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 811-3327
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MFS GOVERNMENT SECURITIES FUND
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(Exact name of registrant as specified in charter)
500 Boylston Street, Boston, Massachusetts 02116
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(Address of principal executive offices) (Zip code)
Stephen E. Cavan
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: February 28, 2003
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Date of reporting period: August 31, 2003
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds
SEMIANNUAL REPORT 8/31/03
MFS(R) Government Securities Fund
A path for pursuing opportunity
[MFS Logo](R)
INVESTMENT MANAGEMENT
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MFS(R) PRIVACY POLICY: A COMMITMENT TO YOU
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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 every MFS investment product and service 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 information
with companies or financial institutions that perform marketing services on our
behalf or to other financial institutions with which we have joint marketing
arrangements.
Access to your nonpublic personal information is limited to appropriate
personnel who provide products, services, or information to you. We maintain
physical, electronic, and procedural safeguards that comply with applicable
federal regulations.
If you have any questions about 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.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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MFS(R) GOVERNMENT SECURITIES FUND
The fund seeks current income and preservation of principal.
TABLE OF CONTENTS
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MFS PRIVACY POLICY
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LETTER FROM THE CHAIRMAN 1
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MFS ORIGINAL RESEARCH(R) 4
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MANAGEMENT REVIEW 5
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PERFORMANCE SUMMARY 7
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PORTFOLIO OF INVESTMENTS 11
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FINANCIAL STATEMENTS 14
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NOTES TO FINANCIAL STATEMENTS 29
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TRUSTEES AND OFFICERS 38
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MONEY MANAGEMENT FOR ALL TYPES
OF INVESTORS 40
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CONTACT INFORMATION 41
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ASSET ALLOCATION 42
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LETTER FROM THE CHAIRMAN
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Dear Shareholders,
[Photo of Jeffrey L. Shames]
Our firm was built on the philosophy that bottom-up fundamental research is
the best means of achieving superior long-term investment performance. When
you're managing billions of dollars for investors, we think you have an
obligation to have in-depth, firsthand knowledge of every company owned,
anywhere in the world.
We have structured our equity and fixed-income investment teams to capitalize
on the strength of our investment process and the global reach of our analysts
based around the world. Our global research team is composed of 45 equity
research analysts, 27 based in the United States and 18 based abroad, and 26
credit research analysts. Each analyst is assigned one or more specific
industries and then charged with identifying the most attractive investment
ideas within these industries. Our U.S. and non-U.S. equity research analysts
are unified into one team that emphasizes a collaborative process in analyzing
securities around the globe. Credit analysts also share their expertise in
each segment of the fixed-income market and work as part of the same team
ensuring that every member has access to information that may have a material
effect on their investment decisions. As MFS(R) continues to grow and as
markets become more complex, we believe our structure will enable us to
maintain a consistent investment process with the goal of providing strong,
long-term investment performance across market capitalizations, investment
disciplines, and country borders for our investors.
THINKING GLOBALLY
More companies than ever compete globally and, therefore, we must make
investment decisions knowing what is occurring outside of a company's local
market. This trend plays to the strength of our environment of collaboration
between our analysts and portfolio managers around the globe. The analysts
know the most details about individual companies in specific industries and
geographic regions. The portfolio managers have broader, cross-industry
insights and a wider perspective on companies and industries. Our goal is to
make sure those two sets of perspectives coordinate and work well together. As
the world's markets become more interdependent, we believe our collaborative
environment allows us to produce solid investment ideas for our portfolios.
BUILDING A NETWORK
Simply put, we believe our structure assures that our analysts maintain their
peripheral vision rather than becoming too immersed in a specific segment of
the market. We do not believe that analysts and portfolio managers - no matter
how talented they may be - can succeed by working in a vacuum. Through the
latest technology available, our entire research team meets frequently via
video and telephone teleconferences, e-mail, and PDAs (personal digital
assistants). When we hire new analysts, we require them to spend an average of
one year in Boston to learn MFS" culture and to build relationships with their
peers. We believe the interaction among our analysts is the key to making our
collaborative process work toward delivering superior long-term investment
performance for our investors. Our analysts work out of four research offices
in Boston, London, Singapore, and Tokyo, and are assigned to specific regions
and industries. They meet regularly with their colleagues to discuss world
trends affecting the companies they cover.
In addition, our equity and fixed-income analysts often visit company
managements as a team. This collaboration is vital because of the different
perspectives they bring to their analysis. Because a company's stock price has
tended to follow its earnings over time, our equity research analysts tend to
focus on gauging earnings potential, a company's position within its industry,
and its ability to grow its market share. Conversely, our fixed-income
analysts will look at stability of a company's cash flow, the value of its
assets, and its capital structure to gauge whether the company can generate
enough free cash flow to pay off its debt. As a result of their collaboration,
we believe we're able to see a more complete view of a company.
WORKING TOGETHER
Our portfolio managers also work closely with the analysts to select the most
appropriate securities for their portfolios from the various recommendations
made by the analysts. Opinions are exchanged and ideas are challenged so that
each member of our team is involved in our investment process. In fact, our
portfolio managers will be the first ones to tell you that many of their best
ideas start with the research analysts. We believe our collaborative approach
also provides us with an effective way to assess risk. Our portfolio managers
are not discouraged from taking on an appropriate level of risk; however, we
have rigorous guidelines to assure that the level of risk is measured and
monitored and consistent with the investment philosophies of each of our
portfolios. All told, we believe our culture empowers the members of our
investment team to continue to do their best work and allows them to make
better investment decisions.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman
MFS Investment Management
September 15, 2003
The opinions expressed in this letter are those of MFS and no forecasts can be
guaranteed.
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MFS ORIGINAL RESEARCH(R)
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THE HUMAN SIDE OF MONEY MANAGEMENT
For nearly 80 years MFS has been offering investors clear paths to pursuing
specific investment objectives. Today, millions of individuals and thousands
of institutions all over the world look to MFS to manage their assets with
insight and care.
Our success, we believe, has to do with the fact that we see investors as
people with plans, not just dollars to invest.
When you invest with MFS, you invest with a company dedicated to helping you
realize your long-term financial goals.
INVESTORS CHOOSE MFS FOR OUR
o global asset management expertise across all asset classes
o time-tested money management process for pursuing consistent results
o full spectrum of investment products backed by MFS Original Research(R)
o resources and services that match real-life needs
TURNING INFORMATION INTO OPPORTUNITY
Sound investments begin with sound information. MFS has been doing its own
research and analyzing findings in-house for decades. The process we use to
uncover opportunity is called MFS Original Research(R).
MFS ORIGINAL RESEARCH INVOLVES:
o meeting with the management of 3,000 companies each year to assess their
business plans and the managers" ability to execute those plans
o making onsite visits to more than 2,000 companies annually to gain
first-hand knowledge of their operations and products
o analyzing financial statements and balance sheets
o talking extensively with companies" customers and competitors
o developing our own proprietary estimates of companies" earnings
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MANAGEMENT REVIEW
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A TURBULENT YIELD ENVIRONMENT
Interest rates continued a period of general decline through the first half of
2003, as investors looked at economic weakness in the United States and around
the globe, and reacted to the build-up and the war in Iraq. The U.S. Federal
Reserve Board's concern about the possibility of deflation and its June interest
rate cut, when added to global concerns, helped drive interest rates on
longer-term bonds to their lowest levels since the 1950s. The yield on 10- year
U.S. Treasuries fell from 3.85% on May 1 to 3.1% on June 13 and contributed to a
vigorous rally in bond prices. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.)
However, the bond market sold off sharply in July and August. The strengthening
of consumer and business confidence in the United States and the belief among
investors that the Fed had reached the last in a long line of interest rates
cuts led to speculation that the Fed may actually begin raising rates. These
factors helped spur a market-driven increase in interest rates. During July the
interest rate on 10-year Treasuries climbed 89 basis points, the sharpest
increase since February 1980. This, in turn, led to a sharp decrease in bond
prices and lower total returns for bond investors.
5- AND 10-YEAR HOLDINGS DETRACTED FROM PERFORMANCE
Fund holdings in the 5-year and 10-year maturity ranges caused the fund to
underperform its benchmark for the period. Although all maturities felt the
impact of the increase in interest rates, the 5- and 10-year bonds were hit the
hardest. The 5-year yield soared 105 basis points (1.05%) from June 30 through
August 31; the 10-year yield rose 95 basis points (0.95%) for the same period.
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"DURING JULY THE INTEREST RATE ON
10-YEAR TREASURIES CLIMBED 89 BASIS
POINTS, THE SHARPEST INCREASE SINCE
FEBRUARY 1980."
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POSITIONING CHANGED TO INCREASE YIELDS
At the beginning of the period, the fund held approximately 60% of its assets in
U.S. government agency bonds, including Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation, (Fannie Mae and Freddie Mac,
respectively). After problems at Freddie Mac surfaced in June, we analyzed both
issuers and determined that investor concerns were unwarranted. In our view,
potential increased regulatory oversight would only improve the creditworthiness
of the bonds. In addition, because the bond prices of both issuers had declined,
we found their current yields more attractive than other government issues. As a
result, we gradually added to our government agency position so that it had
increased by the end of the period.
PREMIUM BONDS HELPED CUSHION DECLINE
The Fannie Mae and Freddie Mac premium mortgage securities that yielded
between 7% to 7.5% helped cushion the portfolio during the July/August period.
Premium bonds generally have offered better yields than are currently
available and tend to be less affected by interest rate changes. (A premium
bond has a current price that is higher than its principal value at maturity.)
/s/ Peter C. Vaream
Peter C. Vaream
Portfolio manager (on behalf of the Fixed-Income Strategy Group)
The MFS Fixed Income Strategy Group is responsible for the day-to-day
management of the fund under the general supervision of Mr. Vaream.
Note to shareholders: Effective September 30, 2002, Stephen C. Bryant retired
from MFS Investment Management and is no longer part of the Fixed Income
Strategy Group. Matthew C. Ryan has replaced Mr. Bryant in the group.
The opinions expressed in this report are those of the portfolio management
team and are current only through the end of the period of the report as
stated on the cover. These views are subject to change at any time based on
market and other conditions, and no forecasts can be guaranteed.
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PERFORMANCE SUMMARY THROUGH 8/31/03
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Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for
the applicable time periods. Performance results reflect the percentage change
in net asset value, including the reinvestment of any dividends and capital
gains distributions. PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. (See
Notes to Performance Summary.)
TOTAL RETURNS
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Average annual
without sales charge
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Class
Share inception
class date 6-mo 1-yr 3-yr 5-yr 10-yr
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A 7/25/84 -- 1.60% 6.87% 5.40% 5.74%
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B 8/30/93 -- 0.94% 6.22% 4.73% 5.04%
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C 4/1/96 -- 0.95% 6.19% 4.72% 5.24%
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I 1/2/97 -- 1.96% 7.24% 5.74% 5.99%
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R 12/31/02 -- 1.41% 6.80% 5.36% 5.72%
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529A 7/31/02 -- 1.25% 6.70% 5.30% 5.69%
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529B 7/31/02 -- 0.70% 6.49% 5.18% 5.63%
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529C 7/31/02 -- 0.70% 6.49% 5.18% 5.63%
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Average annual
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Comparative benchmarks
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Average general
U.S. government fund+ -2.18% 1.35% 6.68% 5.06% 5.43%
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Lehman Brothers
Government/Mortgage
Index# -0.97% 2.73% 7.67% 6.31% 6.53%
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Average annual
without sales charge
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Share
class 6-mo 1-yr 3-yr 5-yr 10-yr
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A -- -3.22% 5.15% 4.38% 5.23%
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B -- -2.94% 5.32% 4.40% 5.04%
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C -- -0.02% 6.19% 4.72% 5.24%
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529A -- -3.56% 4.99% 4.28% 5.18%
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529B -- -3.18% 5.60% 4.86% 5.63%
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529C -- -0.27% 6.49% 5.18% 5.63%
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I and R class shares do not have a sales charge. Please see Notes to Performance
Summary for more details.
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Cumulative
without sales charge
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A -1.71% 1.60% 22.05% 30.08% 74.77%
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B -2.03% 0.94% 19.83% 26.00% 63.47%
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C -2.02% 0.95% 19.76% 25.94% 66.62%
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I -1.54% 1.96% 23.34% 32.21% 78.93%
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R -1.88% 1.41% 21.81% 29.82% 74.43%
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529A -1.94% 1.25% 21.49% 29.48% 73.98%
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529B -2.16% 0.70% 20.77% 28.71% 72.94%
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529C -2.24% 0.70% 20.76% 28.71% 72.94%
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Periods less than one year are actual, not annualized.
+ Source: Lipper Inc., an independent firm that reports mutual fund
performance.
# Source: Standard & Poor's Micropal, Inc.
INDEX DEFINITION
LEHMAN BROTHERS GOVERNMENT/MORTGAGE INDEX - measures the performance of the
government and mortgage securities markets.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A and 529A results, including sales charge, reflects the deduction of the
maximum 4.75% sales charge. Class B and 529B results, including sales charge,
reflects the deduction of the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C and 529C results,
including sales charge, redeemed within one year from the end of the calendar
month of purchase reflects the deduction of the 1% CDSC. Class I shares have no
sales charges and are available only to certain investors. Class R shares have
no sales charges and are available only to certain retirement plans. Class 529A,
529B, and 529C shares are only available in conjunction with qualified tuition
programs, such as the MFS 529 Savings Plan.
Performance for share classes offered after class A shares includes the
performance of the fund's class A shares for periods prior to their offering.
Blended class performance has been adjusted to take into account differences in
sales loads, if any, applicable to these share classes, but has not been
adjusted to take into account differences in class specific operating expenses
(such as Rule 12b-1 fees). Compared to performance these share classes would
have experienced had they been offered for the entire period, the use of blended
performance generally results in higher performance for share classes with
higher operating expenses than the initial share class, and lower performance
for share classes with lower operating expenses than the initial share class.
All performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown; without these, the results would have been less
favorable. See the prospectus and financial statements for details. All results
are historical and assume the reinvestment of dividends and capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN REDEEMED,
MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS, AND THE PERFORMANCE SHOWN DOES NOT REFLECT THE
DEDUCTION OF TAXES, IF ANY, THAT A SHAREHOLDER WOULD PAY ON FUND DISTRIBUTIONS
OR THE REDEMPTION OF FUND SHARES.
MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND MORE
RECENT RETURNS MAY BE DIFFERENT FROM THOSE SHOWN. VISIT WWW.MFS.COM FOR MORE
CURRENT PERFORMANCE RESULTS.
KEY RISK CONSIDERATIONS
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
The portfolio may invest in mortgage-backed securities, which during times of
fluctuating interest rates, may increase or decrease more than other fixed-
income securities.
These risks may increase share price volatility. Please see the prospectus for
further information regarding these and other risk considerations.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
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PORTFOLIO OF INVESTMENTS (unaudited) - 8/31/03
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The Portfolio of Investments is a complete list of all securities owned by your fund. It's divided by
broad-based asset classes.
Bonds - 96.2%
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PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
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U.S. Bonds - 95.4%
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U.S. Government Agencies - 70.4%
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Federal Home Loan Bank, 2.25s, 2006 $17,205 $17,047,660
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Federal Home Loan Mortgage Corp., 2.75s, 2008 49,031 47,223,178
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Federal Home Loan Mortgage Corp., 5.5s, 2033 57,352 57,136,328
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Federal Home Loan Mortgage Corp., 5.625s, 2011 56,803 60,233,901
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Federal Home Loan Mortgage Corp., 6s, 2017 16,533 17,100,345
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Federal Home Loan Mortgage Corp., 6.5s, 2016 - 2029 12,307 12,831,750
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Federal Home Loan Mortgage Corp., 7s, 2030 575 605,441
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Federal Home Loan Mortgage Corp., 7.5s, 2025 - 2028 958 1,023,411
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Federal National Mortgage Assn., 3.25s, 2008 76,469 74,427,354
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Federal National Mortgage Assn., 5s, 2017 - 2018 2,808 2,822,620
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Federal National Mortgage Assn., 5.5s, 2006 - 2033 113,643 114,594,404
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Federal National Mortgage Assn., 6s, 2008 - 2033 191,884 197,951,296
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Federal National Mortgage Assn., 6.5s, 2005 - 2033 160,375 166,373,699
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Federal National Mortgage Assn., 6.942s, 2007 8,540 9,421,201
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Federal National Mortgage Assn., 7s, 2029 - 2031 3,792 3,998,988
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Federal National Mortgage Assn., 7.5s, 2013 - 2031 8,150 8,671,108
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Financing Corp., 9.8s, 2018 14,975 21,683,546
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Financing Corp., 10.35s, 2018 8,400 12,679,170
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Financing Corp., 10.7s, 2017 14,360 22,035,592
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Government National Mortgage Assn., 6.5s, 2028 - 2031 17,581 18,298,708
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Government National Mortgage Assn., 7.5s, 2022 - 2032 5,682 6,029,620
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Government National Mortgage Assn., 8.5s, 2005 - 2009 1,042 1,143,537
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Government National Mortgage Assn., 10.75s, 2016 13 14,238
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Government National Mortgage Assn., 11.5s, 2010 - 2019 94 106,605
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Government National Mortgage Assn., 12s, 2013 - 2015 63 71,401
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Government National Mortgage Assn., 12.5s, 2011 206 234,421
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Small Business Administration, 6.07s, 2022 4,895 5,089,757
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Small Business Administration, 6.34s, 2021 5,857 6,183,277
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Small Business Administration, 6.35s, 2021 5,763 6,089,590
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Small Business Administration, 6.44s, 2021 5,320 5,639,081
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Small Business Administration, 6.625s, 2021 4,958 5,295,915
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Small Business Administration, 8.625s, 2011 $871 $937,358
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 8.8s, 2011 393 423,371
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.05s, 2009 229 244,636
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.1s, 2009 381 404,046
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.25s, 2010 439 473,800
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.3s, 2010 646 696,947
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.5s, 2010 407 437,596
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.65s, 2010 370 399,102
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Small Business Administration, 9.7s, 2010 245 264,674
- -----------------------------------------------------------------------------------------------------
Small Business Administration, 9.9s, 2008 88 93,736
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Small Business Administration, 10.05s, 2008 - 2009 53 57,404
- -----------------------------------------------------------------------------------------------------
Student Loan Marketing Assn., 5.25s, 2006 48,500 51,792,762
- -----------------------------------------------------------------------------------------------------
U.S. Department of Housing & Urban Development, 6.36s, 2016 7,000 7,548,912
- -----------------------------------------------------------------------------------------------------
U.S. Department of Housing & Urban Development, 6.59s, 2016 6,599 7,073,508
- -----------------------------------------------------------------------------------------------------
Total U.S. Government Agencies $972,904,994
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 25.0%
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 5.25s, 2028 22,638 22,253,335
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.25s, 2030 7,761 8,759,623
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.875s, 2025 47,769 57,035,422
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 9.25s, 2016 71,433 100,873,968
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 12s, 2013 34,000 47,198,902
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 1.25s, 2005 33,013 32,718,986
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3s, 2007 6,269 6,237,410
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.25s, 2007 27,461 27,699,142
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.875s, 2013 24,677 23,641,726
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 4.75s, 2008 1,100 1,163,938
- -----------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 5s, 2011 2,575 2,719,542
- -----------------------------------------------------------------------------------------------------
United States Treasury STRIPS (Interest), 0s, 2012 21,000 14,284,074
- -----------------------------------------------------------------------------------------------------
Total U.S. Treasury Obligations $344,586,068
- -----------------------------------------------------------------------------------------------------
Agencies - Other - 0.8%
- -----------------------------------------------------------------------------------------------------
Empresa Energetica Cornito Ltd., 6.07s, 2010 (Energy) $10,123 $11,067,881
- -----------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,324,859,120) $1,328,558,943
- -----------------------------------------------------------------------------------------------------
Repurchase Agreement - 3.6%
- -----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
- -----------------------------------------------------------------------------------------------------
Merrill Lynch & Co., dated 8/29/2003, due 9/02/2003
total to be received $49,700,577 (secured by various
U.S. Treasury and Federal Agency obligations in a
jointly traded account), at Cost $49,695 $49,695,000
- -----------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,374,554,120) $1,378,253,943
- -----------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.2% 3,190,194
- -----------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,381,444,137
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
- --------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------
This statement represents your fund's balance sheet, which details the assets and liabilities
composing the total value of your fund.
AT 8/31/03
ASSETS
Investments, at value (identified cost,
$1,374,554,120) $1,378,253,943
- -----------------------------------------------------------------------------------------------------
Cash 379
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 7,428,636
- -----------------------------------------------------------------------------------------------------
Interest receivable 10,538,819
- -----------------------------------------------------------------------------------------------------
Other assets 109,462
- -----------------------------------------------------------------------------------------------------
Total assets $1,396,331,239
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $4,929,898
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 9,844,823
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 40,010
- -----------------------------------------------------------------------------------------------------
Shareholder servicing agent fee 12,659
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 59,712
- -----------------------------------------------------------------------------------------------------
Total liabilities $14,887,102
- -----------------------------------------------------------------------------------------------------
Net assets $1,381,444,137
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $1,430,077,960
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments 3,699,823
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (38,205,368)
- -----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment income (14,128,278)
- -----------------------------------------------------------------------------------------------------
Total $1,381,444,137
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 143,298,267
- -----------------------------------------------------------------------------------------------------
Class A shares
Net assets $873,683,788
- -----------------------------------------------------------------------------------------------------
Shares outstanding 90,611,817
- -----------------------------------------------------------------------------------------------------
Net asset value per share $9.64
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25 X $9.64) $10.12
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $324,486,750
- -----------------------------------------------------------------------------------------------------
Shares outstanding 33,696,260
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.63
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
Statement of Assets and Liabilities (unaudited) - continued
Class C shares
Net assets $86,222,450
- -----------------------------------------------------------------------------------------------------
Shares outstanding 8,917,403
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.67
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $91,909,804
- -----------------------------------------------------------------------------------------------------
Shares outstanding 9,539,024
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption
price per share $9.64
- -----------------------------------------------------------------------------------------------------
Class R shares
Net assets $3,812,914
- -----------------------------------------------------------------------------------------------------
Shares outstanding 395,841
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption
price per share $9.63
- -----------------------------------------------------------------------------------------------------
Class 529A shares
Net assets $361,772
- -----------------------------------------------------------------------------------------------------
Shares outstanding 37,594
- -----------------------------------------------------------------------------------------------------
Net asset value per share $9.62
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25 X $9.62) $10.10
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $675,033
- -----------------------------------------------------------------------------------------------------
Shares outstanding 70,153
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.62
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $291,626
- -----------------------------------------------------------------------------------------------------
Shares outstanding 30,175
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.66
- -----------------------------------------------------------------------------------------------------
On sales of $100,000 or more, the offering price of Class A and 529A shares is reduced. A contingent
deferred sales charge may be imposed on redemptions of Class A, Class B, Class C, Class 529A, Class 529B,
and Class 529C shares.
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and paid in expenses. It also
describes any gains and/or losses generated by fund operations.
FOR SIX MONTHS ENDED 8/31/03
NET INVESTMENT INCOME
Income
- -----------------------------------------------------------------------------------------------------
Interest $28,742,973
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $3,005,033
- -----------------------------------------------------------------------------------------------------
Trustees" compensation 15,691
- -----------------------------------------------------------------------------------------------------
Shareholder servicing agent fee 814,825
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 1,659,769
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 1,943,585
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 514,881
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R) 3,548
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 659
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 3,104
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 2,082
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 471
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 776
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 520
- -----------------------------------------------------------------------------------------------------
Administrative fee 104,977
- -----------------------------------------------------------------------------------------------------
Custodian fee 234,728
- -----------------------------------------------------------------------------------------------------
Printing 50,493
- -----------------------------------------------------------------------------------------------------
Postage 56,924
- -----------------------------------------------------------------------------------------------------
Auditing fees 19,106
- -----------------------------------------------------------------------------------------------------
Legal fees 21,382
- -----------------------------------------------------------------------------------------------------
Miscellaneous 112,490
- -----------------------------------------------------------------------------------------------------
Total expenses $8,565,044
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (730)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (372,401)
- -----------------------------------------------------------------------------------------------------
Net expenses $8,191,913
- -----------------------------------------------------------------------------------------------------
Net investment income $20,551,060
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
Statement of Operations (unaudited) - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (identified cost basis) on investment
transactions $4,492,405
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation on investments $(52,006,870)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments $(47,514,465)
- -----------------------------------------------------------------------------------------------------
Decrease in net assets from operations $(26,963,405)
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
- -----------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF CHANGES IN NET ASSETS
- -----------------------------------------------------------------------------------------------------------------
This statement describes the increases and/or decreases in net assets resulting from operations, any distributions,
and any shareholder transactions.
SIX MONTHS YEAR
ENDED ENDED
8/31/03 2/28/03
(UNAUDITED)
OPERATIONS
Net investment income $20,551,060 $45,225,143
- -----------------------------------------------------------------------------------------------------
Net realized gain on investments 4,492,405 12,189,563
- -----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments (52,006,870) 39,731,207
- ----------------------------------------------------------- -------------- ---------------
Increase (decrease) in net assets from operations $(26,963,405) $97,145,913
- ----------------------------------------------------------- -------------- ---------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income (Class A) $(20,976,530) $(39,286,086)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class B) (7,349,276) (15,232,117)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class C) (1,947,816) (4,318,997)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class I) (1,467,275) (527,228)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class R) (30,839) (312)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class 529A) (7,885) (4,462)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class 529B) (10,992) (7,900)
- -----------------------------------------------------------------------------------------------------
From net investment income (Class 529C) (7,365) (4,476)
- -----------------------------------------------------------------------------------------------------
Total distributions declared to shareholders $(31,797,978) $(59,381,578)
- ----------------------------------------------------------- -------------- ---------------
Net increase (decrease) in net assets from fund share
transactions $(41,307,827) $473,985,663
- ----------------------------------------------------------- -------------- ---------------
Total increase (decrease) in net assets $(100,069,210) $511,749,998
- ----------------------------------------------------------- -------------- ---------------
NET ASSETS
At beginning of period $1,481,513,347 $969,763,349
- -----------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions in
excess of net investment income of $14,128,278 and
$2,881,360, respectively) $1,381,444,137 $1,481,513,347
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
- ------------------------------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS FINANCIAL HIGHLIGHTS
- ------------------------------------------------------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the fund's financial performance for the semiannual period
and the past 5 fiscal years. Certain information reflects financial results for a single fund share. The total returns in the
table represent the rate by which an investor would have earned (or lost) on an investment in the fund (assuming reinvestment
of all distributions).
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS A (UNAUDITED)
Net asset value,
beginning of period $10.03 $9.73 $9.71 $9.15 $9.69 $9.69
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS(S)(S)#
Net investment
income(S) $0.15 $0.39 $0.50 $0.58 $0.57 $0.56
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and
unrealized gain
(loss) on investments (0.32) 0.42 0.12 0.56 (0.56) 0.01
- -------------------------- -------- ------------- ------------- ----------- ----------- -------------
Total from investment
operations $(0.17) $0.81 $0.62 $1.14 $0.01 $0.57
- -------------------------- -------- ------------- ------------- ----------- ----------- -------------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment
income $(0.22) $(0.51) $(0.52) $(0.58) $(0.55) $(0.57)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net
investment income -- -- (0.08) -- -- --
- -------------------------- -------- ------------- ------------- ----------- ----------- -------------
Total distributions
declared to
shareholders $(0.22) $(0.51) $(0.60) $(0.58) $(0.55) $(0.57)
- -------------------------- -------- ------------- ------------- ----------- ----------- -------------
Net asset value, end
of period $9.64 $10.03 $9.73 $9.71 $9.15 $9.69
- -------------------------- -------- ------------- ------------- ----------- ----------- -------------
Total return (%)(+) (1.71)++ 8.54 6.59 12.98 0.10 6.00
- ------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS A (CONTINUED) (UNAUDITED)
RATIOS (%) TO
AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.89+ 0.93 0.96 0.93 0.90 0.92
- -------------------------------------------------------------------------------------------------------------------------------
Net investment
income(S)(S) 2.93+ 3.97 5.16 6.25 6.06 5.76
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 90 134 116 77 124 176
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $873,684 $927,886 $622,606 $392,457 $328,338 $335,993
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. If this fee had been incurred
by the fund, the net investment income per share and the ratios would have been:
Net investment
income(S)(S) $0.14 $0.38 $0.49 $0.57 $0.56 $0.55
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
Expenses## 0.94+ 0.98 1.01 1.00 1.00 1.02
- -------------------------------------------------------------------------------------------------------------------------------
Net investment
income(S)(S) 2.88+ 3.92 5.11 6.18 5.96 5.66
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
See notes to financial statements.
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS B (UNAUDITED)
Net asset value, beginning of period $10.02 $9.72 $9.69 $9.14 $9.68 $9.68
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS(S)(S)#
Net investment income(S) $0.12 $0.33 $0.44 $0.52 $0.51 $0.50
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain
(loss) on investments (0.32) 0.41 0.12 0.56 (0.56) 0.01
- -------------------------- -------------- ----------- ----------- ----------- ----------- ----------
Total from investment
operations $(0.20) $0.74 $0.56 $1.08 $(0.05) $0.51
- -------------------------- -------------- ----------- ----------- ----------- ----------- ----------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.19) $(0.44) $(0.46) $(0.53) $(0.49) $(0.51)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net investment
income -- -- (0.07) -- -- --
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total distributions declared
to shareholders $(0.19) $(0.44) $(0.53) $(0.53) $(0.49) $(0.51)
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Net asset value, end of period $9.63 $10.02 $9.72 $9.69 $9.14 $9.68
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total return (%) (2.03)++ 7.84 5.98 12.20 (0.52) 5.32
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS B (CONTINUED) (UNAUDITED)
RATIOS (%) TO
AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.54+ 1.58 1.61 1.58 1.55 1.57
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.36+ 3.32 4.52 5.60 5.41 5.08
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 90 134 116 77 124 176
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $324,487 $408,553 $263,964 $163,756 $156,479 $173,569
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. If this fee had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income(S)(S) $0.12 $0.32 $0.43 $0.51 $0.50 $0.48
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
Expenses## 1.59+ 1.63 1.66 1.65 1.65 1.67
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.31+ 3.27 4.47 5.53 5.31 4.98
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS C (UNAUDITED)
Net asset value, beginning of period $10.06 $9.76 $9.73 $9.18 $9.71 $9.72
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS(S)(S)#
Net investment income(S) $0.12 $0.33 $0.44 $0.52 $0.52 $0.49
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain
(loss) on investments (0.32) 0.41 0.12 0.56 (0.56) 0.01
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total from investment
operations $(0.20) $0.74 $0.56 $1.08 $(0.04) $0.50
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.19) $(0.44) $(0.46) $(0.53) $(0.49) $(0.51)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net investment
income -- -- (0.07) -- -- --
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total distributions declared
to shareholders $(0.19) $(0.44) $(0.53) $(0.53) $(0.49) $(0.51)
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Net asset value, end of period $9.67 $10.06 $9.76 $9.73 $9.18 $9.71
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total return (%) (2.02)++ 7.81 5.97 12.17 (0.42) 5.23
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS C (CONTINUED) (UNAUDITED)
RATIOS (%) TO
AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.54+ 1.58 1.61 1.58 1.55 1.57
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.36+ 3.32 4.51 5.60 5.40 5.03
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 90 134 116 77 124 176
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $86,222 $110,096 $81,397 $36,603 $32,708 $36,340
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. If this fee had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income(S)(S) $0.12 $0.32 $0.43 $0.51 $0.49 $0.48
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
Expenses## 1.59+ 1.63 1.66 1.65 1.65 1.67
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.31+ 3.27 4.46 5.53 5.30 4.93
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS I (UNAUDITED)
Net asset value, beginning of period $10.03 $9.73 $9.71 $9.15 $9.69 $9.69
- -------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS(S)(S)#
Net investment income(S) $0.14 $0.33 $0.53 $0.61 $0.60 $0.59
- -------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized
gain
(loss) on investments (0.29) 0.51 0.13 0.56 (0.56) 0.01
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total from investment
operations $(0.15) $0.84 $0.66 $1.17 $0.04 $0.60
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
LESS DISTRIBUTIONS DECLARED
TO SHAREHOLDERS
From net investment income $(0.24) $(0.54) $(0.55) $(0.61) $(0.58) $(0.60)
- -------------------------------------------------------------------------------------------------------------------------------
In excess of net investment
income -- -- (0.09) -- -- --
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total distributions declared
to shareholders $(0.24) $(0.54) $(0.64) $(0.61) $(0.58) $(0.60)
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Net asset value, end of period $9.64 $10.03 $9.73 $9.71 $9.15 $9.69
- ------------------------------- --------- ----------- ----------- ----------- ----------- ----------
Total return (%) (1.54)++ 8.92 6.99 13.34 0.43 6.37
- -------------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
SIX MONTHS YEAR ENDED 2/28-29
ENDED --------------------------------------------------------------------------
8/31/03 2003 2002 2001 2000 1999
CLASS I (CONTINUED) (UNAUDITED)
RATIOS (%) TO
AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.54+ 0.58 0.61 0.58 0.55 0.57
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.77+ 3.64 5.49 6.60 6.40 6.13
- -------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 90 134 116 77 124 176
- -------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $91,910 $33,682 $1,797 $4,821 $5,579 $6,634
- -------------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. If this fee had been
incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income(S)(S) $0.13 $0.33 $0.52 $0.61 $0.59 $0.58
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)
Expenses## 0.59+ 0.63 0.66 0.65 0.65 0.67
- -------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.72+ 3.59 5.44 6.53 6.30 6.03
- -------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
Financial Highlights - continued
SIX MONTHS ENDED PERIOD ENDED
8/31/03 2/28/03*
CLASS R (UNAUDITED)
Net asset value, beginning of period $10.03 $10.02
- --------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.06 $0.16
- --------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.24) (0.07)
- ------------------------------------------------------------------- -------- -----------
Total from investment operations $(0.18) $0.09
- ------------------------------------------------------------------- -------- -----------
Less distributions declared to shareholders from net investment
income $(0.22) $(0.08)
- ------------------------------------------------------------------- -------- -----------
Net asset value, end of period $9.63 $10.03
- ------------------------------------------------------------------- -------- -----------
Total return (%) (1.88)++ 0.88++
- --------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS)/SUPPLEMENTAL DATA(S):
Expenses## 1.04+ 1.08+
- --------------------------------------------------------------------------------------------------
Net investment income 1.27+ 3.04+
- --------------------------------------------------------------------------------------------------
Portfolio turnover 90 134
- --------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $3,813 $79
- --------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated.
If this fee had been incurred by the fund, the net investment income per share and the ratios
would have been:
Net investment income $0.06 $0.16
- --------------------------------------------------------------------------------------------------
RATIOS (TO AVERAGE NET ASSETS):
Expenses## 1.09+ 1.13+
- --------------------------------------------------------------------------------------------------
Net investment income 1.22+ 2.99+
- --------------------------------------------------------------------------------------------------
* For the period from the inception of Class R, December 31, 2002, through February 28, 2003.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
See notes to financial statements.
Financial Highlights - continued
SIX MONTHS PERIOD SIX MONTHS PERIOD SIX MONTHS PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
8/31/03 2/28/03* 8/31/03 2/28/03* 8/31/03 2/28/03*
(UNAUDITED) (UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Net asset value, beginning of period $10.02 $9.86 $10.01 $9.85 $10.06 $9.89
- ----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT
OPERATIONS#
Net investment income(S) $0.13 $0.28 $0.09 $0.24 $0.12 $0.20
- ----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (0.32) 0.15 (0.30) 0.16 (0.34) 0.21
- ----------------------------------- ---------- ----- ----- ----- ----- -----
Total from investment operations $(0.19) $0.43 $(0.21) $0.40 $(0.22) $0.41
- ----------------------------------- ---------- ----- ----- ----- ----- -----
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.21) $(0.27) $(0.18) $(0.24) $(0.18) $(0.24)
- ----------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $9.62 $10.02 $9.62 $10.01 $9.66 $10.06
- ----------------------------------- ---------- ----- ----- ----- ----- -----
Total return (%)(+) (1.94)++ 4.44++ (2.16)++ 4.05++ (2.24)++ 4.14++
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE
NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.14+ 1.18+ 1.79+ 1.83+ 1.79+ 1.83+
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 2.66+ 3.05+ 1.89+ 2.53+ 2.22+ 2.37+
- ----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 90 134 90 134 90 134
- ----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $362 $312 $675 $522 $292 $383
- ----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. If the fee had been incurred
by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.13 $0.28 $0.09 $0.23 $0.11 $0.20
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS (TO AVERAGE NET ASSETS):
Expenses## 1.19+ 1.23+ 1.84+ 1.88+ 1.84+ 1.88+
- ----------------------------------------------------------------------------------------------------------------------------
Net investment income 2.61+ 3.00+ 1.84+ 2.48+ 2.17+ 2.32+
- ----------------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A, Class 529B, and Class 529C, July 31, 2002
through February 28, 2003.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns for Class 529A shares do not include the applicable sales charge. If the charge had been included, the
results would have been lower.
See notes to financial statements.
- -------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (unaudited)
- -------------------------------------------------------------------------------
(1) BUSINESS AND ORGANIZATION
MFS Government Securities Fund (the fund) is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a diversified open-end management investment company.
(2) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
INVESTMENT VALUATIONS - Bonds and other fixed income securities (other than
short-term obligations) of U.S. issuers in the fund's portfolio are valued at
an evaluated bid price on the basis of quotes from brokers and dealers or on
the basis of valuations furnished by a pricing service. Prices obtained from
pricing services utilize both dealer-supplied valuations and electronic data
processing techniques which take into account appropriate factors such as
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data without exclusive reliance upon quoted prices or exchange or over-the-
counter prices, since such valuations are believed to reflect more accurately
the fair value of such securities. Short-term obligations in the fund's
portfolio are valued at amortized cost, which constitutes fair value as
determined by the Board of Trustees. Short-term obligations with a remaining
maturity in excess of 60 days will be valued upon dealer-supplied valuations.
Portfolio investments for which market quotations are not readily available,
or whose values have been materially affected by events occurring after the
close of their primary markets, are valued at fair value as determined in good
faith by or at the direction of the Board of Trustees.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
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 fund
under each such repurchase agreement. The fund, 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.
SECURITY LOANS - State Street Bank and Trust Company ("State Street"), as a
lending agent, may loan the securities of the fund to certain qualified
institutions (the "Borrowers") approved by the fund. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the fund with indemnification against Borrower default. The
fund bears the risk of loss with respect to the investment of cash collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the fund and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the fund and the lending agents. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income. At
August 31, 2003 there were no securities on loan.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Some securities may be purchased on a "when-issued" or "forward
delivery" basis, which means that the securities will be delivered to the fund
at a future date, usually beyond customary settlement time.
The fund may enter in "TBA" (to be announced) purchase commitments to purchase
securities for a fixed unit price at a future date. Although the unit price
has been established, the principal value has not been finalized. However, the
principal amount of the commitments will not fluctuate more than 1.0%. The
fund holds, and maintains until settlement date, cash or high-grade debt
obligations in an amount sufficient to meet the purchase price, or the fund
may enter into offsetting contracts for the forward sale of other securities
it owns. Income on the securities will not be earned until settlement date.
TBA purchase commitments may be considered securities in themselves, and
involve a risk of loss if the value of the security to be purchased declines
prior to settlement date, which is in addition to the risk of decline in the
value of the fund's other assets. Unsettled TBA purchase commitments are
valued at the current market value of the underlying securities, according to
the procedures described under "Investment Valuations" above.
The fund may enter into TBA sale commitments to hedge its portfolio positions
or to sell mortgage-backed securities it owns under delayed delivery
arrangements. Proceeds of TBA sale commitments are not received until the
contractual settlement date. During the time a TBA sale commitment is
outstanding, equivalent deliverable securities, or an offsetting TBA purchase
commitment deliverable on or before the sale commitment date, are held as
"cover" for the transaction.
FEES PAID INDIRECTLY - The fund's custody fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the fund. This amount is shown as a reduction of total expenses on the
Statement of Operations.
TAX MATTERS AND DISTRIBUTIONS - The fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
Distributions to shareholders are recorded on the ex-dividend date. The fund
distinguishes between distributions on a tax basis and a financial reporting
basis and only distributions in excess of tax basis earnings and profits are
reported in the financial statements as distributions from paid-in capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains. Common
types of book and tax differences that could occur include differences in
accounting for mortgage-backed securities and amortization and accretion on
debt securities.
The tax character of distributions declared for the years ended
February 28, 2003 and February 28, 2002 was as follows:
2/28/03 2/28/02
Distributions declared from
ordinary income $59,381,578 $46,093,027
- -------------------------------------------------------------------------------
As of February 28, 2003, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $2,595,353
- ---------------------------------------------------------------------------
Capital loss carryforward (27,846,284)
- ---------------------------------------------------------------------------
Unrealized appreciation 40,953,196
- ---------------------------------------------------------------------------
Other temporary differences (5,574,704)
- ---------------------------------------------------------------------------
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration.
EXPIRATION DATE
February 28, 2005 $(16,126,761)
- --------------------------------------------------------------------------
February 28, 2008 (8,242,293)
- --------------------------------------------------------------------------
February 28, 2009 (3,477,230)
- --------------------------------------------------------------------------
Total $(27,846,284)
- --------------------------------------------------------------------------
MULTIPLE CLASSES OF SHARES OF BENEFICIAL INTEREST - The fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the fund based on the value
of settled shares outstanding of each class, without distinction between share
classes. Dividends are declared separately for each class. Differences in per
share dividend rates are generally due to differences in separate class
expenses. Class B and Class 529B shares will convert to Class A and Class 529A
shares, respectively approximately eight years after purchase.
(3) TRANSACTIONS WITH AFFILIATES
INVESTMENT ADVISER - The fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services, and general
office facilities. The management fee is computed daily and paid monthly at an
annual rate of 0.40% of the fund's average daily net assets. The investment
adviser has voluntarily agreed to waive a portion of its fee, which is shown
as a reduction of total expenses in the Statement of Operations. Management
fees incurred for the six months ended August 31, 2003 were 0.35% of average
daily net assets on an annualized basis. This voluntary reduction in the
management fee effective July 1, 2000 may be rescinded by MFS only with the
approval of the fund's Board of Trustees.
The fund pays compensation to the Independent Trustees ("Trustees") in the
form of both a retainer and attendance fees, and pays no compensation directly
to its Trustees who are officers of the investment adviser, or to officers of
the fund, all of whom receive remuneration for their services to the fund from
MFS. Certain officers and Trustees of the fund are officers or directors of
MFS, MFS Fund Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC).
The fund has an unfunded, defined benefit plan for inactive Trustees and an
unfunded retirement benefit deferral plan for active Trustees. Included in
Trustees" compensation is a net increase of $783 as a result of the change in
the fund's pension liability for active Trustees and a pension expense of
$3,946 for inactive trustees for the six months ended August 31, 2003.
ADMINISTRATOR - The fund has an administrative services agreement with MFS to
provide the fund with certain financial, legal, shareholder communications,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the fund pays MFS an administrative fee
at the following annual percentages of the fund's average daily net assets:
First $2 billion 0.0175%
----------------------------------------------------------
Next $2.5 billion 0.0130%
----------------------------------------------------------
Next $2.5 billion 0.0005%
----------------------------------------------------------
In excess of $7 billion 0.0000%
----------------------------------------------------------
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$93,522 and $761 for the six months ended August 31, 2003 as its portion of
the sales charge on sales of Class A and Class 529A shares of the
fund respectively.
The Trustees have adopted a distribution plan for Class A, Class B, Class C,
Class R, Class 529A, Class 529B and Class 529C shares pursuant to Rule 12b-1
of the Investment Company Act of 1940 as follows:
The fund's distribution plan provides that the fund will pay MFD an annual
percentage of its average daily net assets attributable to certain share
classes in order that MFD may pay expenses on behalf of the fund related to
the distribution and servicing of its shares. These expenses include a service
fee paid to each securities dealer that enters into a sales agreement with MFD
based on the average daily net assets of accounts attributable to such
dealers. These fees are calculated based on each class" average daily net
assets. The maximum distribution and service fees for each class of shares are
as follows:
CLASS A CLASS B CLASS C CLASS R CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25% 0.75% 0.75%
- ---------------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
- ---------------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the six months ended August 31,
2003, amounted to:
CLASS A CLASS B CLASS C CLASS R CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $36,719 $1,158 $1,031 -- $11 -- $1
- ---------------------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year six months ended August 31, 2003, were as follows:
CLASS A CLASS B CLASS C CLASS R CLASS 529A CLASS 529B CLASS 529C
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.35% 1.00% 1.00%
- ---------------------------------------------------------------------------------------------------------------------------
Payment of the remaining 0.15% per annum portion of the Class 529A
distribution fee that is not currently being charged will be implemented on
such a date as the Trustees of the Trust may determine.
Certain Class A, Class 529A, Class C and Class 529C shares are subject to a
contingent deferred sales charge in the event of a shareholder redemption
within, for class A shares, 12 months following the purchase, and, for Class C
and 529 C shares, the first year from the end of the calendar month of
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B and Class 529B shares in the event of a shareholder
redemption within six years from the end of the calendar month of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the six months ended August 31, 2003, were
as follows:
CLASS A CLASS 529A CLASS B CLASS 529B CLASS C CLASS 529C
Contingent Deferred
Sales Charges Imposed $30,437 -- $620,786 -- $25,440 --
- ---------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties which administer the tuition programs through which
an investment in the fund's 529 share classes is made. The fund has entered
into an agreement with MFD pursuant to which MFD receives an annual fee of up
to 0.25% from the fund based solely upon the value of the fund's 529 share
classes attributable to tuition programs to which MFD or a third party which
contracts with MFD provides administrative services. The current fee has been
established at 0.25% annually of average net assets of the fund's 529 share
classes attributable to such programs. The fee may only be increased with the
approval of the Board of Trustees that oversees the fund. The services
provided by MFD or a third party with which MFD contracts include
recordkeeping and tax reporting and account services, as well as services
designed to maintain the program's compliance with the Code and other
regulatory requirements.
SHAREHOLDER SERVICING AGENT - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the fund's average daily net assets at an annual rate of
0.11%. Prior to April 1, 2003, the fee was 0.10% of the fund's average daily
net assets.
(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 $1,303,036,673 $1,339,227,547
- --------------------------------------------------------------------------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are
as follows:
Aggregate cost $1,390,376,665
------------------------------------------------------------------------
Gross unrealized depreciation $(25,255,674)
------------------------------------------------------------------------
Gross unrealized appreciation 13,132,952
------------------------------------------------------------------------
Net unrealized depreciation $(12,122,722)
------------------------------------------------------------------------
(5) SHARES OF BENEFICIAL INTEREST
The fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
fund shares were as follows:
Six months ended Year ended
8/31/03 2/28/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 76,660,194 $762,192,907 142,506,962 $1,406,764,472
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 1,740,447 17,317,914 2,962,199 29,173,953
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (80,256,333) (796,587,037) (116,984,213) (1,154,957,625)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (1,855,692) $(17,076,216) 28,484,948 $280,980,800
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 4,841,795 $48,108,721 26,705,060 $263,064,523
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 609,025 6,055,083 1,105,757 10,885,233
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (12,521,123) (123,675,784) (14,208,978) (139,706,922)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (7,070,303) $(69,511,980) 13,601,839 $134,242,834
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 1,743,675 $17,342,827 9,896,809 $97,592,339
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 150,726 1,504,550 299,275 2,958,954
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (3,918,035) (38,798,841) (7,598,573) (74,648,620)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (2,023,634) $(19,951,464) 2,597,511 $25,902,673
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 6,220,065 $61,570,603 3,295,531 $32,772,907
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 121,641 1,250,012 39,866 395,984
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (161,054) (1,604,551) (161,696) (1,601,545)
- -----------------------------------------------------------------------------------------------------------
Net increase 6,180,652 $61,216,064 3,173,701 $31,567,346
- -----------------------------------------------------------------------------------------------------------
Six months ended Period ended
8/31/03 2/28/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R SHARES
Shares sold 695,082 $6,895,779 7,872 $78,950
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 1,829 17,880 16 160
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (308,958) (3,058,819) -- --
- -----------------------------------------------------------------------------------------------------------
Net increase 387,953 $3,854,840 7,888 $79,110
- -----------------------------------------------------------------------------------------------------------
Six months ended Period ended
8/31/03 2/28/03**
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 11,973 $118,769 32,081 $320,041
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 771 7,656 335 3,329
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (6,301) (61,646) (1,265) (12,465)
- -----------------------------------------------------------------------------------------------------------
Net increase 6,443 $64,779 31,151 $310,905
- -----------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 20,253 $200,618 51,568 $514,537
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 1,067 10,588 627 5,627
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (3,287) (31,855) (75) (745)
- -----------------------------------------------------------------------------------------------------------
Net increase 18,033 $179,351 52,120 $519,419
- -----------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 18,998 $188,970 38,822 $389,521
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of distributions 754 7,535 344 3,433
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (27,699) (279,706) (1,044) (10,378)
- -----------------------------------------------------------------------------------------------------------
Net increase (decrease) (7,947) $(83,201) 38,122 $382,576
- -----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R shares, December 31, 2002 through February 28, 2003.
** For the period from the inception of Class 529 shares, July 31, 2002 through February 28, 2003.
(6) LINE OF CREDIT
The fund and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. A commitment fee of $6,361 which is based on the average daily
unused portion of the line of credit is included in miscellaneous expense. The
fund had no significant borrowings during the six months ended August 31, 2003.
- --------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------------------------------------
The following tables present certain information regarding the Trustees and officers of the fund, including
their principal occupations, which, unless specific dates are shown, are of more than five years" duration,
although the titles may not have been the same throughout.
Name, age, position with the Trust, principal occupation, and other directorships(1)
INTERESTED TRUSTEES
JEFFREY L. SHAMES(2) (born 06/02/55) ABBY M. O'NEILL (born 04/27/28)
Chairman Trustee
Massachusetts Financial Services Company, Chairman Private investor; Rockefeller Financial Services,
Inc. (investment advisers), Chairman and Chief
JOHN W. BALLEN(2) (born 09/12/59) Executive Officer
Trustee and President
Massachusetts Financial Services Company, Chief LAWRENCE T. PERERA (born 06/23/35)
Executive Officer and Director Trustee
Hemenway & Barnes (attorneys), Partner
KEVIN R. PARKE(2) (born 12/14/59)
Trustee WILLIAM J. POORVU (born 04/10/35)
Massachusetts Financial Services Company, Trustee
President, Chief Investment Officer and Director Private investor; Harvard University Graduate
School of Business Administration, Class of 1961
INDEPENDENT TRUSTEES Adjunct Professor in Entrepreneurship Emeritus;
CBL & Associates Properties, Inc. (real estate
LAWRENCE H. COHN, M.D. (born 03/11/37) investment trust), Director
Trustee
Brigham and Women's Hospital, Chief of Cardiac J. DALE SHERRATT (born 09/23/38)
Surgery; Harvard Medical School, Professor of Trustee
Surgery Insight Resources, Inc. (acquisition planning
specialists), President; Wellfleet Investments
WILLIAM R. GUTOW (born 09/27/41) (investor in health care companies), Managing
Trustee General Partner (since 1993); Cambridge
Private investor and real estate consultant; Nutraceuticals (professional nutritional
Capitol Entertainment Management Company (video products), Chief Executive Officer (until May
franchise), Vice Chairman 2001)
J. ATWOOD IVES (born 05/01/36) ELAINE R. SMITH (born 04/25/46)
Trustee Trustee
Private investor; KeySpan Corporation (energy Independent health care industry consultant
related services), Director; Eastern Enterprises
(diversified services company), Chairman, Trustee WARD SMITH (born 09/13/30)
and Chief Executive Officer (until November 2000) Trustee
Private investor
(1) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(2) "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the
1940 Act) which is the principal federal law governing investment companies like the Trust. The address of MFS
is 500 Boylston Street, Boston, Massachusetts 02116.
Trustees and Officers - continued
OFFICERS
JEFFREY L. SHAMES (born 06/02/55) ROBERT R. FLAHERTY (born 09/18/63)
Chairman Assistant Treasurer
Massachusetts Financial Services Company, Chairman Massachusetts Financial Services Company, Vice
President (since August 2000); UAM Fund Services,
JOHN W. BALLEN (born 09/12/59) Senior Vice President (prior to August 2000)
Trustee and President
Massachusetts Financial Services Company, Chief RICHARD M. HISEY (born 08/29/58)
Executive Officer and Director Treasurer
Massachusetts Financial Services Company, Senior
JAMES R. BORDEWICK, JR. (born 03/06/59) Vice President (since July 2002); The Bank of New
Assistant Secretary and Assistant Clerk York, Senior Vice President (September 2000 to
Massachusetts Financial Services Company, Senior July 2002); Lexington Global Asset Managers, Inc.,
Vice President and Associate General Counsel Executive Vice President and Chief Financial
Officer (prior to September 2000); Lexington
STEPHEN E. CAVAN (born 11/06/53) Funds, Treasurer (prior to September 2000)
Secretary and Clerk
Massachusetts Financial Services Company, Senior ELLEN MOYNIHAN (born 11/13/57)
Vice President, General Counsel and Secretary Assistant Treasurer
Massachusetts Financial Services Company, Vice
STEPHANIE A. DESISTO (born 10/01/53) President
Assistant Treasurer
Massachusetts Financial Services Company, Vice JAMES O. YOST (born 06/12/60)
President (since April 2003); Brown Brothers Assistant Treasurer
Harriman & Co., Senior Vice President (November Massachusetts Financial Services Company, Senior
2002 to April 2003); ING Groep N.V./Aeltus Vice President
Investment Management, Senior Vice President
(prior to November 2002)
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. This means that each Trustee will be elected to hold office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal. Each
officer will hold office until his or her successor is chosen and qualified, or until he or she retires,
resigns or is removed from office.
Messrs. Shames, Ives, Perera and Poorvu, and Ms. Smith, have served in their capacity as Trustee of the Trust
continuously since originally elected or appointed. Messrs. Ballen and Gutow have each served as a Trustee of
the Trust since August 1, 2001. Messrs. Cohn, Sherratt and Smith, and Ms. O'Neill, were elected by
shareholders and have served as Trustees of the Trust since January 1, 2002. Mr. Parke has served as Trustee
of the Trust since January 1, 2002.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 110 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request, by calling 1-800-225-2606.
- --------------------------------------------------------------------------------------------
INVESTMENT ADVISER CUSTODIANS
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA
02116-3741 02110
DISTRIBUTOR JP Morgan Chase Bank
MFS Fund Distributors, Inc. One Chase Manhattan Plaza
500 Boylston Street, Boston, MA New York, NY 10081
02116-3741
PORTFOLIO MANAGEMENT
MFS Fixed Income Strategy Group(1)
(1) MFS Investment Management
- -------------------------------------------------------------------------------
MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS
- -------------------------------------------------------------------------------
YOUR GOALS ARE IMPORTANT
MFS offers a complete range of investments and investment services to address
specific financial needs over time. When your investing goals change, you can
easily stay with MFS for the products you need, when you need them. Whether
you're investing for college or retirement expenses or for tax management or
estate planning, MFS will be there.
Ask your investment professional how MFS can help you move toward the goals
you've set.
MFS FAMILY OF FUNDS(R)
More than 50 portfolios offer domestic and international
equity and fixed-income investment across the full risk
spectrum
VARIABLE ANNUITIES
A selection of annuity products with advantages for
building and preserving wealth
MFS 401(k) AND IRA SUITES
Retirement plans for businesses and individuals
MFS COLLEGE SAVINGS PLANS
Investment products to help meet education expenses
MFS PRIVATE PORTFOLIO SERVICES
Investment advisory services that provide custom products
for high-net-worth individuals
You can obtain a prospectus for any MFS product from your investment
professional. The prospectus contains complete information on the fees and
risks associated with investing. Read the prospectus carefully before
investing or sending money.
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- -------------------------------------------------------------------------------
CONTACT INFORMATION
- -------------------------------------------------------------------------------
INVESTOR INFORMATION
For information on MFS mutual funds, call your investment professional or, for
an information kit, call toll free: 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
A general description of the MFS Funds proxy voting policies is available
without charge, upon request, by calling 1-800-225-2606, by visiting the About
MFS section of mfs.com or by visiting the SEC's website at http://www.sec.
gov.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
Type of Information Phone number Hours, Eastern Time
- --------------------------------------------------------------------------------
General information 1-800-225-2606 8 a.m. to 8 p.m., any
business day
- --------------------------------------------------------------------------------
Speech- or hearing-impaired 1-800-637-6576 9 a.m. to 5 p.m., any
business day
- --------------------------------------------------------------------------------
Shares prices, account 1-800-MFS-TALK
balances exchanges (1-800-637-8255) 24 hours a day,
or stock and bond outlooks touch-tone required 365 days a year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to WWW.MFS.COM for a clear view of market events, investor education,
account access, and product and performance insights.
Go paperless with EDELIVERY: Join your fellow shareholders who are already
taking advantage of this great new benefit from MFS. With eDelivery, we send
you prospectuses, reports, and proxies electronically. You get timely
information without mailbox clutter (and help your fund save printing and
postage costs).
SIGN-UP instructions: If your account is registered with us, go to
www.mfs.com, log in to your account via MFS Access, and select the eDelivery
sign up options.
If you own your MFS fund shares through a financial institution or through a
retirement plan, MFS Talk, MFS Access, and eDelivery may not be available
to you.
[logo] M F S(R)
INVESTMENT MANAGEMENT
500 Boylston Street
Boston, MA 02116-3741
(C) 2003 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.
500 Boylston Street, Boston, MA 02116
MFG SEM-10/03 92M
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 the instructions to Form N-CSR that
applies to the Registrant's principal executive officer and principal financial
and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Messrs. J. Atwood Ives and Ward Smith, 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 the instructions to Form N-CSR. In addition, Messrs. Ives and Smith
are both "independent" members of the Audit Committee as defined in the
instructions to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable at this time. Applicable for annual reports filed for the first
fiscal year ending after December 15, 2003.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
If applicable, not applicable at this time. Applicable for annual reports
covering periods ending on or after the compliance date for the listing
standards applicable to the particular issuer. Listed issuers must be in
compliance with the new listing rules by the earlier of the registrant's first
annual shareholders meeting after January 15, 2004 or October 31, 2004.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Applicable for annual reports filed on or after July 1, 2003.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures as conducted within 90 days of the filing date of this 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 registrant's last fiscal half-year (the registrant's second fiscal
half-year in the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the registrant's internal control
over financial reporting.
ITEM 10. 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.
(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 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
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 SECURITIES FUND
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By (Signature and Title)* /s/ JOHN W. BALLEN
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John W. Ballen, President
Date: October 24, 2003
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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)* /s/ JOHN W. BALLEN
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John W. Ballen, President
(Principal Executive Officer)
Date: October 24, 2003
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By (Signature and Title)* /s/ RICHARD M. HISEY
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Richard M. Hisey, Treasurer
(Principal Financial Officer and Accounting Officer)
Date: October 24, 2003
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* Print name and title of each signing officer under his or her signature.