MFS and the MFS Related Entities. (1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under "Audit Fees," including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews. (2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis. (3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte other than those reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees", including fees for services related to sales tax refunds, consultation on internal cost allocations, consultation on allocation of monies pursuant to an administrative proceeding regarding disclosure of brokerage allocation practices in connection with fund sales, and analysis of certain portfolio holdings verses investment styles.
ITEM 4(e)(1): Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services: To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Fund and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 between such regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting. ITEM 4(e)(2): None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied). ITEM 4(f): Not applicable. ITEM 4(h): The Registrant's Audit Committee has considered whether the provision by a Registrant's independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services were provided prior to the effectiveness of SEC rules requiring pre-approval or because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant's principal auditors. ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. The Registrant has an Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Messrs. Robert E. Butler, J. Dale Sherratt and Robert W. Uek and Ms. Laurie J. Thomsen. ITEM 6. SCHEDULE OF INVESTMENTS A schedule of investments of the Registrant is included as part of the report to shareholders of the Registrant under Item 1 of this Form N-CSR. ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. The Board of Trustees and the Board of Managers of the investment companies (the "MFS Funds") advised by Massachusetts Financial Services Company ("MFS") have delegated to MFS the right and obligation to vote proxies for shares that are owned by the MFS Funds, in accordance with MFS' proxy voting policies and procedures (the "MFS Proxy Policies"). The MFS Proxy Policies are set forth below: MASSACHUSETTS FINANCIAL SERVICES COMPANY PROXY VOTING POLICIES AND PROCEDURES SEPTEMBER 17, 2003, AS REVISED ON SEPTEMBER 20, 2004, MARCH 15, 2005 AND MARCH 1, 2006 Massachusetts Financial Services Company, MFS Institutional Advisors, Inc. and MFS' other investment adviser subsidiaries (collectively, "MFS") have adopted proxy voting policies and procedures, as set forth below ("MFS Proxy Voting Policies and Procedures"), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS, other than the MFS Union Standard Equity Fund (the "MFS Funds"). References to "clients" in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures. The MFS Proxy Voting Policies and Procedures include: A. Voting Guidelines; B. Administrative Procedures; C. Monitoring System; D. Records Retention; and E. Reports. A. VOTING GUIDELINES 1. GENERAL POLICY; POTENTIAL CONFLICTS OF INTEREST MFS' policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS' clients, and not in the interests of any other party or in MFS' corporate interests, including interests such as the distribution of MFS Fund shares, administration of 401(k) plans, and institutional relationships. MFS has carefully reviewed matters that in recent years have been presented for shareholder vote by either management or shareholders of public companies. Based on the overall principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote. In all cases, MFS will exercise its discretion in voting on these matters in accordance with this overall principle. In other words, the underlying guidelines are simply that - guidelines. Proxy items of significance are often considered on a case-by-case basis, in light of all relevant facts and circumstances, and in certain cases MFS may vote proxies in a manner different from these guidelines. As a general matter, MFS maintains a consistent voting position on similar proxy proposals with respect to various issuers. In addition, MFS generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts. However, MFS recognizes that there are gradations in certain types of proposals that might result in different voting positions being taken with respect to different proxy statements. There also may be situations involving matters presented for shareholder vote that are not clearly governed by the guidelines, such as proposed mergers and acquisitions. Some items that otherwise would be acceptable will be voted against the proponent when it is seeking extremely broad flexibility without offering a valid explanation. MFS reserves the right to override the guidelines with respect to a particular shareholder vote when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. From time to time, MFS receives comments on these guidelines as well as regarding particular voting issues from its clients and corporate issuers. These comments are carefully considered by MFS, when it reviews these guidelines each year and revises them as appropriate. These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its affiliates that are likely to arise in connection with the voting of proxies on behalf of MFS' clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Review Group is responsible for monitoring and reporting with respect to such potential material conflicts of interest. 2. MFS' Policy on Specific Issues ELECTION OF DIRECTORS MFS believes that good governance should be based on a board with a majority of directors who are "independent" of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of "independent" directors. While MFS generally supports the board's nominees in uncontested elections, we will withhold our vote for a nominee for a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not "independent" or, alternatively, the compensation, nominating or audit committees would include members who are not "independent." MFS will also withhold its vote for a nominee to the board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason. In addition, MFS will withhold its vote for all nominees standing for election to a board of a U.S. issuer if we can determine: (1) if, since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has repriced underwater options; or (2) if, within the last year, shareholders approved by majority vote a resolution recommending that the board rescind a "poison pill" and the board has failed to take responsive action to that resolution. Responsive action would include the rescission of the "poison pill"(without a broad reservation to reinstate the "poison pill" in the event of a hostile tender offer), or public assurances that the terms of the "poison pill" would be put to a binding shareholder vote within the next five to seven years. MFS evaluates a contested election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the nominees for both slates and an evaluation of what each side is offering shareholders. MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company's bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) ("Majority Vote Proposals"). MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast. MFS believes that a company's election policy should address the specific circumstances at that company. MFS considers whether a company's election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election: o Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement; o Guidelines should include a reasonable timetable for resolution of the nominee's status and a requirement that the resolution be disclosed together with the reasons for the resolution; o Vest management of the process in the company's independent directors, other than the nominee in question; and o Outline the range of remedies that the independent directors may consider concerning the nominee. CLASSIFIED BOARDS MFS opposes proposals to classify a board (e.g., a board in which only one-third of board members are elected each year). MFS supports proposals to declassify a board. NON-SALARY COMPENSATION PROGRAMS Restricted stock plans should reward results rather than tenure. In some cases, restricted stock is granted to the recipient at deep discounts to fair market value, sometimes at par value. The holder cannot sell for a period of years, but in the meantime the holder is able to vote and receive dividends. Eventually the restrictions lapse and the stock can be sold by the holder. MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give "free rides" on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted. MFS opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to reprice underwater options or to automatically replenish shares (i.e., evergreen plans). MFS will consider on a case-by-case basis proposals to exchange existing options for newly issued options (taking into account such factors as whether there is a reasonable value-for-value exchange). MFS opposes stock option and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against stock option and restricted stock plans if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS may accept a higher percentage (up to 20%) in the case of startup or small companies which cannot afford to pay large salaries to executives, or in the case where MFS, based upon the issuer's public disclosures, believes that the issuer has been responsible with respect to its recent compensation practices, including the mix of the issuance of restricted stock and options. MFS votes in favor of stock option or restricted stock plans for non-employee directors as long as they satisfy the requirements set forth above with respect to stock option and restricted stock plans for company executives. EXPENSING OF STOCK OPTIONS While we acknowledge that there is no agreement on a uniform methodology for expensing stock options, MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company's financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company's income statements. EXECUTIVE COMPENSATION MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. Therefore, MFS opposes shareholder proposals that seek to set limits on executive compensation. Shareholder proposals seeking to set limits on executive compensation tend to specify arbitrary compensation criteria. MFS also opposes shareholder requests for disclosure on executive compensation beyond regulatory requirements because we believe that current regulatory requirements for disclosure of executive compensation are appropriate and that additional disclosure is often unwarranted and costly. Although we support linking executive stock option grants to a company's stock performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group index. MFS believes that compensation committees should retain the flexibility to propose the appropriate index or other criteria by which performance-based options should be measured. MFS evaluates other executive compensation restrictions (e.g., terminating the company's stock option or restricted stock programs, freezing executive pay during periods of large layoffs, and establishing a maximum ratio between the highest paid executive and lowest paid employee) based on whether such proposals are in the best long-term economic interests of our clients. EMPLOYEE STOCK PURCHASE PLANS MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution. "GOLDEN PARACHUTES" From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer's annual compensation that is not determined in MFS' judgment to be excessive. ANTI-TAKEOVER MEASURES In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from "poison pills" and "shark repellents" to super-majority requirements. MFS will vote for proposals to rescind existing "poison pills" and proposals that would require shareholder approval to adopt prospective "poison pills." Nevertheless, MFS will consider supporting the adoption of a prospective "poison pill" or the continuation of an existing "poison pill" if the following two conditions are met: (1) the "poison pill" allows MFS clients to hold an aggregate position of up to 15% of a company's total voting securities (and of any class of voting securities); and (2) either (a) the "poison pill" has a term of not longer than five years, provided that MFS will consider voting in favor of the "poison pill" if the term does not exceed seven years and the "poison pill" is linked to a business strategy or purpose that MFS believes is likely to result in greater value for shareholders; or (b) the terms of the "poison pill" allow MFS clients the opportunity to accept a fairly structured and attractively priced tender offer (e.g., a "chewable poison pill" that automatically dissolves in the event of an all cash, all shares tender offer at a premium price). MFS will consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer. REINCORPORATION AND REORGANIZATION PROPOSALS When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. While MFS generally votes in favor of management proposals that it believes are in the best long-term economic interests of its clients, MFS may oppose such a measure if, for example, the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers. ISSUANCE OF STOCK There are many legitimate reasons for issuance of stock. Nevertheless, as noted above under "Non-Salary Compensation Programs", when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g., by approximately 15% or more), MFS generally votes against the plan. In addition, MFS votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a "blank check") because the unexplained authorization could work as a potential anti-takeover device. REPURCHASE PROGRAMS MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders. CONFIDENTIAL VOTING MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm. CUMULATIVE VOTING MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS' clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company's nominating committee, which now for the first time (for U.S. listed companies) must be comprised solely of "independent" directors. WRITTEN CONSENT AND SPECIAL MEETINGS Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder's right to call a special meeting of company shareholders. INDEPENDENT AUDITORS MFS believes that the appointment of auditors is best left to the board of directors of the company and therefore supports the ratification of the board's selection of an auditor for the company. Recently, some shareholder groups have submitted proposals to limit the non-audit activities of a company's audit firm. Some proposals would prohibit the provision of any non-audit services by a company's auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company's auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company's auditor for specific pieces of non-audit work in the limited situations permitted under current law. BEST PRACTICES STANDARDS Best practices standards are rapidly developing in the corporate governance areas as a result of recent corporate scandals, the Sarbanes-Oxley Act of 2002 and revised listing standards on major stock exchanges. MFS generally support these developments. However, many issuers are not publicly registered, are not subject to these enhanced listing standards, or are not operating in an environment that is comparable to that in the United States. In reviewing proxy proposals under these circumstances, MFS votes for proposals that enhance standards of corporate governance so long as we believe that - given the circumstances or the environment within which the issuers operate - the proposal is consistent with the best long-term economic interests of our clients. SOCIAL ISSUES There are many groups advocating social change, and many have chosen the publicly-held corporation as a vehicle for advancing their agenda. Common among these are resolutions requiring the corporation to refrain from investing or conducting business in certain countries, to adhere to some list of goals or principles (e.g., environmental standards) or to promulgate special reports on various activities. MFS votes against such proposals unless their shareholder-oriented benefits will outweigh any costs or disruptions to the business, including those that use corporate resources to further a particular social objective outside the business of the company or when no discernible shareholder economic advantage is evident. The laws of various states may regulate how the interests of certain clients subject to those laws (e.g., state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients. FOREIGN ISSUERS MFS will evaluate items on proxies for foreign companies in the context of the guidelines described above, as well as local market standards and best practices. Proxies for foreign companies often contain significantly more voting items than those of U.S. companies. Many of these items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted in favor) for foreign issuers include the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; (v) approval of share repurchase programs; (vi) election of directors in uncontested elections and (vii) appointment of auditors. In accordance with local law or business practices, many foreign companies prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the meeting ("share blocking"). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior to the meeting (e.g., one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the "block" restriction lifted early (e.g., in some countries shares generally can be "unblocked" up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer's transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote. B. ADMINISTRATIVE PROCEDURES 1. MFS PROXY REVIEW GROUP The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The MFS Proxy Voting Committee: a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable; b. Determines whether any potential material conflicts of interest exist with respect to instances in which (i) MFS seeks to override these MFS Proxy Voting Policies and Procedures and (ii) votes on ballot items not clearly governed by these MFS Proxy Voting Policies and Procedures; and c. Considers special proxy issues as they may arise from time to time. 2. POTENTIAL CONFLICTS OF INTEREST The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its affiliates that could arise in connection with the voting of proxies on behalf of MFS' clients. Any significant attempt to influence MFS' voting on a particular proxy matter should be reported to the MFS Proxy Voting Committee. In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, or (ii) matters presented for vote are not clearly governed by these MFS Proxy Voting Policies and Procedures, the MFS Proxy Voting Committee, or delegees, will follow these procedures: a. Compare the name of the issuer of such proxy against a list of significant current and potential (i) distributors of MFS Fund shares, (ii) retirement plans administered by MFS, and (iii) MFS institutional clients (the "MFS Significant Client List"); b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee; c. If the name of the issuer appears on the MFS Significant Client List, then at least one member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests; and d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer's relationship to MFS, the analysis of the matters submitted for proxy vote, and the basis for the determination that the votes ultimately were cast in what MFS believes to be the best long-term economic interests of MFS' clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to the MFS' Conflicts Officer. The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS' distribution, retirement plan administration and institutional business units. The MFS Significant Client List will be reviewed and updated periodically, as appropriate. 3. GATHERING PROXIES Most proxies received by MFS and its clients originate at Automatic Data Processing Corp. ("ADP") although a few proxies are transmitted to investors by corporate issuers through their custodians or depositories. ADP and issuers send proxies and related material directly to the record holders of the shares beneficially owned by MFS' clients, usually to the client's custodian or, less commonly, to the client itself. This material will include proxy cards, reflecting the proper shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy statements with the issuer's explanation of the items to be voted upon. MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, Institutional Shareholder Services, Inc. (the "Proxy Administrator"), pursuant to which the Proxy Administrator performs various proxy vote related services, such as vote processing and recordkeeping functions for MFS' Funds and institutional client accounts. The Proxy Administrator receives proxy statements and proxy cards directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator's system by an MFS holdings datafeed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for the upcoming shareholders' meetings of over 10,000 corporations are available on-line to certain MFS employees and the MFS Proxy Voting Committee. 4. ANALYZING PROXIES Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator at the prior direction of MFS automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures. As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS' voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g., corporate actions, such as mergers and acquisitions), a representative of MFS Proxy Voting Committee may consult with or seek recommendations from portfolio managers or analysts.(1) However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted. - ----------- (1) From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst is not available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained within a few business days prior to the shareholder meeting, the MFS Proxy Review Group may determine to vote the proxy in what it believes to be the best long-term economic interests of MFS' clients. As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS' best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS' clients. Any such override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies. 5. VOTING PROXIES In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS' clients. C. MONITORING SYSTEM It is the responsibility of the Proxy Administrator and MFS' Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received, they are forwarded to the Proxy Administrator and are input into the Proxy Administrator's system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company's stock and the number of shares held on the record date with the Proxy Administrator's listing of any upcoming shareholder's meeting of that company. When the Proxy Administrator's system "tickler" shows that the voting cut-off date of a shareholders' meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy card has not been received from the client's custodian, the Proxy Administrator calls the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy card from the custodian in time to be voted at the meeting, MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer. D. RECORDS RETENTION MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy cards completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator's system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company's proxy issues, are retained as required by applicable law. E. REPORTS MFS FUNDS MFS will report the results of its voting to the Board of Trustees, Board of Directors and Board of Managers of the MFS Funds. These reports will include: (i) a summary of how votes were cast; (ii) a review of situations where MFS did not vote in accordance with the guidelines and the rationale therefor; (iii) a review of the procedures used by MFS to identify material conflicts of interest; and (iv) a review of these policies and the guidelines and, as necessary or appropriate, any proposed modifications thereto to reflect new developments in corporate governance and other issues. Based on these reviews, the Trustees, Directors and Managers of the MFS Funds will consider possible modifications to these policies to the extent necessary or advisable. ALL MFS ADVISORY CLIENTS At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue. Generally, MFS will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client. ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES. GENERAL. Information regarding the portfolio manager(s) of the MFS Government Markets Income Trust (the "Fund") is set forth below.
TITLE AND FIVE YEAR PORTFOLIO MANAGER PRIMARY ROLE SINCE HISTORY ----------------- ------------ ----- ------------------- Geoffrey L. Schechter Portfolio Manager April 2006 Senior Vice President of MFS; employed in the investment management area of MFS since 1993.
COMPENSATION. Portfolio manager total cash compensation is a combination of base salary and performance bonus: o Base Salary - Base salary represents a smaller percentage of portfolio manager total cash compensation (generally below 33%) than incentive compensation. o Performance Bonus - Generally, incentive compensation represents a majority of portfolio manager total cash compensation. The performance bonus is based on a combination of quantitative and qualitative factors, with more weight given to the former (generally over 60%) and less weight given to the latter. >> The quantitative portion is based on pre-tax performance of all of the accounts managed by the portfolio manager (which includes the Fund and any other accounts managed by the portfolio manager) over a one-, three- and five-year period relative to the appropriate Lipper peer group universe and/or one or more benchmark indices with respect to each account. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one- and five-year periods (adjusted as appropriate if the portfolio manager has served for shorter periods). >> The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts and traders) and management's assessment of overall portfolio manager contributions to investor relations and the investment process (distinct from fund and other account performance). Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors. Finally, portfolio managers are provided with a benefits package including a defined contribution plan, health coverage and other insurance, which are available to other employees of MFS on substantially similar terms. The percentage such benefits represent of any portfolio manager's compensation depends upon the length of the individual's tenure at MFS and salary level, as well as other factors. OWNERSHIP OF FUND SHARES. The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund's portfolio manager as of the Fund's fiscal year ended November 30, 2006. The following dollar ranges apply: N. None A. $1 - $10,000 B. $10,001 - $50,000 C. $50,001 - $100,000 D. $100,001 - $500,000 E. $500,001 - $1,000,000 F. Over $1,000,000 NAME OF PORTFOLIO MANAGER DOLLAR RANGE OF EQUITY SECURITIES IN FUND - ------------------------- ----------------------------------------- Geoffrey L. Schechter N OTHER ACCOUNTS. In addition to the Fund, the Fund's portfolio manager is responsible (either individually or jointly) for the day-to-day management of certain other accounts, the number and total assets of which as of the Fund's fiscal year ended November 30, 2006 were as follows:
REGISTERED INVESTMENT OTHER POOLED INVESTMENT COMPANIES VEHICLES OTHER ACCOUNTS ------------------------ ------------------------ ----------------------- NUMBER OF NUMBER OF NUMBER OF NAME ACCOUNTS* TOTAL ASSETS* ACCOUNTS TOTAL ASSETS ACCOUNTS TOTAL ASSETS Geoffrey L. Shechter 10 $6.2 billion 1 $217.2 million 0 N/A - ------------ * Includes the Fund.
Advisory fees are not based upon performance of any of the accounts identified in the table above. POTENTIAL CONFLICTS OF INTEREST. MFS seeks to identify potential conflicts of interest resulting from a portfolio manager's management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts. The management of multiple funds and accounts (including proprietary accounts) may give rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there may be securities which are suitable for the Fund's portfolio as well as for accounts of MFS or its subsidiaries with similar investment objectives. A Fund's trade allocation policies may give rise to conflicts of interest if the Fund's orders do not get fully executed or are delayed in getting executed due to being aggregated with those of other accounts of MFS or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely impact the value of the Fund's investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund. When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by MFS to be fair and equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Fund is concerned. In most cases, however, MFS believes that the Fund's ability to participate in volume transactions will produce better executions for the Fund. MFS does not receive a performance fee for its management of the Fund. As a result, MFS and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund - for instance, those that pay a higher advisory fee and/or have a performance fee. ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.
============================================================================================================= MFS GOVERNMENT MARKETS INCOME TRUST - ------------------------------------------------------------------------------------------------------------- (d) (c) MAXIMUM NUMBER TOTAL NUMBER OF (OR APPROXIMATE (b) SHARES PURCHASED AS DOLLAR VALUE) OF (a) AVERAGE PART OF PUBLICLY SHARES THAT MAY YET TOTAL NUMBER OF PRICE PAID ANNOUNCED PLANS BE PURCHASED UNDER PERIOD SHARES PURCHASED PER SHARE OR PROGRAMS THE PLANS OR PROGRAMS ============================================================================================================= 12/1/05-12/31/05 98,500 $6.44 98,500 4,074,776 - ------------------------------------------------------------------------------------------------------------- 1/1/06-1/31/06 60,600 $6.59 60,600 4,014,176 - ------------------------------------------------------------------------------------------------------------- 2/1/06-2/28/06 41,300 $6.49 41,300 3,972,876 - ------------------------------------------------------------------------------------------------------------- 3/1/06-3/31/06 82,600 $6.42 82,600 5,108,876 - ------------------------------------------------------------------------------------------------------------- 4/1/06-4/30/06 84,000 $6.31 84,000 5,024,876 - ------------------------------------------------------------------------------------------------------------- 5/1/06-5/31/06 82,100 $6.33 82,100 4,942,776 - ------------------------------------------------------------------------------------------------------------- 6/1/06-6/30/06 87,500 $6.33 87,500 4,855,276 - ------------------------------------------------------------------------------------------------------------- 7/1/06-7/31/06 96,000 $6.33 96,000 4,759,276 - ------------------------------------------------------------------------------------------------------------- 8/1/06-8/31/06 150,000 $6.48 150,000 4,609,276 - ------------------------------------------------------------------------------------------------------------- 9/1/06-9/30/06 0 -- 0 4,609,276 - ------------------------------------------------------------------------------------------------------------- 10/1/06-10/31/06 0 -- 0 4,609,276 - ------------------------------------------------------------------------------------------------------------- 11/1/06-11/30/06 0 -- 0 4,609,276 - ------------------------------------------------------------------------------------------------------------- TOTAL 782,600 $6.41 782,600 =============================================================================================================
Note: The Board of Trustees approves procedures to repurchase shares annually. The notification to shareholders of the program is part of the semi-annual and annual reports sent to shareholders. These annual programs begin on March 1st of each year. The programs conform to the conditions of Rule 10b-18 of the Securities Exchange Act of 1934 and limit the aggregate number of shares that may be purchased in each annual period (March 1 through the following February 28) to 10% of the Registrant's outstanding shares as of the first day of the plan year (March 1). The aggregate number of shares available for purchase for the March 1, 2006 plan year is 5,191,476. ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant's Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (as required by Item 22(b)(15) of Schedule 14A), or this Item. ITEM 11. CONTROLS AND PROCEDURES. (a) Based upon their evaluation of the effectiveness registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the "Act")) as conducted within 90 days of the filing date of this report on Form N-CSR, the registrant's principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) There were no changes in the registrant's internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter covered by the report that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 12. EXHIBITS. (a) File the exhibits listed below as part of this Form. Letter or number the exhibits in the sequence indicated. (1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto. (2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2 under the Act (17 CFR 270.30a-2): Attached hereto. (3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the Registrant to 10 or more persons. Not applicable. (b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed "filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto. NOTICE A copy of the Amended and Restated Declaration of Trust of the Registrant is on file with the Secretary of State of the Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) MFS GOVERNMENT MARKETS INCOME TRUST ------------------------------------------------------------------ By (Signature and Title)* MARIA F. DWYER ----------------------------------------------------- Maria F. Dwyer, President Date: January 18, 2007 ---------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* MARIA F. DWYER ----------------------------------------------------- Maria F. Dwyer, President (Principal Executive Officer) Date: January 18, 2007 ---------------- By (Signature and Title)* TRACY ATKINSON ----------------------------------------------------- Tracy Atkinson, Treasurer (Principal Financial Officer and Accounting Officer) Date: January 18, 2007 ---------------- * Print name and title of each signing officer under his or her signature. EX-99.CODE ETH 2 ex99_ethics-662001.txt CODE OF ETHICS EXHIBIT 12(a)(1) SEPTEMBER 2003 (AS REVISED FEBRUARY, 2004, MAY, 2005, SEPTEMBER, 2005 AND NOVEMBER, 2005) CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND PRINCIPAL FINANCIAL OFFICERS I. COVERED OFFICERS/PURPOSE OF THE CODE This code of ethics (this "Code") has been adopted by the funds (collectively, "Funds" and each, "Fund") under supervision of the MFS Funds Board and Compass Board of Trustees/Managers (the "Boards") and applies to the Funds' Principal Executive Officer and Principal Financial Officer (the "Covered Officers," each of whom is set forth in Exhibit A) for the purpose of promoting: o honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o full, fair, accurate, timely and understandable disclosure in reports and documents that the Funds file with, or submits to, the Securities and Exchange Commission ("SEC") and in other public communications made by the Funds; o compliance by the Funds with applicable laws and governmental rules and regulations; o the prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o accountability for adherence to the Code. II. CONDUCT GUIDELINES Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. In addition, each Covered Officer should not place his or her personal interests ahead of the Funds' interests and should endeavor to act honestly and ethically. In furtherance of the foregoing, each Covered Officer must: o not use his or her personal influence or personal relationships improperly to influence investment decisions or financial reporting for any Fund whereby the Covered Officer would benefit personally to the detriment of the Fund; and o not cause a Fund to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the Fund. The following activities, which could create the appearance of a conflict of interest, are permitted only with the approval of the Funds' Chief Legal Officer ("CLO"): o service as a director on the board of any "for profit" company; o running for political office; o the receipt of any Fund business-related gift in excess of $300; o the receipt of any entertainment from any company with which a Fund has current or prospective business dealings unless such entertainment is business-related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety; o any material ownership interest in, or any consulting or employment relationship with, any Fund service providers (e.g., custodian banks, audit firms), other than the Funds' investment adviser, principal underwriter, administrator or any affiliated person thereof; o a direct or indirect financial interest in commissions, transaction charges or spreads paid by a Fund for effecting portfolio transactions or for selling or redeeming shares, other than an interest arising from the Covered Officer's employment or securities ownership. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself or herself with the disclosure requirements generally applicable to the Funds; o each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about a Fund to others, whether within or outside the Fund, including to the Fund's trustees and auditors, and to governmental regulators and self-regulatory organizations; o each Covered Officer should, to the extent appropriate within his or her area of Fund responsibility, consult with other officers and employees of the Funds and the adviser with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the Funds file with, or submit to, the SEC and in other public communications made by the Funds; and o it is the responsibility of each Covered Officer to promote compliance within his or her area of Fund responsibility with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Boards that he or she has received, read, and understands the Code; o annually thereafter affirm to the Boards that he or she has complied with the requirements of the Code; o annually report to the CLO affiliations and relationships which are or may raise the appearance of a conflict of interest with the Covered Officer's duties to the Funds, as identified in the annual Trustee and Officer Questionnaire; o not retaliate against any other Covered Officer or any officer or employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; and o notify the CLO promptly if he or she knows of any violation of this Code. Failure to do so is itself a violation of this Code. The CLO is responsible for applying this Code to specific situations in which questions are presented under it, granting waivers upon consultation with the appropriate Board or its designee, investigating violations, and has the authority to interpret this Code in any particular situation. The CLO will report requests for waivers to the appropriate Board (or a designee thereof) promptly upon receipt of a waiver request and will periodically report to the appropriate Board any approvals granted since the last report. The CLO will take all appropriate action to investigate any potential violations reported to him or her and to report any violations to the appropriate Board. If the Board concurs that a violation has occurred, it will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer. Any changes to or waivers of this Code will, to the extent required, be disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies thereunder. Insofar as other policies or procedures of the Funds, the Funds' adviser, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The Funds' and their investment adviser's codes of ethics under Rule 17j-1 under the Investment Company Act and any other codes or policies or procedures adopted by the Funds or their investment adviser or other service providers are separate requirements and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of each Board, including a majority of independent trustees. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code and under the direction of the CLO will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the appropriate Funds' Board, its counsel, counsel to the Board's independent trustees and senior management and the board of directors of the Fund's investment adviser and its counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the Funds and does not constitute an admission, by or on behalf of any Fund, as to any fact, circumstance, or legal conclusion. EXHIBIT A PERSONS COVERED BY THIS CODE OF ETHICS Funds' Principal Executive Officer: Maria F. Dwyer Funds' Principal Financial Officer: Tracy Atkinson EX-99.CERT 3 ex99_cert-662001.txt CERTIFICATION EX-99.CERT MFS GOVERNMENT MARKETS INCOME TRUST CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Tracy Atkinson, certify that: 1. I have reviewed this report on Form N-CSR of MFS Government Markets Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 18, 2007 TRACY ATKINSON ---------------- --------------------------------------- Tracy Atkinson Treasurer (Principal Financial Officer and Accounting Officer) EX-99.CERT MFS GOVERNMENT MARKETS INCOME TRUST CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT I, Maria F. Dwyer, certify that: 1. I have reviewed this report on Form N-CSR of MFS Government Markets Income Trust; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures as of a date within 90 days prior to the filing date of this report based on such evaluation; and d. disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 18, 2007 MARIA F. DWYER ---------------- --------------------------------------- Maria F. Dwyer President (Principal Executive Officer) EX-99.906CERT MFS GOVERNMENT MARKETS INCOME TRUST CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Tracy Atkinson, certify that, to my knowledge: 1. The Form N-CSR (the "Report") of MFS Government Markets Income Trust (the "Registrant") fully complies for the period covered by the Report with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: January 18, 2007 TRACY ATKINSON ---------------- --------------------------------------- Tracy Atkinson Treasurer (Principal Financial Officer and Accounting Officer) A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. EX-99.906CERT MFS GOVERNMENT MARKETS INCOME TRUST CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT I, Maria F. Dwyer, certify that, to my knowledge: 1. The Form N-CSR (the "Report") of MFS Government Markets Income Trust (the "Registrant") fully complies for the period covered by the Report with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Date: January 18, 2007 MARIA F. DWYER ---------------- --------------------------------------- Maria F. Dwyer President (Principal Executive Officer) A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO THE REGISTRANT AND WILL BE RETAINED BY THE REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----