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)
James R. Bordewick, Jr.
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 29, 2004
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Date of reporting period: February 29, 2004
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) Mutual Funds
ANNUAL REPORT 2/29/04
MFS(R) GOVERNMENT
SECURITIES FUND
A path for pursuing opportunity
[MFS LOGO]
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.
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To view MFS' statement concerning regulatory issues affecting the mutual fund
industry and the firm, please visit mfs.com.
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TABLE OF CONTENTS
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MFS PRIVACY POLICY
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LETTER FROM THE CEO 1
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MFS ORIGINAL RESEARCH(R) 4
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MANAGEMENT REVIEW 5
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PERFORMANCE SUMMARY 8
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PORTFOLIO OF INVESTMENTS 12
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FINANCIAL STATEMENTS 15
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NOTES TO FINANCIAL STATEMENTS 29
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INDEPENDENT AUDITORS' REPORT 41
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TRUSTEES AND OFFICERS 42
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MONEY MANAGEMENT FOR ALL TYPES OF INVESTORS 44
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FEDERAL TAX INFORMATION 45
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CONTACT INFORMATION 46
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ASSET ALLOCATION 47
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
As the firm's new Chief Executive Officer, I want to thank you for your
continued trust in MFS and tell you about the series of actions we have taken
since our recent settlements with the regulators. These actions are designed to
enhance the governance structure of the MFS funds, tighten our business
practices, and strengthen the management team at MFS.
In early February, Robert Pozen joined MFS as non-executive Chairman. A seasoned
veteran of the mutual fund industry, Bob has held prior positions as President
of Fidelity Management & Research Company, as Associate General Counsel of the
Securities and Exchange Commission, and as a visiting professor at Harvard Law
School.
In an effort to develop and implement policies that we believe will set a new
standard in regulatory compliance, MFS has hired two new senior executives.
Jeffrey Carp is joining us as General Counsel with responsibility for all of our
legal affairs. Previously he was a senior partner with the law firm of Hale and
Dorr LLP. Also joining MFS in the new position of Executive Vice President of
Regulatory Affairs is Maria Dwyer, who returned to the firm after serving as a
senior executive at Fidelity. At MFS, Maria is in charge of compliance, internal
audit, and fund treasury.
In the area of governance, we have taken steps to enhance the independence of
our funds' boards of trustees to better protect the interests of shareholders.
We have independent board chairs and at least 75% of the trustees are
independent. The trustees will appoint not only their own counsel but also an
independent compliance officer. This officer will assist the boards and their
committees in monitoring the MFS funds' compliance with federal and state
regulations.
In February, MFS reached agreements with federal and state regulators to settle
their administrative proceedings against the firm and two senior executives in
connection with market timing and related issues. Under the terms of the
settlements, we agreed to pay $225 million to compensate affected retail fund
shareholders. The $225 million will be distributed in accordance with a
distribution plan developed by an independent consultant.
We have further agreed with state regulators to reduce management fees on
certain funds we advise by approximately $25 million annually over the next five
years and to pay an administrative fine of $1 million, which will be used for
the purpose of investor education. We have introduced a set of policies designed
to protect the MFS funds and MFS fund shareholders from market timing abuses. By
July, all MFS retail funds, except money market funds, will have a 2% redemption
fee on short-term trades. Our global, international, high-yield, mid- and
small-cap funds will impose the 2% fee on redemptions or exchanges of fund
shares made within 30 calendar days of a share purchase. For all other MFS
funds, except money market funds, the 2% fee will be imposed on redemptions or
exchanges made within 5 business days of a share purchase. See the fund
prospectus for more information.
We continue to use fair value pricing, a strategy that minimizes the potential
for investors to take advantage of "stale" prices. These can occur, as one
example, when funds own foreign securities whose prices close on overseas
exchanges in different time zones. At the same time, we enhanced our monitoring
of excessive trading. We did so by increasing our staff and updating our
computer systems to improve our ability to detect excessive trading in our
funds. Finally, we are supporting industry efforts to establish a "hard" 4 p.m.
close on all trading, which would prevent the possibility of late trading.
In March, MFS reached a second settlement with the SEC under an administrative
proceeding resolving the SEC's investigation into how we disclosed brokerage
allocation practices in connection with fund sales. According to the settlement
order, we did not effectively disclose the potential conflict of interest that
may arise from these arrangements.
Under the terms of the settlement, MFS has agreed to pay one dollar in
disgorgement and $50 million in penalty to MFS fund shareholders. The settlement
noted that MFS had policies in place designed to obtain best execution of all
trades of securities within MFS portfolios.
This past November, MFS eliminated the above mentioned practice of directing
brokerage commissions to certain firms in recognition of fund sales.
Additionally, we announced in March that we would ban the use of soft dollars to
acquire third-party securities research and market data. Soft dollars are
permitted under federal securities laws. In fact, it is a common industry
practice to use a portion of the brokerage commissions to pay for certain
research and execution products and services that are provided to asset
managers. MFS will now pay cash out of its own pocket for third-party research
and market data.
MFS continues to be financially strong, with more than U.S. $140 billion (as of
12/31/03) in assets under management, which continued to be stable during the
first quarter of 2004. We also have the full support of our parent company, Sun
Life Financial, an internationally diversified financial services firm that
manages more than U.S. $269 billion (as of 12/31/03).
We chose to settle these two proceedings with the SEC so we could concentrate on
serving our fund shareholders. As Chief Investment Officer, my focus is on
ensuring that our portfolio teams work closely together and take full advantage
of all the resources available to them to deliver the best possible investment
performance.
As the inventor of the open-end mutual fund in America in 1924, MFS has a strong
tradition and culture of innovation. By strengthening our business and
governance practices, we believe we have an unprecedented opportunity to set a
new standard in the mutual fund industry.
As I look ahead, I do so with confidence. The collaboration among MFS employees,
many of whom have worked at the firm for their entire careers, continues as we
remain singularly dedicated to our clients. It has been our sincere privilege to
serve you, and we thank you for the confidence that you have shown in MFS.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer
MFS Investment Management(R)
March 15, 2004
Note to Shareholders: On February 6, 2004, Jeffrey L. Shames retired as
Chairman of MFS. Robert Pozen was named as non-executive Chairman. Also,
on February 6, 2004, Robert J. Manning was appointed Chief Executive Officer,
President, and Chief Investment Officer.
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 MFS(R) DIFFERENCE
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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MARKET ENVIRONMENT
The U.S. government bond market for the 12 months ended February 29, 2004 was
influenced by the Federal Reserve Board's (the Fed) desire to foster economic
growth and by low interest rates paid by U.S. government bonds. Although
interest rates at the end of February 2004 were not that different from what
they had been a year earlier, they were fairly volatile during the 12-month
period, especially in the summer months of 2003 following the Fed's 25 basis
point (0.25%) cut in short-term interest rates. For example, the yield of the
10-year U.S. Treasury bond reached 3.10% in June -- a four-decade low. However
Treasury interest rates then rose again from late June through August and
reached 4.60% in September 2003. By February 29, 2004, however, the 10-year
Treasury bond yield had fallen back to 3.97%.
FUND POSITIONING
The two most significant shifts in fund positioning were to cut the fund's
allocation to U.S. Treasury securities and to increase holdings in U.S.
government agency securities. On February 28, 2003, the fund held more than 34%
of its assets in U.S. Treasuries and roughly 15% in U.S. government agency
bonds. By the end of the reporting period in February 2004, U.S. Treasuries
represented only about 12% of fund assets and U.S. government agencies more than
40%. The cuts in the fund's U.S. Treasury holdings began in the middle of 2003.
The fund's position in government agencies was built throughout the period
because we became more comfortable with the credit quality of these issuers as a
result of increased regulatory and market scrutiny. In addition, we believe
those securities offered more attractive yields than comparable maturity
Treasury issues. (The principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.)
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PORTFOLIO ALLOCATIONS AS OF 2/29/04
AGENCY-BACKED, SINGLE-FAMILY
MORTGAGE-BACKED SECURITIES 42.2%
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UNITED STATES AGENCY 40.6%
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U.S. GOVERNMENT 12.1%
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CASH 3.0%
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COLLATERALIZED MORTGAGE OBLIGATION
AGENCY 1.2%
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AGENCY-BACKED, MULTI-FAMILY
MORTGAGE-BACKED SECURITIES 0.8%
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RESIDENTIAL MORTGAGE-BACKED
SECURITIES 0.1%
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The portfolio is actively managed, and current holdings may be different.
DETRACTORS FROM PERFORMANCE
Fund returns lagged the fund's benchmark, the Lehman Brothers Government
Mortgage Index, because of the fund's relative underweighting in mortgage-
backed securities over the last quarter of 2003. Mortgage rates were fairly
stable, homeowner refinancing decreased, and new home purchases were down from
levels earlier in the year. As a result, mortgage-backed securities appreciated
in value, but the fund did not participate fully in that upward move because of
its underweighting in the group.
CONTRIBUTORS TO PERFORMANCE
The fund's U.S. government agency positions were the most noteworthy
contributors to fund performance. Because of the upheaval in U.S. Treasury
interest rates in the summer of 2003, we believe that fixed-income investors
became more risk averse during those summer months. As a result, the difference
in yields (spreads) increased between guaranteed U.S. Treasury securities and
U.S. government agencies that carry greater credit risk. However, in August,
those spreads began to narrow. In our view, investors became more comfortable
with the attendant risks and higher yields offered by agency securities. As
spreads decreased, yields on government agency securities came down, and their
prices appreciated. Because we had increased our agency positions, the fund
participated in that appreciation.
Respectfully,
/s/ Peter C. Vaream
Peter C. Vaream on behalf of the MFS 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.
The views expressed in this report are those of the portfolio managers only
through the end of the period of the report as stated on the cover and do not
necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market and
other conditions, and MFS disclaims any responsibility to update such views.
These views may not be relied upon as investment advice or an indication of
trading intent on behalf of any MFS Fund. References to specific securities are
not recommendations of such securities, and may not be representative of any MFS
Fund's current or future investments.
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Visit mfs.com for our latest economic and investment outlook.
o Under Updates & Announcements, click Week in Review for a summary of recent
investment- related news.
o From Week in Review, link to MFS Global Investment Perspective for our
current view of the world.
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PERFORMANCE SUMMARY THROUGH 2/29/04
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The following information illustrates the historical performance of the fund's
original share class in comparison to its benchmark. Performance results include
the deduction of the maximum applicable sales charge and reflect the percentage
change in net asset value, including reinvestment of dividends and capital gains
distributions. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. The performance of other share classes will be greater than or less
than the line shown. (See Notes to Performance Summary.)
VISIT MFS.COM FOR THE MOST RECENT MONTH-END PERFORMANCE RESULTS. MARKET
VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE, AND CURRENT
PERFORMANCE MAY BE LOWER OR HIGHER THAN THE PERFORMANCE DATA QUOTED.
THE PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE
OF FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND
SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. 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.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended 2/29/04.)
MFS Government Lehman Brothers
Securities Fund -- Government
Class A Mortgage index
2/94 $ 9,525 $10,000
2/96 10,825 11,391
2/98 12,334 13,223
2/00 13,087 14,267
2/02 15,761 17,399
2/04 17,481 19,655
TOTAL RETURNS
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Average annual
without sales charge
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Class
Share class inception date 1-yr 3-yr 5-yr 10-yr
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A 7/25/84 2.19% 5.74% 5.98% 6.26%
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B 8/30/93 1.53% 5.09% 5.31% 5.56%
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C 4/1/96 1.54% 5.07% 5.32% 5.72%
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I 1/2/97 2.55% 6.12% 6.35% 6.53%
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R1 12/31/02 2.05% 5.68% 5.95% 6.24%
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R2 10/31/03 2.16% 5.73% 5.98% 6.26%
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529A 7/31/02 1.94% 5.57% 5.88% 6.21%
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529B 7/31/02 1.27% 5.21% 5.67% 6.10%
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529C 7/31/02 1.28% 5.25% 5.68% 6.11%
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Average annual
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Comparative benchmarks
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Average general U.S. government bond
fund+ 1.88% 5.70% 5.90% 5.93%
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Lehman Brothers Government Mortgage
Index# 3.35% 6.65% 6.92% 6.99%
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Average annual
with sales charge
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Share class
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A -2.66% 4.04% 4.96% 5.74%
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B -2.40% 4.17% 4.98% 5.56%
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C 0.56% 5.07% 5.32% 5.72%
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529A -2.91% 3.87% 4.86% 5.69%
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529B -2.65% 4.30% 5.34% 6.10%
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529C 0.30% 5.25% 5.68% 6.11%
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I, R1 and R2 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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Share class 1-yr 3-yr 5-yr 10-yr
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A 2.19% 18.23% 33.71% 83.53%
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B 1.53% 16.04% 29.52% 71.80%
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C 1.54% 16.00% 29.57% 74.39%
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I 2.55% 19.50% 36.03% 88.21%
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R1 2.05% 18.03% 33.48% 83.22%
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R2 2.16% 18.19% 33.67% 83.47%
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529A 1.94% 17.67% 33.07% 82.66%
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529B 1.27% 16.47% 31.72% 80.81%
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529C 1.28% 16.58% 31.84% 80.97%
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+ 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 R1 and R2
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.
Performance results reflect any applicable subsidies and waivers in effect
during the periods shown. Without such subsidies and waivers the fund's
performance would be less favorable. Please see the prospectus and financial
statements for complete details.
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 - 2/29/04
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The Portfolio of Investments is a complete list of all securities owned by your fund. It is
categorized by broad-based asset classes.
Bonds - 97.4%
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PRINCIPAL AMOUNT
ISSUER (000 Omitted) $ VALUE
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Agency - Other - 4.5%
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Financing Corp., 10.7%, 2017 $14,360 $22,824,688
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Financing Corp., 9.8%, 2018 14,975 22,548,187
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Financing Corp., 10.35%, 2018 8,400 13,135,307
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$58,508,182
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Asset Backed & Securitized - 0.2%
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Freddie Mac, 3.108%, 2035 $2,120 $2,135,354
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Mortgage Backed - 44.5%
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Fannie Mae, 6.5%, 2005 - 2033 $106,404 $112,109,998
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Fannie Mae, 6.942%, 2007 8,475 9,407,240
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Fannie Mae, 7.5%, 2013 - 2031 5,319 5,699,466
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Fannie Mae, 6%, 2016 - 2033 174,236 182,127,440
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Fannie Mae, 5.5%, 2017 - 2034 182,110 186,413,064
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Fannie Mae, 5%, 2017 - 2018 2,494 2,563,470
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Fannie Mae, 7%, 2029 - 2031 2,503 2,658,883
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Freddie Mac, 6.5%, 2016 - 2029 7,963 8,420,306
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Freddie Mac, 6%, 2017 12,093 12,753,532
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Freddie Mac, 7.5%, 2025 - 2028 704 759,759
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Freddie Mac, 7%, 2030 403 427,429
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Freddie Mac, 5.5%, 2033 - 2033 35,667 36,541,169
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Ginnie Mae, 8.5%, 2005 - 2009 791 878,597
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Ginnie Mae, 11.5%, 2010 - 2018 80 93,077
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Ginnie Mae, 12.5%, 2011 181 207,651
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Ginnie Mae, 12%, 2013 - 2015 44 51,715
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Ginnie Mae, 10.75%, 2016 12 14,074
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Ginnie Mae, 7.5%, 2022 - 2032 3,459 3,712,883
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Ginnie Mae, 6.5%, 2028 - 2031 12,163 12,854,894
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$577,694,647
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U.S. Government Agencies - 36.0%
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Aid to Israel, 5.5%, 2023 $16,567 $17,103,937
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Empresa Energetica Cornito Ltd., 6.07%, 2010 9,580 10,528,803
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Fannie Mae, 5.5%, 2006 - 2011 58,270 63,855,378
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Fannie Mae, 3.25%, 2008 76,469 76,958,707
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Fannie Mae, 6%, 2008 19,672 22,032,719
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Federal Home Loan Bank, 2.25%, 2006 17,205 17,333,108
- -------------------------------------------------------------------------------------------------
Federal Home Loan Bank, 2.875%, 2006 27,485 27,975,745
- -------------------------------------------------------------------------------------------------
Federal Home Loan Bank, 4.5%, 2013 9,795 9,870,921
- -------------------------------------------------------------------------------------------------
Freddie Mac, 2.875%, 2006 25,573 25,967,898
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Freddie Mac, 2.75%, 2008 49,031 48,826,296
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Freddie Mac, 3.625%, 2008 23,536 24,048,543
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SLM Corp., 5.25%, 2006 52,855 56,416,317
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Small Business Administration, 9.9%, 2008 74 79,064
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Small Business Administration, 10.05%, 2008 - 2009 36 39,653
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Small Business Administration, 9.05%, 2009 216 231,263
- -------------------------------------------------------------------------------------------------
Small Business Administration, 9.1%, 2009 359 382,107
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Small Business Administration, 9.25%, 2010 286 310,089
- -------------------------------------------------------------------------------------------------
Small Business Administration, 9.3%, 2010 440 478,069
- -------------------------------------------------------------------------------------------------
Small Business Administration, 9.5%, 2010 343 371,165
- -------------------------------------------------------------------------------------------------
Small Business Administration, 9.65%, 2010 305 330,886
- -------------------------------------------------------------------------------------------------
Small Business Administration, 9.7%, 2010 202 219,509
- -------------------------------------------------------------------------------------------------
Small Business Administration, 8.625%, 2011 589 638,457
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Small Business Administration, 8.8%, 2011 349 377,874
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Small Business Administration, 6.34%, 2021 5,573 6,093,008
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Small Business Administration, 6.35%, 2021 5,477 5,991,592
- -------------------------------------------------------------------------------------------------
Small Business Administration, 6.44%, 2021 5,085 5,579,201
- -------------------------------------------------------------------------------------------------
Small Business Administration, 6.625%, 2021 4,662 5,149,875
- -------------------------------------------------------------------------------------------------
Small Business Administration, 6.07%, 2022 4,798 5,187,782
- -------------------------------------------------------------------------------------------------
Small Business Administration, 4.89%, 2023 8,206 8,333,882
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Small Business Administration, 4.98%, 2023 3,142 3,208,296
- -------------------------------------------------------------------------------------------------
Small Business Administration, 4.72%, 2024 8,426 8,487,678
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U.S. Department of Housing & Urban Development, 6.36%, 2016 7,000 7,917,665
- -------------------------------------------------------------------------------------------------
U.S. Department of Housing & Urban Development, 6.59%, 2016 6,599 7,287,678
- -------------------------------------------------------------------------------------------------
$467,613,165
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U.S. Treasury Obligations - 12.2%
- -------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 1.875%, 2006 $29,430 $29,580,593
- -------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 9.25%, 2016 4,369 6,401,266
- -------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.875%, 2025 20,904 26,424,788
- -------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 5.25%, 2028 16,325 17,027,106
- -------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.25%, 2030 15,456 18,425,839
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 1.625%, 2005 42,254 42,447,101
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 5.75%, 2005 1,572 1,684,804
- -------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 4.75%, 2008 1,100 1,191,868
- -------------------------------------------------------------------------------------------------
U.S. Treasury STRIPS (Interest), 0%, 2012 21,000 15,384,201
- -------------------------------------------------------------------------------------------------
$158,567,566
- -------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,225,222,885) $1,264,518,914
- -------------------------------------------------------------------------------------------------
Repurchase Agreement - 3.0%
- -------------------------------------------------------------------------------------------------
Merrill Lynch, dated 2/27/04, due 3/01/04, total to be received
$39,416,383 (secured by various U.S. Treasury and Federal Agency
obligations in a jointly traded account), at Cost $39,413 $39,413,000
- -------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,264,635,885) $1,303,931,914
- -------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - (0.4)% (5,344,976)
- -------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,298,586,938
- -------------------------------------------------------------------------------------------------
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 2/29/04
ASSETS
Investments, at value (identified cost, $1,264,635,885) $1,303,931,914
- ------------------------------------------------------------------------------------------------
Cash 364
- ------------------------------------------------------------------------------------------------
Receivable for fund shares sold 2,130,432
- ------------------------------------------------------------------------------------------------
Interest receivable 11,224,052
- ------------------------------------------------------------------------------------------------
Other assets 2,766
- ------------------------------------------------------------------------------------------------
Total assets $1,317,289,528
- ------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $3,191,049
- ------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 15,045,215
- ------------------------------------------------------------------------------------------------
Payable to affiliates
- ------------------------------------------------------------------------------------------------
Management fee 37,608
- ------------------------------------------------------------------------------------------------
Shareholder servicing costs 48,185
- ------------------------------------------------------------------------------------------------
Distribution and service fee 50,084
- ------------------------------------------------------------------------------------------------
Administrative fee 1,850
- ------------------------------------------------------------------------------------------------
Program manager fee 24
- ------------------------------------------------------------------------------------------------
Administrative service fee 1
- ------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 328,574
- ------------------------------------------------------------------------------------------------
Total liabilities $18,702,590
- ------------------------------------------------------------------------------------------------
Net assets $1,298,586,938
- ------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF
Paid-in capital $1,319,678,214
- ------------------------------------------------------------------------------------------------
Unrealized appreciation on investments 39,296,029
- ------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (57,583,627)
- ------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (2,803,678)
- ------------------------------------------------------------------------------------------------
Total $1,298,586,938
- ------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 131,946,756
- ------------------------------------------------------------------------------------------------
Class A shares
Net assets $803,973,647
- ------------------------------------------------------------------------------------------------
Shares outstanding 81,668,051
- ------------------------------------------------------------------------------------------------
Net asset value per share $9.84
- ------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$9.84) $10.33
- ------------------------------------------------------------------------------------------------
Class B shares
Net assets $255,512,246
- ------------------------------------------------------------------------------------------------
Shares outstanding 25,993,745
- ------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.83
- ------------------------------------------------------------------------------------------------
Class C shares
Net assets $63,609,257
- ------------------------------------------------------------------------------------------------
Shares outstanding 6,443,584
- ------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.87
- ------------------------------------------------------------------------------------------------
Class I shares
Net assets $168,123,670
- ------------------------------------------------------------------------------------------------
Shares outstanding 17,092,350
- ------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $9.84
- ------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $6,188,349
- ------------------------------------------------------------------------------------------------
Shares outstanding 629,075
- ------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $9.84
- ------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $40,948
- ------------------------------------------------------------------------------------------------
Shares outstanding 4,163
- ------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $9.84
- ------------------------------------------------------------------------------------------------
Class 529A shares
Net assets $332,043
- ------------------------------------------------------------------------------------------------
Shares outstanding 33,794
- ------------------------------------------------------------------------------------------------
Net asset value per share $9.83
- ------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$9.83) $10.32
- ------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $524,032
- ------------------------------------------------------------------------------------------------
Shares outstanding 53,340
- ------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.82
- ------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $282,746
- ------------------------------------------------------------------------------------------------
Shares outstanding 28,654
- ------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.87
- ------------------------------------------------------------------------------------------------
On sales of $100,000 or more, the offering price of Class A and Class 529A shares are 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 YEAR ENDED 2/29/04
NET INVESTMENT INCOME
Interest income $54,688,934
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $5,655,256
- -----------------------------------------------------------------------------------------------------
Trustees' compensation 37,543
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 2,361,102
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 3,107,085
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 3,384,903
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 890,613
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 15,262
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 66
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 1,255
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 5,899
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 3,579
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 896
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 1,475
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 895
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 33
- -----------------------------------------------------------------------------------------------------
Administrative fee 142,936
- -----------------------------------------------------------------------------------------------------
Custodian fee 370,221
- -----------------------------------------------------------------------------------------------------
Printing 116,937
- -----------------------------------------------------------------------------------------------------
Postage 106,558
- -----------------------------------------------------------------------------------------------------
Auditing fees 38,276
- -----------------------------------------------------------------------------------------------------
Legal fees 23,360
- -----------------------------------------------------------------------------------------------------
Miscellaneous 226,648
- -----------------------------------------------------------------------------------------------------
Total expenses $16,490,798
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (5,904)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (703,979)
- -----------------------------------------------------------------------------------------------------
Net expenses $15,780,915
- -----------------------------------------------------------------------------------------------------
Net investment income $38,908,019
- -----------------------------------------------------------------------------------------------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Realized gain on investment transactions (identified cost) $1,610,862
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation on investments $(16,410,664)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments $(14,799,802)
- -----------------------------------------------------------------------------------------------------
Increase in net assets from operations $24,108,217
- -----------------------------------------------------------------------------------------------------
See notes to financial statements.
- ------------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENTS 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.
FOR YEARS ENDED 2/29, 2/28 2004 2003
INCREASE IN NET ASSETS
OPERATIONS
Net investment income $38,908,019 $45,225,143
- ------------------------------------------------------------------------------------------------------
Net realized gain on investments 1,610,862 12,189,563
- ------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments (16,410,664) 39,731,207
- ---------------------------------------------------------- ------------- ------------
Increase in net assets from operations $24,108,217 $97,145,913
- ---------------------------------------------------------- ------------- ------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- ------------------------------------------------------------------------------------------------------
Class A $(36,259,911) $(39,286,086)
- ------------------------------------------------------------------------------------------------------
Class B (11,782,723) (15,232,117)
- ------------------------------------------------------------------------------------------------------
Class C (3,106,392) (4,318,997)
- ------------------------------------------------------------------------------------------------------
Class I (4,020,905) (527,228)
- ------------------------------------------------------------------------------------------------------
Class R1 (112,504) (312)
- ------------------------------------------------------------------------------------------------------
Class R2 (410) --
- ------------------------------------------------------------------------------------------------------
Class 529A (13,754) (4,462)
- ------------------------------------------------------------------------------------------------------
Class 529B (18,887) (7,900)
- ------------------------------------------------------------------------------------------------------
Class 529C (11,567) (4,476)
- ---------------------------------------------------------- ------------- ------------
Total distributions declared to shareholders $(55,327,053) $(59,381,578)
- ---------------------------------------------------------- ------------- ------------
Net increase (decrease) in net assets from fund
share transactions $(151,707,573) $473,985,663
- ---------------------------------------------------------- ------------- ------------
Total increase (decrease) in net assets $(182,926,409) $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 $2,803,678 and
$2,881,360, respectively) $1,298,586,938 $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 past 5 years (or,
if shorter, the period of the fund's operation). 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) held for the entire period. This information has been audited by the fund's
independent auditors, whose report, together with the fund's financial statements, are included in this report.
FOR YEARS ENDED 2/29, 2/28
CLASS A 2004 2003 2002 2001 2000
Net asset value, beginning of period $10.03 $9.73 $9.71 $9.15 $9.69
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.29 $0.39 $0.50 $0.58 $0.57
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.08) 0.42 0.12 0.56 (0.56)
- --------------------------------------------------------- ------ ------ ------ ------
Total from investment operations $0.21 $0.81 $0.62 $1.14 $0.01
- --------------------------------------------------------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.40) $(0.51) $(0.52) $(0.58) $(0.55)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (0.08) -- --
- --------------------------------------------------------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.40) $(0.51) $(0.60) $(0.58) $(0.55)
- --------------------------------------------------------- ------ ------ ------ ------
Net asset value, end of period $9.84 $10.03 $9.73 $9.71 $9.15
- --------------------------------------------------------- ------ ------ ------ ------
Total return (%)(+) 2.19 8.54 6.59 12.98 0.10
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA(S):
Expenses## 0.95 0.93 0.96 0.93 0.90
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.94 3.97 5.16 6.25 6.06
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134 116 77 124
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $803,974 $927,886 $622,606 $392,457 $328,338
- ------------------------------------------------------------------------------------------------------------------------------
(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) $0.28 $0.38 $0.49 $0.57 $0.56
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.00 0.98 1.01 1.00 1.00
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.89 3.92 5.11 6.18 5.96
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund 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.
# 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
FOR YEARS ENDED 2/29, 2/28
CLASS B 2004 2003 2002 2001 2000
Net asset value, beginning of period $10.02 $9.72 $9.69 $9.14 $9.68
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.24 $0.33 $0.44 $0.52 $0.51
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.09) 0.41 0.12 0.56 (0.56)
- -------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.15 $0.74 $0.56 $1.08 $(0.05)
- -------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.34) $(0.44) $(0.46) $(0.53) $(0.49)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (0.07) -- --
- -------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.34) $(0.44) $(0.53) $(0.53) $(0.49)
- -------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $9.83 $10.02 $9.72 $9.69 $9.14
- -------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 1.53 7.84 5.98 12.20 (0.52)
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA(S):
Expenses## 1.59 1.58 1.61 1.58 1.55
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.42 3.32 4.52 5.60 5.41
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134 116 77 124
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $255,512 $408,553 $263,964 $163,756 $156,479
- ------------------------------------------------------------------------------------------------------------------------------
(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) $0.23 $0.32 $0.43 $0.51 $0.50
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.64 1.63 1.66 1.65 1.65
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.37 3.27 4.47 5.53 5.31
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund 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.
# 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
FOR YEARS ENDED 2/29, 2/28
CLASS C 2004 2003 2002 2001 2000
Net asset value, beginning of period $10.06 $9.76 $9.73 $9.18 $9.71
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.25 $0.33 $0.44 $0.52 $0.52
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.10) 0.41 0.12 0.56 (0.56)
- -------------------------------------------- -------- ------ ------ ------ ------
Total from investment operations $0.15 $0.74 $0.56 $1.08 $(0.04)
- -------------------------------------------- -------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.34) $(0.44) $(0.46) $(0.53) $(0.49)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (0.07) -- --
- -------------------------------------------- -------- ------ ------ ------ ------
Total distributions declared to
shareholders $(0.34) $(0.44) $(0.53) $(0.53) $(0.49)
- -------------------------------------------- -------- ------ ------ ------ ------
Net asset value, end of period $9.87 $10.06 $9.76 $9.73 $9.18
- -------------------------------------------- -------- ------ ------ ------ ------
Total return (%) 1.54 7.81 5.97 12.17 (0.42)
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA(S):
Expenses## 1.59 1.58 1.61 1.58 1.55
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.47 3.32 4.51 5.60 5.40
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134 116 77 124
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $63,609 $110,096 $81,397 $36,603 $32,708
- ------------------------------------------------------------------------------------------------------------------------------
(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) $0.24 $0.32 $0.43 $0.51 $0.49
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.64 1.63 1.66 1.65 1.65
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.42 3.27 4.46 5.53 5.30
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund 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.
# 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
FOR YEARS ENDED 2/29, 2/28
CLASS I 2004 2003 2002 2001 2000
Net asset value, beginning of period $10.03 $9.73 $9.71 $9.15 $9.69
- ------------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.25 $0.33 $0.53 $0.61 $0.60
- ------------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (0.00)+++^ 0.51 0.13 0.56 (0.56)
- ----------------------------------------------- ------- ------ ------ ------ ------
Total from investment operations $0.25 $0.84 $0.66 $1.17 $0.04
- ----------------------------------------------- ------- ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.44) $(0.54) $(0.55) $(0.61) $(0.58)
- ------------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- (0.09) -- --
- ----------------------------------------------- ------- ------ ------ ------ ------
Total distributions declared to shareholders $(0.44) $(0.54) $(0.64) $(0.61) $(0.58)
- ----------------------------------------------- ------- ------ ------ ------ ------
Net asset value, end of period $9.84 $10.03 $9.73 $9.71 $9.15
- ----------------------------------------------- ------- ------ ------ ------ ------
Total return (%) 2.55 8.92 6.99 13.34 0.43
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS) AND
SUPPLEMENTAL DATA(S):
Expenses## 0.62 0.58 0.61 0.58 0.55
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.57 3.64 5.49 6.60 6.40
- ------------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134 116 77 124
- ------------------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $168,124 $33,682 $1,797 $4,821 $5,579
- ------------------------------------------------------------------------------------------------------------------------------
(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) $0.25 $0.33 $0.52 $0.61 $0.59
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.67 0.63 0.66 0.65 0.65
- ------------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.52 3.59 5.44 6.53 6.30
- ------------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund 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.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
+++ Per share amount is less than $0.01.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the period because of the
timing of sales of fund shares and the amount of per share realized and unrealized gains and losses at such time.
See notes to financial statements.
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R1 2/29/04 2/28/03*
Net asset value, beginning of period $10.03 $10.02
- ----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.18 $0.16
- ----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments 0.02^ (0.07)
- ------------------------------------------------------------------- -------- --------
Total from investment operations $0.20 $0.09
- ------------------------------------------------------------------- -------- --------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.39) $(0.08)
- ------------------------------------------------------------------- -------- --------
Net asset value, end of period $9.84 $10.03
- ------------------------------------------------------------------- -------- --------
Total return (%) 2.05 0.88++
- ----------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.14 1.08+
- ----------------------------------------------------------------------------------------------------------
Net investment income 1.87 3.04+
- ----------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134
- ----------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $6,188 $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 $0.18 $0.16
- ----------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS:
Expenses## 1.19 1.13+
- ----------------------------------------------------------------------------------------------------------
Net investment income 1.82 2.99+
- ----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, 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.
^ The per share amount is not in accordance with the net realized and unrealized gain/loss for the
period because of the timing of sales of fund shares and the amount of per share realized and
unrealized gains and losses at such time.
See notes to financial statements.
Financial Highlights - continued
PERIOD ENDED
2/29/04**
CLASS R2
Net asset value, beginning of period $9.70
- -------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.02
- -------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.22^
- ------------------------------------------------------------------- -------
Total from investment operations $0.24
- ------------------------------------------------------------------- -------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.10)
- ------------------------------------------------------------------- -------
Net asset value, end of period $9.84
- ------------------------------------------------------------------- -------
Total return (%) 2.48++
- -------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.37+
- -------------------------------------------------------------------------------
Net investment income 0.72+
- -------------------------------------------------------------------------------
Portfolio turnover 143
- -------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $41
- -------------------------------------------------------------------------------
(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 $0.02
- -------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS:
Expenses## 1.42+
- -------------------------------------------------------------------------------
Net investment income 0.67+
- -------------------------------------------------------------------------------
** For the period from the inception of Class R2 shares, October 31, 2003,
through February 29, 2004.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^ The per share amount is not in accordance with the net realized and
unrealized gain/loss for the period because of the timing of sales of fund
shares and the amount of per share realized and unrealized gains and losses
at such time.
See notes to financial statements.
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS 529A 2/29/04 2/28/03*
Net asset value, beginning of period $10.02 $9.86
- ---------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.26 $0.28
- ---------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.07) 0.15
- ------------------------------------------------------------------ --------- ---------
Total from investment operations $0.19 $0.43
- ------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.38) $(0.27)
- ------------------------------------------------------------------ --------- ---------
Net asset value, end of period $9.83 $10.02
- ------------------------------------------------------------------ --------- ---------
Total return (%)(+) 1.94 4.44++
- ---------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.20 1.18+
- ---------------------------------------------------------------------------------------------------------
Net investment income 2.69 3.05+
- ---------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134
- ---------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $332 $312
- ---------------------------------------------------------------------------------------------------------
(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 $0.26 $0.28
- ---------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS:
Expenses## 1.25 1.23+
- ---------------------------------------------------------------------------------------------------------
Net investment income 2.64 3.00+
- ---------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, 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.
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS 529B 2/29/04 2/28/03*
Net asset value, beginning of period $10.01 $9.85
- -----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.20 $0.24
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.08) 0.16
- ------------------------------------------------------------------ --------- ---------
Total from investment operations $0.12 $0.40
- ------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.31) $(0.24)
- ------------------------------------------------------------------ --------- ---------
Net asset value, end of period $9.82 $10.01
- ------------------------------------------------------------------ --------- ---------
Total return (%) 1.27 4.05++
- -----------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.85 1.83+
- -----------------------------------------------------------------------------------------------------------
Net investment income 2.07 2.53+
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134
- -----------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $524 $522
- -----------------------------------------------------------------------------------------------------------
(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 $0.20 $0.23
- -----------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS:
Expenses## 1.90 1.88+
- -----------------------------------------------------------------------------------------------------------
Net investment income 2.02 2.48+
- -----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, 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.
See notes to financial statements.
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS 529C 2/29/04 2/28/03*
Net asset value, beginning of period $10.06 $9.89
- -----------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.22 $0.20
- -----------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.10) 0.21
- ------------------------------------------------------------------ --------- ---------
Total from investment operations $0.12 $0.41
- ------------------------------------------------------------------ --------- ---------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.31) $(0.24)
- ------------------------------------------------------------------ --------- ---------
Net asset value, end of period $9.87 $10.06
- ------------------------------------------------------------------ --------- ---------
Total return (%) 1.28 4.14++
- -----------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS AND
SUPPLEMENTAL DATA(S):
Expenses## 1.84 1.83+
- -----------------------------------------------------------------------------------------------------------
Net investment income 2.15 2.37+
- -----------------------------------------------------------------------------------------------------------
Portfolio turnover 143 134
- -----------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $283 $383
- -----------------------------------------------------------------------------------------------------------
(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 $0.21 $0.20
- -----------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS:
Expenses## 1.89 1.88+
- -----------------------------------------------------------------------------------------------------------
Net investment income 2.10 2.32+
- -----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, 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.
See notes to financial statements.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(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 - The fund uses independent pricing services approved by
the Board of Trustees wherever possible to value its portfolio securities.
Portfolio securities are valued at current market prices where current market
prices are readily available, or the fund may fair value portfolio securities
under the direction of the Board of Trustees when a determination is made that
current market prices are not readily available. Bonds and other fixed income
securities (other than short-term obligations) in the fund's portfolio are
valued at an evaluated bid price as reported by an independent pricing service,
or to the extent a valuation is not reported by a pricing service, such
securities are valued on the basis of quotes from brokers and dealers. 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. Bonds and other fixed income
securities for which it is determined that current market prices are not readily
available will be fair valued under the direction of the Board of Trustees.
Short-term obligations with a remaining maturity in excess of 60 days will be
valued upon dealer-supplied valuations. All other short-term obligations in the
fund's portfolio are valued at amortized cost, which constitutes market value as
determined by 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
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. On loans
collateralized by cash, the cash collateral is invested in a money market fund
or 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 agent. 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 February 29, 2004 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 accounting principles generally accepted in the United Sates of America.
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 0.01%. 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, for the year ended February 29, 2004, 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 29, 2004 was as follows:
2/29/04 2/28/03
Distributions declared from:
- ------------------------------------------------------------------------------
Ordinary income $55,327,053 $59,381,578
- ------------------------------------------------------------------------------
During the year ended February 29, 2004, accumulated distributions in excess of
net investment income decreased by $16,496,716 and accumulated net realized loss
on investments increased by $16,496,716 due to differences between book and tax
accounting for mortgage-backed securities and amortization and accretion on debt
securities. This change had no effect on the net assets or net asset value per
share.
As of February 29, 2004, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $495,386
- ------------------------------------------------------------------------------
Capital loss carryforward (33,576,113)
- ------------------------------------------------------------------------------
Post-October capital loss deferral (6,095,300)
- ------------------------------------------------------------------------------
Unrealized appreciation 21,383,815
- ------------------------------------------------------------------------------
Other temporary differences (3,299,064)
- ------------------------------------------------------------------------------
Post-October capital loss deferrals represent losses realized during the current
fiscal year, but recognized for tax purposes in the next fiscal year.
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)
- ------------------------------------------------------------------------------
February 29, 2012 (5,729,829)
- ------------------------------------------------------------------------------
Total $(33,576,113)
- ------------------------------------------------------------------------------
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
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.40% of
the fund's average daily net assets. The investment adviser has contractually
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 year
ended February 29, 2004 were 0.35% of average daily net assets on an annualized
basis.
As part of the settlement agreement with the New York Attorney General
concerning market timing and related matters, MFS has agreed to reduce the
fund's management fee to 0.30% of average daily net assets for the period March
1, 2004 through February 28, 2009. During this time period, the Board of
Trustees will continue to review the appropriateness of all advisory fees in
accordance with their oversight responsibilities. After February 28, 2009 the
management fee will be determined in accordance with then existing review
policies approved by the Board of Trustees overseeing the fund.
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 retired Trustees and an unfunded retirement
benefit deferral plan for current Trustees. Included in Trustees' compensation
is a net increase of $1,367 as a result of the change in the fund's pension
liability for current Trustees and a pension expense of $7,843 for retired
Trustees for the year ended February 29, 2004.
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 up
to the following annual percentage rates 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%
----------------------------------------------------------
In addition to the administrative services provided by MFS to the fund as
described above, MFS is responsible for providing certain administrative
services with respect to class R2 shares. These services include various
administrative, recordkeeping, and communication/educational services with
respect to the retirement plans which invest in class R2 shares, and may be
provided directly by MFS or by a third party. The fund pays an annual 0.25%
administrative service fee solely from the assets of class R2 shares to MFS for
the provision of these services.
DISTRIBUTOR - MFD, a wholly owned subsidiary of MFS, as distributor, received
$137,926 and $1,187 for the year ended February 29, 2004 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 R1, Class R2, 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. The
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 R1 CLASS R2
Distribution Fee 0.10% 0.75% 0.75% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.35% 1.00% 1.00% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Distribution Fee 0.25% 0.75% 0.75%
- ------------------------------------------------------------------------------------------------------------------
Service Fee 0.25% 0.25% 0.25%
- ------------------------------------------------------------------------------------------------------------------
Total Distribution Plan 0.50% 1.00% 1.00%
- ------------------------------------------------------------------------------------------------------------------
MFD retains the service fee for accounts not attributable to a securities dealer, which for the year ended
February 29, 2004, amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $122,225 $2,014 $2,568 $2 $--
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $27 $5 $22
- ------------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended February 29, 2004, were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.35% 1.00% 1.00% 0.50% 0.50%
- ------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage Rates 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 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 529C 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 year ended February 29, 2004, were as follows:
CLASS A CLASS B CLASS C CLASS 529A CLASS 529B CLASS 529C
Contingent Deferred Sales
Charges Imposed $81,971 $1,137,479 $39,118 $-- $110 $--
- ----------------------------------------------------------------------------------------------------------------------
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 Internal Revenue Code and other regulatory
requirements.
SHAREHOLDER SERVICING AGENT - Included in shareholder servicing costs is a fee
paid to MFSC, a wholly owned subsidiary of MFS, 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%, which amounted to $1,543,542 for
the year ended February 29, 2004. Prior to April 1, 2003, the fee was 0.10% of
the fund's average daily net assets. Also included in shareholder servicing
costs are out-of-pocket expenses, paid to MFSC, which amounted to $321,716 for
the year ended February 29, 2004, as well as other expenses paid to unaffiliated
vendors.
(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 $1,934,123,487 $2,077,072,720
- ------------------------------------------------------------------------------------------------------
Investments (non-U.S. government securities) 16,489,301 1,070
- ------------------------------------------------------------------------------------------------------
$1,950,612,787 $2,077,073,790
- ------------------------------------------------------------------------------------------------------
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 $1,282,548,099
- ------------------------------------------------------------------------------
Gross unrealized appreciation $25,896,891
- ------------------------------------------------------------------------------
Gross unrealized depreciation (4,513,076)
- ------------------------------------------------------------------------------
Net unrealized appreciation $21,383,815
- ------------------------------------------------------------------------------
(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:
Year ended 2/29/04 Year ended 2/28/03
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 88,974,135 $882,178,226 142,506,962 $1,406,764,472
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 3,148,855 31,030,457 2,962,199 29,173,953
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (102,922,448) (1,017,159,186) (116,984,213) (1,154,957,625)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) (10,799,458) $(103,950,503) 28,484,948 $280,980,800
- ---------------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 6,213,517 $61,465,689 26,705,060 $263,064,523
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,009,807 9,951,257 1,105,757 10,885,233
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (21,996,142) (215,913,138) (14,208,978) (139,706,922)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) (14,772,818) $(144,496,192) 13,601,839 $134,242,834
- ---------------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 2,314,505 $22,917,630 9,896,809 $97,592,339
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 249,846 2,472,075 299,275 2,958,954
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (7,061,804) (69,553,941) (7,598,573) (74,648,620)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) (4,497,453) $(44,164,236) 2,597,511 $25,902,673
- ---------------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 13,567,977 $133,136,806 3,295,531 $32,772,907
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 372,255 3,689,606 39,866 395,984
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (206,254) (2,045,202) (161,696) (1,601,545)
- ---------------------------------------------------------------------------------------------------------------
Net increase 13,733,978 $134,781,210 3,173,701 $31,567,346
- ---------------------------------------------------------------------------------------------------------------
Year ended 2/29/04 Period ended 2/28/03*
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 1,126,253 $11,098,044 7,872 $78,950
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 10,104 98,413 16 160
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (515,170) (5,061,439) -- --
- ---------------------------------------------------------------------------------------------------------------
Net increase 621,187 $6,135,018 7,888 $79,110
- ---------------------------------------------------------------------------------------------------------------
Period ended 2/29/04**
SHARES AMOUNT
CLASS R2 SHARES
Shares sold 4,130 $40,020
- -----------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 33 320
- -----------------------------------------------------------------------
Net increase 4,163 $40,340
- -----------------------------------------------------------------------
Year ended 2/29/04 Period ended 2/28/03***
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 18,974 $186,975 32,081 320,041
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,415 13,913 335 3,329
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (17,746) (172,984) (1,265) (12,465)
- ---------------------------------------------------------------------------------------------------------------
Net increase 2,643 $27,904 31,151 $310,905
- ---------------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 24,441 $241,533 51,568 $514,537
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,961 19,277 627 5,627
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (25,182) (243,458) (75) (745)
- ---------------------------------------------------------------------------------------------------------------
Net increase 1,220 $17,352 52,120 $519,419
- ---------------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 22,163 $219,790 38,322 $389,521
- ---------------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,213 12,021 344 3,433
- ---------------------------------------------------------------------------------------------------------------
Shares reacquired (32,844) (330,277) (1,044) (10,378)
- ---------------------------------------------------------------------------------------------------------------
Net increase (decrease) (9,468) $(98,466) 38,122 $382,576
- ---------------------------------------------------------------------------------------------------------------
* For the period from the commencement of Class R1 shares, December 31, 2002 through February 28, 2003.
** For the period from the commencement of Class R2 shares, October 31, 2003 through February 29, 2004.
*** For the period from the commencement 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 plus 50%. A commitment fee of $13,479 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 year ended February 29, 2004.
(7) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding regarding disclosure
of brokerage allocation practices in connection with fund sales. Under the terms
of the settlement, in which MFS neither admitted nor denied any wrongdoing, MFS
agreed to pay (one dollar) $1.00 in disgorgement and $50 million in penalty to
certain MFS funds, pursuant to a plan to be approved by an independent
distribution consultant. The agreement with the SEC is reflected in an order of
the SEC. The settlement order states that MFS failed to adequately disclose to
the Boards of Trustees and to shareholders of the MFS funds the specifics of its
preferred arrangements with certain brokerage firms selling MFS fund shares. The
settlement order states that MFS had in place policies designed to obtain best
execution of all fund trades.
As part of the settlement, MFS also agreed to retain an independent compliance
consultant to review the completeness of its disclosure to fund trustees and to
fund shareholders of strategic alliances between MFS or its affiliates and
broker-dealers and other financial advisers who support the sale of fund shares.
The brokerage allocation practices which were the subject of this proceeding
were discontinued by MFS in November 2003.
In addition, in February, 2004, MFS reached agreement with the Securities and
Exchange Commission ("SEC"), the New York Attorney General ("NYAG") and the
Bureau of Securities Regulation of the State of New Hampshire ("NH") to settle
administrative proceedings alleging false and misleading information in certain
MFS fund prospectuses regarding market timing and related matters (the
"February Settlements"). These regulators alleged that prospectus language for
certain MFS funds was false and misleading because, although the prospectuses
for those funds in the regulators' view indicated that the funds prohibited
market timing, MFS did not limit trading activity in 11 domestic large cap
stock, high grade bond and money market funds. MFS' former Chief Executive
Officer, John W. Ballen, and former President, Kevin R. Parke, have also
reached agreement with the SEC (Messrs. Ballen and Parke resigned their
director and officer positions with MFS on February 13, 2004). Under the terms
of the February Settlements, MFS and the executives neither admit nor deny
wrongdoing.
Under the terms of the February Settlements, a $225 million pool has been
established for distribution to shareholders in certain of the MFS funds offered
to retail investors ("Retail Funds"), which has been funded by MFS and of which
$50 million is characterized as a penalty. This pool will be distributed in
accordance with a methodology developed by an independent distribution
consultant in consultation with MFS and the Boards of Trustees of the Retail
Funds, and acceptable to the SEC. MFS has further agreed with the NYAG to reduce
its management fees in the aggregate amount of approximately $25 million
annually over the next five years, and not to increase certain management fees
during this period. MFS has also paid an administrative fine to NH in the amount
of $1 million, which will be used for investor education purposes (NH will
retain $250,000 and $750,000 will be contributed to the North American
Securities Administrators Association's Investor Protection Trust). In addition,
MFS and the Retail Funds will adopt certain governance changes.
Messrs. Ballen and Parke have agreed to temporary suspensions from association
with any registered investment company or investment adviser, will pay
approximately $315,000 each to the SEC, and resigned their positions as trustees
of all MFS funds, and Mr. Ballen resigned his position as President of all MFS
funds, effective February 6, 2004. Messrs. Ballen and Parke will not be
returning to MFS or the MFS funds after their suspensions.
Since December 2003, MFS, Sun Life Financial Inc., various MFS funds, the
Trustees of these MFS funds, and certain officers of MFS have been named as
defendants in multiple lawsuits filed in federal and state courts. The lawsuits
variously have been commenced as class actions or individual actions on behalf
of investors who purchased, held or redeemed shares of the funds during
specified periods, as class actions on behalf of participants in certain
retirement plan accounts, or as derivative actions on behalf of the MFS funds.
The lawsuits generally allege that some or all of the defendants (i) permitted
or acquiesced in market timing and/or late trading in some of the MFS funds,
inadequately disclosed MFS' internal policies concerning market timing and such
matters, and received excessive compensation as fiduciaries to the MFS fund, or
(ii) permitted or acquiesced in the improper use of fund assets by MFS to
support the distribution of fund shares and inadequately disclosed MFS' use of
fund assets in this manner. The actions assert that some or all of the
defendants violated the federal securities laws, including the Securities Act of
1933 and the Securities Exchange Act of 1934, the Investment Company Act of 1940
and the Investment Advisers Act of 1940, the Employee Retirement Income Security
Act of 1974, as well as fiduciary duties and other violations of common law. The
lawsuits seek unspecified compensatory damages. Insofar as any of the actions is
appropriately brought derivatively on behalf of any of the MFS funds, any
recovery will inure to the benefit of the funds. The defendants are reviewing
the allegations of the multiple complaints and will respond appropriately.
Additional lawsuits based on similar allegations may be filed in the future.
Any potential resolution of these matters may include, but not be limited to,
judgments or settlements for damages against MFS, the MFS funds, or any other
named defendant. As noted above, as part of the regulatory settlements, MFS has
established a restitution pool in the amount of $225 million to compensate
certain shareholders of the Retail Funds for damages that they allegedly
sustained as a result of market timing or late trading in certain of the funds,
and will pay $50 million to compensate certain MFS funds based upon the amount
of brokerage commissions allocated in recognition of fund sales. It is not clear
whether these amounts will be sufficient to compensate shareholders for all of
the damage they allegedly sustained, whether certain shareholders or putative
class members may have additional claims to compensation, or whether the damages
that may be awarded in any of the actions will exceed these amounts. In the
event the MFS funds incur any losses, costs or expenses in connection with such
lawsuits, the Boards of Trustees of the affected funds may pursue claims on
behalf of such funds against any party that may have liability to the funds in
respect thereof.
Review of these matters by the independent Trustees of the MFS funds and their
counsel is continuing. There can be no assurance that these regulatory actions
and lawsuits, or the adverse publicity associated with these developments will
not result in increased fund redemptions, reduced sales of fund shares, or other
adverse consequences to the funds.
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INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
To the Trustees and the Shareholders of MFS Government Securities Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Government Securities Fund, including the portfolio of investments, as of
February 29, 2004, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
presented. These financial statements and financial highlights are the
responsibility of the fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of February 29, 2004, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Government Securities Fund at February 29, 2004, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the periods
presented, in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 15, 2004
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TRUSTEES AND OFFICERS
- --------------------------------------------------------------------------------------------------------------
The following tables present certain information regarding the Trustees and officers of MFS Government
Securities 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
JOHN W. BALLEN(2)(5) (born 09/12/59) DAVID H. GUNNING(4) (born 05/30/42)
Trustee and President Trustee
Massachusetts Financial Services Company, Chief Cleveland-Cliffs Inc. (mining products and service
Executive Officer and Director (until February provider), Vice Chairman/Director (since April
2004) 2001); Encinitos Ventures (private investment
company), Principal (1997 to April 2001); Lincoln
ROBERT J. MANNING(2)(7) (born 10/20/63) Electric Holdings, Inc. (welding equipment
Trustee manufacturer), Director; Southwest Gas Corporation
Massachusetts Financial Services Company, Chief (natural gas distribution company), Director
Executive Officer, President, Chief Investment
Officer and Director WILLIAM R. GUTOW (born 09/27/41)
Trustee
KEVIN R. PARKE(2)(5) (born 12/14/59) Private investor and real estate consultant;
Trustee Capitol Entertainment Management Company (video
Massachusetts Financial Services Company, franchise), Vice Chairman
President, Chief Investment Officer and Director
(until February 2004) AMY B. LANE(4) (born 02/08/53)
Trustee
ROBERT C. POZEN(2)(7) (born 08/08/46) Retired; Merrill Lynch & Co., Inc., Managing
Trustee Director, Investment Banking Group (1997 to
Massachusetts Financial Services Company, Chairman February 2001); Borders Group, Inc. (book and
(since February 2004); Harvard Law School music retailer), Director; Federal Realty
(education), John Olin Visiting Professor (since Investment Trust (real estate investment trust),
July 2002); Secretary of Economic Affairs, The Trustee
Commonwealth of Massachusetts (January 2002 to
December 2002); Fidelity Investments, Vice ABBY M. O'NEILL(3) (born 04/27/28)
Chairman (June 2000 to December 2001); Fidelity Trustee
Management & Research Company (investment Private investor; Rockefeller Financial Services,
adviser), President (March 1997 to July 2001); The Inc. (investment advisers), Chairman and Chief
Bank of New York (financial services), Director; Executive Officer
Bell Canada Enterprises (telecommunications),
Director; Telesat (satellite communications), LAWRENCE T. PERERA (born 06/23/35)
Director Trustee
Hemenway & Barnes (attorneys), Partner
JEFFREY L. SHAMES(2)(6) (born 06/02/55)
Trustee WILLIAM J. POORVU (born 04/10/35)
Massachusetts Financial Services Company, Chairman Trustee
(until February 2004) 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
J. ATWOOD IVES (born 05/01/36) investment trust), Director
Co-Chair
Private investor; KeySpan Corporation (energy J. DALE SHERRATT (born 09/23/38)
related services), Director; Eastern Enterprises Trustee
(diversified services company), Chairman, Trustee Insight Resources, Inc. (acquisition planning
and Chief Executive Officer (until November 2000) specialists), President; Wellfleet Investments
(investor in health care companies), Managing
WARD SMITH (born 09/13/30) General Partner (since 1993); Cambridge
Co-Chair Nutraceuticals (professional nutritional
Private investor products), Chief Executive Officer (until May
2001)
LAWRENCE H. COHN, M.D. (born 03/11/37)
Trustee ELAINE R. SMITH (born 04/25/46)
Brigham and Women's Hospital, Chief of Cardiac Trustee
Surgery; Harvard Medical School, Professor of Independent health care industry consultant
Surgery
(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.
(3) Retired December 31, 2003.
(4) Appointed Trustee on January 27, 2004.
(5) Resigned February 6, 2004.
(6) Resigned on February 13, 2004.
(7) Appointed Trustee on February 24, 2004.
Trustees and Officers - continued
OFFICERS
JOHN W. BALLEN(1) (born 09/12/59) RICHARD M. HISEY (born 08/29/58)
Trustee and President Treasurer
Massachusetts Financial Services Company, Chief Massachusetts Financial Services Company, Senior
Executive Officer and Director (until February Vice President (since July 2002); The Bank of New
2004) York, Senior Vice President (September 2000 to
July 2002); Lexington Global Asset Managers, Inc.,
JAMES R. BORDEWICK, JR. (born 03/06/59) Executive Vice President and Chief Financial
Assistant Secretary and Assistant Clerk Officer (prior to September 2000); Lexington
Massachusetts Financial Services Company, Senior Funds, Treasurer (prior to September 2000)
Vice President and Associate General Counsel
ROBERT J. MANNING(2) (born 10/20/63)
STEPHEN E. CAVAN (born 11/06/53) President
Secretary and Clerk Massachusetts Financial Services Company, Chief
Massachusetts Financial Services Company, Senior Executive Officer, President, Chief Investment
Vice President, General Counsel and Secretary Officer and Director
STEPHANIE A. DESISTO (born 10/01/53) ELLEN MOYNIHAN (born 11/13/57)
Assistant Treasurer Assistant Treasurer
Massachusetts Financial Services Company, Vice Massachusetts Financial Services Company, Vice
President (since April 2003); Brown Brothers President
Harriman & Co., Senior Vice President (November
2002 to April 2003); ING Groep N.V./Aeltus JAMES O. YOST (born 06/12/60)
Investment Management, Senior Vice President Assistant Treasurer
(prior to November 2002) Massachusetts Financial Services Company, Senior
Vice President
ROBERT R. FLAHERTY (born 09/18/63)
Assistant Treasurer
Massachusetts Financial Services Company, Vice
President (since August 2000); UAM Fund Services,
Senior Vice President (prior to August 2000)
(1) Resigned on February 6, 2004.
(2) Appointed President on February 6, 2004.
The Trust does not hold annual shareholder meetings for the purpose of electing Trustees, and Trustees are not
elected for fixed terms. The Trust will hold a shareholders" meeting in 2005 and at least once every five
years thereafter to elect Trustees. Each Trustee and officer will hold office until his or her successor is
chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Mr. Shames has served as a Trustee of the Trust continually since originally appointed until February 13,
2004. Messrs. Cohn, Sherratt and Smith, have served in their capacity as Trustee of the Trust continuously
since originally elected or appointed. Messrs. Gutow, Ives, Perera and Poorvu, and Ms. Smith, were elected by
shareholders and have served as Trustees of the Trust since January 1, 2002. Mr. Ballen was elected by
shareholders and served as a Trustee of the Trust from January 1, 2002 until February 6, 2004, and Mr. Parke
served as a Trustee of the Trust from January 1, 2002, until February 6, 2004. Ms. O'Neill retired on December
31, 2003. Mr. Gunning and Ms. Lane have served as Trustees of the Trust since January 27, 2004, and Messrs.
Manning and Pozen have served as Trustees since February 24, 2004.
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 109 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 CUSTODIAN
Massachusetts Financial Services Company State Street Bank and Trust Company
500 Boylston Street, Boston, MA 225 Franklin Street, Boston, MA
02116-3741 02110
DISTRIBUTOR AUDITORS
MFS Fund Distributors, Inc. Deloitte & Touche LLP
500 Boylston Street, Boston, MA 200 Berkeley Street, Boston, MA
02116-3741 02116
PORTFOLIO MANAGEMENT TEAM
MFS Fixed Income Strategy Group
- --------------------------------------------------------------------------------
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
A prospectus for any MFS product can be obtained from your investment
professional. The prospectus contains complete information on the fund's
investment objective(s), the risks associated with an investment in the fund,
the fees, charges and expenses involved, as well as other information about the
fund. The prospectus should be read carefully before investing.
Variable annuities are offered through MFS/Sun Life Financial Distributors, Inc.
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
In January 2004, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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 and procedures 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, 365 days a
or stock and bond outlooks touch-tone required year
- --------------------------------------------------------------------------------
WORLD WIDE WEB
Go to 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 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.
[MFS LOGO]
500 Boylston Street
Boston, MA 02116-3741
(C) 2004 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc. 500
Boylston Street, Boston, MA 02116
MFG-ANN-4/04 71M
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.
ITEMS 4(A) THROUGH 4(D) AND 4(G):
The Board of Trustees has appointed Deloitte & Touche LLP ("Deloitte") to serve
as independent accountants to the Registrant. In addition, Deloitte may provide
non-audit related services to the Registrant and/or to the Registrants'
investment adviser, Massachusetts Financial Services Company ("MFS") and to
various entities either controlling, controlled by, or under common control with
MFS that provide ongoing services to the Funds ("MFS Related Entities").
For the fiscal years ended February 29, 2004 and February 28, 2003, audit fees
billed to the Registrant by Deloitte were as follows:
Registrant's
Audit Fees
Fees billed by Deloitte: 2004 2003
---- ----
MFS Government Securities Fund $33,500 $30,300
For the fiscal years ended February 29, 2004 and February 28, 2003, fees for
audit-related, tax and other services provided to the Registrant, MFS and MFS
Related Entities were as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3) Total Non-Audit Fees
Fees billed by Deloitte: 2004 2003 2004 2003 2004 2003 2004 2003
-------- -------- -------- ------- -------- -------- -------- --------
MFS Government Securities Fund $ 0 $ 0 $ 4,700 $ 4,500 $ 0 $ 0 $ 4,700 $ 4,500
To MFS and MFS Related Entities 442,450 180,000 57,195 59,248 146,000 275,474 645,645 514,722
-------- -------- -------- ------- -------- -------- -------- --------
TOTAL FEES BILLED $442,450 $180,000 $ 61,895 $63,748 $146,000 $275,474 $650,345 $519,222
(1) There were no Audit-Related services provided to the Registrant by Deloitte for the fiscal years ended February 29, 2004 and
February 28, 2003. Audit-Related Fees billed by Deloitte to MFS and MFS Related Entities includes fees for internal control
reviews.
(2) Fees included in the Tax Fees category comprise all services performed by professional staff in the independent accountant's
tax division except those services related to the audit. This category includes fees for tax compliance, tax planning, and
tax advice. Tax compliance, tax advice, and tax planning services include preparation of original and amended tax returns,
and tax advice related to income recognition and distribution policies.
(3) All Other Fees include fees for services related to financial information system implementation, consultation on internal
cost allocations, and in 2003, staff assistance in preparing certain information required for tax disclosures in financial
reports.
ITEM 4(E)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services:
Pre-approval is needed for all planned and anticipated audit and
permissible non-audit services rendered to the Funds and all
permissible non-audit services rendered to MFS or MFS Related Entities
if the services relate directly to the operations and/or financial
reporting of the Registrant. In the event such services arise between
regular meetings of the Audit Committee and it is not practical to seek
pre-approval at the next regular meeting of the Audit Committee, such
services may be referred to the Chair of the Audit Committee for
approval; provided that, the Chair may not approve any individual
engagement for such services exceeding $50,000 or multiple engagements
for such services in the aggregate exceeding $100,000 between such
regular meetings of the Audit Committee. Any engagement approved by the
Chair between regular meetings of the Audit Committee shall be
presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(E)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Registrant and MFS and MFS Related Entities disclosed
above were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of
Rule 2-01 of Regulation S-X (which permits audit committee approval after the
start of the engagement with respect to services other than audit review or
attest services, if certain conditions are satisfied.
ITEM 4(F): Not applicable.
ITEM 4(H): Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
Not applicable at this time. [Applicable for periods ending on or after July 9,
2004 (beginning with Form N-CSRs filed at the end of September, 2004 for July
31, 2004 reporting period.)]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 10. 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 11. 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(b) under the Exchange Act (17
CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title
18 of the United States Code (18 U.S.C. 1350) as an exhibit. A
certification furnished pursuant to this paragraph will not be deemed
"filed" for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r),
or otherwise subject to the liability of that section. Such certification
will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933 or the Exchange Act, except to the extent that
the registrant specifically incorporates it by reference: Attached hereto.
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
By (Signature and Title)* ROBERT J. MANNING
--------------------------------
Robert J. Manning, President
Date: April 23, 2004
--------------
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)* ROBERT J. MANNING
--------------------------------
Robert J. Manning, President
(Principal Executive Officer)
Date: April 23, 2004
--------------
By (Signature and Title)* RICHARD M. HISEY
--------------------------------
Richard M. Hisey, Treasurer
(Principal Financial Officer
and Accounting Officer)
Date: April 23, 2004
--------------
* Print name and title of each signing officer under his or her signature.