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 F. DesMarais
Massachusetts Financial Services Company
500 Boylston Street
Boston, Massachusetts 02116
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(Name and address of agents for service)
Registrant's telephone number, including area code: (617) 954-5000
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Date of fiscal year end: February 28
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Date of reporting period: February 28, 2005
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ITEM 1. REPORTS TO STOCKHOLDERS.
MFS(R) GOVERNMENT SECURITIES FUND 2/28/05
ANNUAL REPORT
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M F S(SM)
INVESTMENT MANAGEMENT(R)
THIS REPORT HAS BEEN PREPARED FOR THE GENERAL INFORMATION TO SHAREHOLDERS. IT
IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY WHEN PRECEDED OR
ACCOMPANIED BY A CURRENT PROSPECTUS.
ANNUAL REPORT
LETTER FROM THE CEO 1
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PORTFOLIO COMPOSITION 4
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MANAGEMENT REVIEW 5
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PERFORMANCE SUMMARY 7
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EXPENSE TABLE 12
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PORTFOLIO OF INVESTMENTS 14
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FINANCIAL STATEMENTS 18
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NOTES TO FINANCIAL STATEMENTS 37
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REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM 52
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TRUSTEES AND OFFICERS 53
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PROXY VOTING POLICIES AND INFORMATION 57
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QUARTERLY PORTFOLIO DISCLOSURE 57
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FEDERAL TAX INFORMATION 57
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CONTACT INFORMATION BACK COVER
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LETTER FROM THE CEO
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Dear Shareholders,
[Photo of Robert J. Manning]
Last summer and fall, I wrote to you about enhancements that MFS(R) was making
to its investment process. Our goal, as always, was to deliver strong
performance across all asset classes. I am now happy to report to you that
2004 was a very successful year for MFS, relative to our peers in the mutual
fund industry. While there will always be room for improvement, we believe the
enhancements we have made to our investment process resulted in significantly
improved performance across the MFS Family of Funds(R).
You may remember some of the enhancements I outlined last year.
They included
o increasing collaboration and information sharing among our investment
personnel across asset classes, through an Investment Management Committee
with members from our Domestic Equity, International Equity, Fixed Income,
and Quantitative Research teams
o increasing the number of analysts supporting our portfolio managers and
doubling the average investment experience of our domestic equity analyst
staff
o making additional use of our most-seasoned portfolio managers to mentor
research analysts
o combining more quantitative, top-down risk control and security analysis
with our traditional bottom-up research process
o opening a research office in Mexico City to complement our existing staff in
Boston, London, Singapore, and Tokyo
The effect of these enhancements, I believe, is evident in the 2004 performance
of our funds. For the 12 months ended December 31, 2004, 80% of MFS domestic
equity funds, 100% of MFS international equity funds, and 80% of MFS fixed-
income funds delivered results in the top half of their Lipper peer groups.
Our longer-term performance also benefited from our ongoing commitment to the
MFS Original Research(R) process: more than 75% of MFS funds were in the top
half of their respective Lipper categories over the 3-, 5-, and 10-year periods
ended December 31, 2004.
Of course, I cannot offer any guarantees that our performance will repeat
itself. Still, I am confident that the recent enhancements to our investment
process will continue to benefit shareholders in 2005 and beyond.
What I can tell you with certainty is that the way you manage your investments
will determine how well you take advantage of the performance that financial
markets deliver. Historically, individual investors have tended to underperform
the markets. For example, a 2003 study by DALBAR, Inc. showed that over the
nearly two decades from 1984 through 2002, the average U.S. stock investor
earned a 2.6% average annual return at a time when U.S. stocks, as measured by
the Standard & Poor's 500 Stock Index, delivered a 12.2% average annual
return.(1)
This huge discrepancy, in our view, occurred because nonprofessional investors
generally did not adhere to the basic principles followed by most professional
investors: allocate among asset classes, diversify within each asset class, and
rebalance one's portfolio on a routine schedule. I elaborated on this "ADR"
theme in fund reports over the last few months of 2004. For more information on
how to apply a Disciplined Diversification(SM) strategy to your portfolio using
the principles of ADR, I would urge you to contact your own investment
professional. You may also want to refer to information on the subject on our
Web site, MFS.COM.
As always, we appreciate your confidence in MFS, and you can be sure of our
continued commitment to do the best we can to help you pursue your long-term
financial goals.
Respectfully,
/s/ Robert J. Manning
Robert J. Manning
Chief Executive Officer and Chief Investment Officer
MFS Investment Management(R)
April 15, 2005
It is not possible to invest directly in an index.
Lipper rankings and performance are based on historical average annual returns
of Class A shares, and do not include any sales charges. Past performance is
no guarantee of future results.
Asset allocation and diversification cannot guarantee a profit or protect
against a loss.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
(1) Source: DALBAR July 2003 update to its Quantitative Analysis of Investment
Behavior; DALBAR, Inc., is a financial-services market research firm
headquartered in Boston, MA.
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PORTFOLIO COMPOSITION
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PORTFOLIO STRUCTURE*
Bonds 89.9%
Cash & Other Net Assets 10.1%
BOND MARKET SECTORS*
Mortgage Backed 48.0%
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U.S. Govt Agencies 30.9%
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U.S. Treasuries 10.9%
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Cash & Other Net Assets 10.1%
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Residential Mortgage Backed 0.1%
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CREDIT QUALITY OF BONDS**
AAA 99.6%
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Not Rated 0.4%
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PORTFOLIO FACTS
Average Duration 4.0
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Average Life 6.2 yrs.
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Average Maturity*** 14.5 yrs.
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Average Quality AAA
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Average Quality Short Term Bonds A-1
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* For purposes of this graphical presentation, the bond component includes
both accrued interest amounts and the equivalent exposure from any
derivative holdings, if applicable.
** Credit quality ratings are based on a weighted average of each security's
rating from Moody's Investors Service. If not rated by Moody's, the rating
will be that assigned by Standard & Poor's. Likewise, if not assigned a
rating by Standard & Poor's, it will be based on the rating assigned by
Fitch, Inc. If not rated by any of the three agencies, the security is
considered not rated, except for U.S. Treasuries and mortgage-backed
securities, which are included in the "AAA"-rating category. Percentages
are based on market value of investments as of 2/28/05.
*** The average maturity shown is calculated using the final stated maturity on
the portfolio's holdings without taking into account any holdings which
have been pre-refunded to an earlier date or which have a mandatory put
date prior to the stated maturity. The average life shown takes into
account these earlier dates.
Percentages are based on net assets as of 2/28/05, unless otherwise noted.
The portfolio is actively managed, and current holdings may be different.
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MANAGEMENT REVIEW
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SUMMARY OF RESULTS
For the twelve months ended February 28, 2005, Class A shares of the MFS
Government Securities Fund provided a total return of 1.81%, not including
sales charges. In comparison, the fund's benchmark, the Lehman Brothers
Government/Mortgage Index, returned 2.28%. The investment objective of the
fund is current income and preservation of principal. The fund invests, under
normal market conditions, at least 80% of its net assets in U.S. Government
securities, which are bonds or other debt obligations issued by, or whose
principal and interest payments are guaranteed or supported by, the U.S.
Government, one of its agencies or instrumentalities, or a government-
sponsored enterprise.
MARKET ENVIRONMENT
Over the period, many measures of global economic growth, including employment
and corporate spending, continued to improve, although we feel that high oil
prices, rising short-term interest rates in the United States, a significant
decline in the value of the U.S. dollar against most major currencies, and
geopolitical uncertainty impacted markets. But, oil prices pulled back from
their record levels toward the end of 2004 and, in our view, investors seemed
to turn their attention to strong corporate profits and economic growth.
DETRACTORS FROM PERFORMANCE
Relative to the fund's benchmark, the Lehman Brothers Government/Mortgage
Index, our underweighted positions in 30-year mortgage-backed securities held
back results as those securities performed strongly during the period. Some of
our investments in premium coupon mortgage pools, which suffered higher-than-
expected prepayments, also detracted from performance as homeowners took
advantage of lower interest rates to refinance their mortgages.
CONTRIBUTORS TO PERFORMANCE
The fund's holdings in 15-year mortgage pools issued by both Fannie Mae (the
Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan
Mortgage Corporation) were key contributors to performance. During this period
of significant interest rate volatility, mortgage-backed securities were
subject to both prepayment risk, which occurs when rates are falling, and
extension risk, which occurs when rates are rising. The fund's overweighted
positions in 15-year securities aided relative results as they tended to be
impacted less by both types of risk.
The fund's positions in 30-year mortgage pools issued by Ginnie Mae (the
Government National Mortgage Association) also aided relative performance, as
investors looked to minimize their risk during a period of economic
uncertainty. Ginnie Mae securities are guaranteed by the U.S. government and
have less credit risk than other mortgage-backed securities, such as those
issued by Fannie Mae and Freddie Mac.
The fund also benefited from the flattening of the U.S. yield curve. Our
overweighted positions in bonds with maturities in the 10-year range and
underweighted positions in securities in the two-year maturity range added to
relative performance as longer-term bonds outperformed shorter-term bonds
during the period.
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 management team
only through the end of the period of the report as stated on the cover and do
not necessarily reflect the views of MFS or any other person in the MFS
organization. These views are subject to change at any time based on market
and other conditions, and MFS disclaims any responsibility to update such
views. These views may not be relied upon as investment advice or as an
indication of trading intent on behalf of any MFS fund. References to specific
securities are not recommendations of such securities and may not be
representative of any MFS fund's current or future investments.
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PERFORMANCE SUMMARY THROUGH 2/28/05
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The following chart 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. (FOR THE MOST
RECENT MONTH-END PERFORMANCE FOR I SHARES, CALL 1-888-808-6374.) 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.
HIGH SHORT-TERM RETURNS FOR ANY PERIOD MAY BE AND LIKELY WERE ATTRIBUTABLE TO
FAVORABLE MARKET CONDITIONS DURING THAT PERIOD, WHICH MAY NOT BE REPEATABLE.
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
MFS Government Lehman
Securities Brothers
Fund Government/
- Class A Mortgage Index
2/95 $ 9,525 $10,000
2/96 10,696 11,187
2/97 11,089 11,776
2/98 12,187 12,985
2/99 12,918 13,815
2/00 12,931 14,010
2/01 14,610 15,912
2/02 15,573 17,087
2/03 16,902 18,677
2/04 17,273 19,302
2/05 17,585 19,742
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 1.81% 4.13% 6.34% 6.32%
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B 8/30/93 1.12% 3.45% 5.66% 5.62%
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C 4/01/96 1.13% 3.45% 5.64% 5.63%
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I 1/02/97 2.03% 4.45% 6.68% 6.62%
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R1* 12/31/02 1.53% 3.98% 6.25% 6.28%
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R2* 10/31/03 1.27% 3.56% 5.72% 5.65%
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529A 7/31/02 1.42% 3.84% 6.16% 6.23%
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529B 7/31/02 0.87% 3.21% 5.50% 5.54%
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529C 7/31/02 0.78% 3.20% 5.50% 5.54%
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Average annual
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Comparative benchmarks
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Lehman Brothers Government/Mortgage
Index# 2.28% 4.93% 7.10% 7.04%
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Average general U.S. government
bond fund+ 1.53% 4.15% 6.27% 6.02%
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Average annual
with sales charge
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Share class
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A -3.03% 2.46% 5.31% 5.81%
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B -2.80% 2.52% 5.33% 5.62%
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C 0.15% 3.45% 5.64% 5.63%
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529A -3.39% 2.17% 5.13% 5.72%
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529B -3.05% 2.27% 5.18% 5.54%
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529C -0.20% 3.20% 5.50% 5.54%
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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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A 1.81% 12.92% 35.99% 84.62%
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B 1.12% 10.72% 31.66% 72.76%
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C 1.13% 10.71% 31.59% 72.88%
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I 2.03% 13.97% 38.20% 89.75%
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R1* 1.53% 12.42% 35.39% 83.80%
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R2* 1.27% 11.08% 32.09% 73.32%
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529A 1.42% 11.96% 34.84% 83.05%
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529B 0.87% 9.93% 30.72% 71.52%
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529C 0.78% 9.92% 30.71% 71.51%
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* Effective April 1, 2005, Class R1 shares have been renamed "Class R shares",
and Class R2 shares have been renamed "Class R3 shares". In addition, on
April 1, 2005, the fund launched the following new R share classes: R1, R2,
R4, and R5. All references herein to Class R1 and Class R2 shares are as of
February 28, 2005 and do not reflect the renaming of Class R1 and Class R2
shares.
+ 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 debt issued by the U.S.
Government as well as mortgage-backed pass-through securities of Ginnie Mae
(GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is a combination
of the Lehman Government Index and the Lehman Mortgage Backed Securities (MBS)
Index.
It is not possible to invest directly in an index.
NOTES TO PERFORMANCE SUMMARY
Class A and 529A results including sales charge reflect the deduction of the
maximum 4.75% sales charge. Class B and 529B results including sales charge
reflect 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 (assuming redemption within one year from the end of
the prior month of purchase) reflect 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.
There also is an additional annual fee, which is detailed in the program
description, on qualified tuition programs. If this fee was reflected, the
performance for Class 529 shares would have been lower. This annual fee is
waived for Oregon residents and for those accounts with assets of $25,000
or more.
Performance for I, R1 and 529A shares includes the performance of the fund's
Class A shares for periods prior to their offering. Performance for C, R2,
529B and 529C shares includes the performance of the fund's Class B shares for
periods prior to their offering. This 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 share class to which it is blended, and lower performance for share
classes with lower operating expenses than the share class to which it is
blended.
Performance results reflect any applicable expense subsidies and waivers in
effect during the periods shown. Without such subsidies and waivers the fund's
performance results would be less favorable. Please see the prospectus and
financial statements for complete details.
KEY RISK CONSIDERATIONS
The portfolio may invest in government guaranteed securities. These 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.
The portfolio has engaged and may engage in active and frequent trading to
achieve its principal investment strategies. This may result in the
realization and distribution to shareholders of higher capital gains, as
compared to a portfolio with less active trading policies, which would
increase your tax liability unless you hold your shares through a tax-deferred
vehicle (such as an IRA account). Frequent trading also increases transaction
costs, which could detract from the portfolio's performance.
Credit risk is the risk that the issuer of a fixed income security will not be
able to pay principal and interest when due. Rating agencies assign credit
ratings to certain fixed income securities to indicate their credit risk. The
price of a fixed income security will generally fall if the issuer defaults on
its obligation to pay principal or interest, the rating agencies downgrade the
issuer's credit rating or other news affects the market's perception of the
issuer's credit risk.
When interest rates rise, the prices of fixed income securities in the
portfolio will generally fall. Conversely, when interest rates fall, the
prices of fixed income securities in the portfolio will generally rise.
Interest rate risk will generally affect the price of a fixed income security
more if the security has a longer maturity. Fixed income securities with
longer maturities will therefore be more volatile than other fixed income
securities with shorter maturities. Conversely, fixed income securities with
shorter maturities will be less volatile but generally provide lower returns
than fixed income securities with longer maturities. The average maturity of
the portfolio's fixed income investments will affect the volatility of the
portfolio's share price.
Please see the prospectus for further information regarding these and other
risk considerations.
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EXPENSE TABLE
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FUND EXPENSES BORNE BY SHAREHOLDERS DURING THE PERIOD FROM
SEPTEMBER 1, 2004, THROUGH FEBRUARY 28, 2005.
As a shareholder of the fund, you incur two types of costs: (1) transaction
costs, including sales charges (loads) on certain purchase or redemption
payments and redemption fees on certain exchanges and redemptions, and
(2) ongoing costs, including management fees; distribution and service
(12b-1) fees; and other fund expenses. This example is intended to help you
understand your ongoing costs (in dollars) of investing in the fund and to
compare these costs with the ongoing costs of investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning
of the period and held for the entire period September 1, 2004 through
February 28, 2005.
ACTUAL EXPENSES
The first line for each share class in the table on the following page
provides information about actual account values and actual expenses. You may
use the information in this line, together with the amount you invested, to
estimate the expenses that you paid over the period. Simply divide your
account value by $1,000 (for example, an $8,600 account value divided by
$1,000 = 8.6), then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During Period" to estimate the expenses
you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line for each share class in the table on the following page
provides information about hypothetical account values and hypothetical
expenses based on the fund's actual expense ratio and an assumed rate of
return of 5% per year before expenses, which is not the fund's actual return.
The hypothetical account values and expenses may not be used to estimate the
actual ending account balance or expenses you paid for the period. You may use
this information to compare the ongoing costs of investing in the fund and
other funds. To do so, compare this 5% hypothetical example with the
5% hypothetical examples that appear in the shareholder reports of the
other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only and do not reflect any transactional costs, such as sales
charges (loads) or redemption fees. Therefore, the second line for each share
class in the table is useful in comparing ongoing costs only, and will not
help you determine the relative total costs of owning different funds. In
addition, if these transactional costs were included, your costs would have
been higher.
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Share Class
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Expenses
Annualized Beginning Ending Paid During
Expense Account Value Account Value Period**
Ratio 9/01/04 2/28/05 9/01/04-2/28/05
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Actual 0.88% $1,000 $1,009 $4.38
A -------------------------------------------------------------------------
Hypothetical* 0.88% $1,000 $1,020 $4.41
- -------------------------------------------------------------------------------
Actual 1.59% $1,000 $1,007 $7.91
B -------------------------------------------------------------------------
Hypothetical* 1.59% $1,000 $1,017 $7.95
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Actual 1.59% $1,000 $1,006 $7.91
C -------------------------------------------------------------------------
Hypothetical* 1.59% $1,000 $1,017 $7.95
- -------------------------------------------------------------------------------
Actual 0.59% $1,000 $1,011 $2.94
I -------------------------------------------------------------------------
Hypothetical* 0.59% $1,000 $1,022 $2.96
- -------------------------------------------------------------------------------
Actual 1.10% $1,000 $1,008 $5.48
R1 -------------------------------------------------------------------------
Hypothetical* 1.10% $1,000 $1,019 $5.51
- -------------------------------------------------------------------------------
Actual 1.40% $1,000 $1,007 $6.97
R2 -------------------------------------------------------------------------
Hypothetical* 1.40% $1,000 $1,018 $7.00
- -------------------------------------------------------------------------------
Actual 1.19% $1,000 $1,008 $5.92
529A -------------------------------------------------------------------------
Hypothetical* 1.19% $1,000 $1,019 $5.96
- -------------------------------------------------------------------------------
Actual 1.84% $1,000 $1,005 $9.15
529B -------------------------------------------------------------------------
Hypothetical* 1.84% $1,000 $1,016 $9.20
- -------------------------------------------------------------------------------
Actual 1.84% $1,000 $1,005 $9.15
529C -------------------------------------------------------------------------
Hypothetical* 1.84% $1,000 $1,016 $9.20
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* 5% class return per year before expenses.
** Expenses paid is equal to each class" annualized expense ratio for the most
recent six month period, as shown above, multiplied by the average account
value over the period, multiplied by the number of days in the period,
divided by the number of days in the year. Expenses paid do not include any
applicable sales charges (loads) or redemption fees. If these transaction
costs had been included, your costs would have been higher.
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PORTFOLIO OF INVESTMENTS - 2/28/05
- ---------------------------------------------------------------------------------------------------
The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized
by broad-based asset classes.
Bonds - 94.1%
- ---------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- ---------------------------------------------------------------------------------------------------
Agency - Other - 3.8%
- ---------------------------------------------------------------------------------------------------
Financing Corp., 9.8%, 2018 $14,975,000 $21,988,302
- ---------------------------------------------------------------------------------------------------
Financing Corp., 10.35%, 2018 8,400,000 12,832,604
- ---------------------------------------------------------------------------------------------------
Financing Corp., 10.7%, 2017 14,360,000 22,129,377
- ---------------------------------------------------------------------------------------------------
$56,950,283
- ---------------------------------------------------------------------------------------------------
Asset Backed & Securitized - 0.1%
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 3.108%, 2035 $2,120,000 $2,108,129
- ---------------------------------------------------------------------------------------------------
Mortgage Backed - 47.8%
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.45%, 2014 $3,246,594 $3,177,050
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.5%, 2019 82,893,953 81,922,416
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.62%, 2015 3,496,428 3,451,083
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.65%, 2013 3,714,547 3,677,394
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.652%, 2014 9,902,307 9,834,017
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.73%, 2012 2,911,695 2,914,285
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.771%, 2014 7,900,785 7,922,009
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.785%, 2012 942,983 948,661
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.79%, 2012 11,265,251 11,150,708
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.8%, 2013 1,348,575 1,355,164
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.82%, 2014 - 2015 5,330,105 5,333,817
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.845%, 2013 3,946,367 3,971,220
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.846%, 2014 10,824,791 10,878,747
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.85%, 2015 1,500,000 1,504,687
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.92%, 2014 1,701,211 1,731,912
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 5%, 2013 - 2034 182,547,097 183,568,483
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 5.06%, 2013 1,576,505 1,606,048
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 5.1%, 2014 2,048,765 2,086,843
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 5.5%, 2017 - 2034 118,607,481 120,408,723
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 6%, 2016 - 2034 88,227,425 90,896,366
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 6.5%, 2016 - 2034 51,012,694 53,250,633
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 6.956%, 2007 2,790,548 2,936,843
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 7%, 2029 265,944 280,758
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 7.5%, 2013 - 2031 1,276,694 1,367,830
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 8.5%, 2006 - 2008 5,294 5,563
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 9%, 2005 - 2007 27,820 29,203
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 5.5%, 2033 17,971,780 18,167,599
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 6%, 2017 - 2034 8,388,672 8,716,698
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 6.5%, 2016 - 2029 4,961,244 5,192,603
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 8.5%, 2009 94 99
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 9%, 2020 - 2021 19,647 21,866
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 9.5%, 2013 - 2021 27,644 30,913
- ---------------------------------------------------------------------------------------------------
Ginnie Mae, 5%, 2033 8,132,858 8,109,444
- ---------------------------------------------------------------------------------------------------
Ginnie Mae, 5.5%, 2033 - 2034 64,770,628 65,915,888
- ---------------------------------------------------------------------------------------------------
Ginnie Mae, 6%, 2034 4,039,085 4,172,941
- ---------------------------------------------------------------------------------------------------
Ginnie Mae, 8.5%, 2006 - 2009 494,657 529,262
- ---------------------------------------------------------------------------------------------------
Ginnie Mae, 9.5%, 2009 170,100 172,636
- ---------------------------------------------------------------------------------------------------
Ginnie Mae, 11.5%, 2010 - 2018 53,253 59,191
- ---------------------------------------------------------------------------------------------------
$717,299,603
- ---------------------------------------------------------------------------------------------------
U.S. Government Agencies - 26.6%
- ---------------------------------------------------------------------------------------------------
Aid to Israel, 0%, 2024 $14,262,000 $5,234,339
- ---------------------------------------------------------------------------------------------------
Aid to Israel, 5.5%, 2023 16,567,000 17,634,959
- ---------------------------------------------------------------------------------------------------
Empresa Energetica Cornito Ltd., 6.07%, 2010 8,445,000 8,788,711
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 3.125%, 2007 50,000,000 48,920,800
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 3.41%, 2007 12,397,000 12,224,694
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 4.625%, 2014 23,432,000 23,367,656
- ---------------------------------------------------------------------------------------------------
Fannie Mae, 5.5%, 2011 103,496,000 109,451,677
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 3.55%, 2007 30,000,000 29,727,540
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 4.875%, 2013 9,555,000 9,741,227
- ---------------------------------------------------------------------------------------------------
Freddie Mac, 5.05%, 2015 13,957,000 14,002,667
- ---------------------------------------------------------------------------------------------------
Overseas Private Investment Corp., 0%, 2007 6,685,720 6,618,158
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.34%, 2024 4,486,634 4,358,680
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.72%, 2024 8,049,687 8,001,163
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.77%, 2024 6,759,337 6,738,481
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.86%, 2024 - 2025 10,320,000 10,310,960
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.87%, 2024 6,032,000 6,029,774
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.88%, 2024 3,744,000 3,746,527
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.89%, 2023 7,901,988 7,936,443
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.98%, 2023 3,013,292 3,041,137
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 4.99%, 2024 5,345,000 5,384,765
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 5.18%, 2024 7,576,700 7,713,684
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 5.19%, 2024 4,986,249 5,076,396
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 5.52%, 2024 4,705,832 4,870,719
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 6.07%, 2022 4,284,762 4,527,026
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 6.34%, 2021 4,961,553 5,282,450
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 6.35%, 2021 4,463,662 4,752,090
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 6.44%, 2021 4,342,830 4,636,637
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 6.625%, 2021 4,159,110 4,477,932
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 8.625%, 2011 316,915 337,944
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 8.8%, 2011 218,555 232,393
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.05%, 2009 106,582 112,644
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.1%, 2009 194,011 204,161
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.25%, 2010 120,997 129,448
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.3%, 2010 255,971 273,483
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.5%, 2010 198,622 211,792
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.65%, 2010 223,491 239,224
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.7%, 2010 105,116 112,344
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 9.9%, 2008 47,707 50,448
- ---------------------------------------------------------------------------------------------------
Small Business Administration, 10.05%, 2008 - 2009 22,460 23,953
- ---------------------------------------------------------------------------------------------------
U.S. Department of Housing & Urban Development, 6.36%, 2016 7,000,000 7,637,308
- ---------------------------------------------------------------------------------------------------
U.S. Department of Housing & Urban Development, 6.59%, 2016 6,599,000 7,013,721
- ---------------------------------------------------------------------------------------------------
$399,176,155
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 15.8%
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 5.25%, 2028 $10,509,000 $11,188,386
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6%, 2026 24,208,000 28,029,281
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.25%, 2030 6,166,000 7,490,488
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.875%, 2025 1,307,000 1,660,094
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 2%, 2014 22,015,045 22,700,439
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.375%, 2007 26,726,077 28,086,381
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 3.625%, 2008### 23,308,313 25,152,047
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 5.5%, 2008 60,000,000 62,939,040
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 5.625%, 2008 9,678,000 10,210,667
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 6%, 2009 4,566,000 4,945,371
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Notes, 6.5%, 2006 32,000,000 33,500,000
- ---------------------------------------------------------------------------------------------------
U.S. Treasury STRIPS (Interest Only), 0%, 2016 811,000 483,998
- ---------------------------------------------------------------------------------------------------
$236,386,192
- ---------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $1,403,533,265) $1,411,920,362
- ---------------------------------------------------------------------------------------------------
Put Option Purchased - 0%
- ---------------------------------------------------------------------------------------------------
PAR AMOUNT
ISSUE/STRIKE PRICE/EXPIRATION OF CONTRACTS $ VALUE
- ---------------------------------------------------------------------------------------------------
U.S. Treasury Bond Futures/April 109 Put/ 03/24/05
(Premium Paid, $21,055) $98 $36,750
- ---------------------------------------------------------------------------------------------------
Repurchase Agreement - 2.9%
- ---------------------------------------------------------------------------------------------------
ISSUER PAR AMOUNT $ VALUE
- ---------------------------------------------------------------------------------------------------
Goldman Sachs, dated 2/28/05, due 3/01/05, total to be
received $44,488,225 (secured by various U.S. Treasury and
Federal Agency obligations in a jointly traded account),
at Cost $44,485,000 $44,485,000
- ---------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $1,448,039,320) $1,456,442,112
- ---------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 3.0% 44,343,300
- ---------------------------------------------------------------------------------------------------
Net Assets - 100.0% $1,500,785,412
- ---------------------------------------------------------------------------------------------------
### Security segregated as collateral for open futures contracts.
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 the fund.
AT 2/28/05
ASSETS
Investments, at value (identified cost, $1,448,039,320) $1,456,442,112
- -----------------------------------------------------------------------------------------------------
Cash 532
- -----------------------------------------------------------------------------------------------------
Receivable for daily variation margin on open futures
contracts 278,646
- -----------------------------------------------------------------------------------------------------
Receivable for investments sold 115,493,520
- -----------------------------------------------------------------------------------------------------
Receivable for fund shares sold 2,784,169
- -----------------------------------------------------------------------------------------------------
Interest receivable 10,683,492
- -----------------------------------------------------------------------------------------------------
Other assets 8,580
- -----------------------------------------------------------------------------------------------------
Total assets $1,585,691,051
- -----------------------------------------------------------------------------------------------------
LIABILITIES
Distributions payable $1,049,211
- -----------------------------------------------------------------------------------------------------
Payable for investments purchased 79,282,985
- -----------------------------------------------------------------------------------------------------
Payable for fund shares reacquired 3,299,863
- -----------------------------------------------------------------------------------------------------
Payable to affiliates
- -----------------------------------------------------------------------------------------------------
Management fee 36,172
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 257,862
- -----------------------------------------------------------------------------------------------------
Distribution and service fee 42,420
- -----------------------------------------------------------------------------------------------------
Administrative fee 1,289
- -----------------------------------------------------------------------------------------------------
Program manager fee 24
- -----------------------------------------------------------------------------------------------------
Administrative service fee 10
- -----------------------------------------------------------------------------------------------------
Accrued expenses and other liabilities 935,803
- -----------------------------------------------------------------------------------------------------
Total liabilities $84,905,639
- -----------------------------------------------------------------------------------------------------
Net assets $1,500,785,412
- -----------------------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Paid-in capital $1,561,623,553
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on investments 8,704,355
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments (65,260,490)
- -----------------------------------------------------------------------------------------------------
Accumulated distributions in excess of net investment
income (4,282,006)
- -----------------------------------------------------------------------------------------------------
Net assets $1,500,785,412
- -----------------------------------------------------------------------------------------------------
Shares of beneficial interest outstanding 155,553,991
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class A shares
Net assets $932,555,153
- -----------------------------------------------------------------------------------------------------
Shares outstanding 96,628,032
- -----------------------------------------------------------------------------------------------------
Net asset value per share $9.65
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$9.65) $10.13
- -----------------------------------------------------------------------------------------------------
Class B shares
Net assets $233,653,031
- -----------------------------------------------------------------------------------------------------
Shares outstanding 24,244,346
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.64
- -----------------------------------------------------------------------------------------------------
Class C shares
Net assets $44,676,061
- -----------------------------------------------------------------------------------------------------
Shares outstanding 4,616,181
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.68
- -----------------------------------------------------------------------------------------------------
Class I shares
Net assets $278,982,830
- -----------------------------------------------------------------------------------------------------
Shares outstanding 28,933,355
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $9.64
- -----------------------------------------------------------------------------------------------------
Class R1 shares
Net assets $9,408,025
- -----------------------------------------------------------------------------------------------------
Shares outstanding 975,463
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $9.64
- -----------------------------------------------------------------------------------------------------
Class R2 shares
Net assets $422,061
- -----------------------------------------------------------------------------------------------------
Shares outstanding 43,767
- -----------------------------------------------------------------------------------------------------
Net asset value, offering price, and redemption price
per share $9.64
- -----------------------------------------------------------------------------------------------------
Statement of Assets and Liabilities - continued
Class 529A shares
Net assets $387,928
- -----------------------------------------------------------------------------------------------------
Shares outstanding 40,272
- -----------------------------------------------------------------------------------------------------
Net asset value per share $9.63
- -----------------------------------------------------------------------------------------------------
Offering price per share (100/95.25X$9.63) $10.11
- -----------------------------------------------------------------------------------------------------
Class 529B shares
Net assets $403,673
- -----------------------------------------------------------------------------------------------------
Shares outstanding 41,908
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.63
- -----------------------------------------------------------------------------------------------------
Class 529C shares
Net assets $296,650
- -----------------------------------------------------------------------------------------------------
Shares outstanding 30,667
- -----------------------------------------------------------------------------------------------------
Net asset value and offering price per share $9.67
- -----------------------------------------------------------------------------------------------------
On sales of $100,000 or more, the offering price of Class A and Class 529A
shares is reduced. A contingent deferred sales charge may be imposed on
redemptions of Class A, Class B, Class C, Class 529A, Class 529B, and Class
529C shares.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------------------------------
FINANCIAL STATEMENTS STATEMENT OF OPERATIONS
- -----------------------------------------------------------------------------------------------------
This statement describes how much your fund received in investment income and
paid in expenses. It also describes any gains and/or losses generated by fund
operations.
YEAR ENDED 2/28/05
NET INVESTMENT INCOME
- -----------------------------------------------------------------------------------------------------
Interest income $60,431,268
- -----------------------------------------------------------------------------------------------------
Expenses
- -----------------------------------------------------------------------------------------------------
Management fee $5,299,911
- -----------------------------------------------------------------------------------------------------
Trustees" compensation 89,232
- -----------------------------------------------------------------------------------------------------
Shareholder servicing costs 2,015,624
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class A) 2,595,921
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class B) 2,299,454
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class C) 517,450
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R1) 34,610
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class R2) 746
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529A) 1,173
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529B) 4,516
- -----------------------------------------------------------------------------------------------------
Distribution and service fee (Class 529C) 2,875
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529A) 838
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529B) 1,129
- -----------------------------------------------------------------------------------------------------
Program manager fee (Class 529C) 719
- -----------------------------------------------------------------------------------------------------
Administrative service fee (Class R2) 373
- -----------------------------------------------------------------------------------------------------
Administrative fee 107,121
- -----------------------------------------------------------------------------------------------------
Custodian fee 289,107
- -----------------------------------------------------------------------------------------------------
Printing 182,043
- -----------------------------------------------------------------------------------------------------
Postage 90,346
- -----------------------------------------------------------------------------------------------------
Auditing fees 41,698
- -----------------------------------------------------------------------------------------------------
Legal fees 41,220
- -----------------------------------------------------------------------------------------------------
Miscellaneous 424,673
- -----------------------------------------------------------------------------------------------------
Total expenses $14,040,779
- -----------------------------------------------------------------------------------------------------
Fees paid indirectly (26,274)
- -----------------------------------------------------------------------------------------------------
Reduction of expenses by investment adviser (1,325,973)
- -----------------------------------------------------------------------------------------------------
Net expenses $12,688,532
- -----------------------------------------------------------------------------------------------------
Net investment income $47,742,736
- -----------------------------------------------------------------------------------------------------
Statement of Operations - continued
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Realized gain (loss) (identified cost basis)
- -----------------------------------------------------------------------------------------------------
Investment transactions $9,850,330
- -----------------------------------------------------------------------------------------------------
Futures contracts 125,153
- -----------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments $9,975,483
- -----------------------------------------------------------------------------------------------------
Change in unrealized appreciation (depreciation)
- -----------------------------------------------------------------------------------------------------
Investments $(35,400,629)
- -----------------------------------------------------------------------------------------------------
Futures contracts 301,563
- -----------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments $(35,099,066)
- -----------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments $(25,123,583)
- -----------------------------------------------------------------------------------------------------
Change in net assets from operations $22,619,153
- -----------------------------------------------------------------------------------------------------
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.
YEAR ENDED YEAR ENDED
2/28/05 2/29/04
CHANGE IN NET ASSETS
FROM OPERATIONS
Net investment income $47,742,736 $38,908,019
- -------------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments 9,975,483 1,610,862
- -------------------------------------------------------------------------------------------------------
Net unrealized gain (loss) on investments (35,099,066) (16,410,664)
- --------------------------------------------------------- --------------- -------------
Change in net assets from operations $22,619,153 $24,108,217
- --------------------------------------------------------- --------------- -------------
DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income
- -------------------------------------------------------------------------------------------------------
Class A $(30,710,051) $(36,259,911)
- -------------------------------------------------------------------------------------------------------
Class B (7,063,974) (11,782,723)
- -------------------------------------------------------------------------------------------------------
Class C (1,577,976) (3,106,392)
- -------------------------------------------------------------------------------------------------------
Class I (9,120,541) (4,020,905)
- -------------------------------------------------------------------------------------------------------
Class R1 (250,685) (112,504)
- -------------------------------------------------------------------------------------------------------
Class R2 (5,374) (410)
- -------------------------------------------------------------------------------------------------------
Class 529A (11,688) (13,754)
- -------------------------------------------------------------------------------------------------------
Class 529B (12,638) (18,887)
- -------------------------------------------------------------------------------------------------------
Class 529C (8,125) (11,567)
- --------------------------------------------------------- --------------- -------------
Total distributions declared to shareholders $(48,761,052) $(55,327,053)
- --------------------------------------------------------- --------------- -------------
Change in net assets from fund share transactions $228,335,829 $(151,707,573)
- --------------------------------------------------------- --------------- -------------
Redemption fees $4,544 $--
- --------------------------------------------------------- --------------- -------------
Total change in net assets $202,198,474 $(182,926,409)
- --------------------------------------------------------- --------------- -------------
NET ASSETS
At beginning of period $1,298,586,938 $1,481,513,347
- -------------------------------------------------------------------------------------------------------
At end of period (including accumulated distributions
in excess of net investment income of $4,282,006 and
$2,803,678, respectively) $1,500,785,412 $1,298,586,938
- -------------------------------------------------------------------------------------------------------
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
registered public accounting firm, whose report, together with the fund's financial statements, are included in this report.
YEARS ENDED 2/28, 2/29
--------------------------------------------------------------------------------
CLASS A 2005 2004 2003 2002 2001
Net asset value, beginning of period $9.84 $10.03 $9.73 $9.71 $9.15
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.36 $0.29 $0.39 $0.50 $0.58
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.19) (0.08) 0.42 0.12 0.56
- ----------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.17 $0.21 $0.81 $0.62 $1.14
- ----------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.36) $(0.40) $(0.51) $(0.52) $(0.58)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.08) --
- ----------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.36) $(0.40) $(0.51) $(0.60) $(0.58)
- ----------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $9.65 $9.84 $10.03 $9.73 $9.71
- ----------------------------------------------- ------ ------ ------ ------ ------
Total return (%)(+) 1.81 2.19 8.54 6.59 12.98
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 2/28, 2/29
--------------------------------------------------------------------------------
CLASS A (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.87 0.95 0.93 0.96 0.93
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 3.71 2.94 3.97 5.16 6.25
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134 116 77
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $932,555 $803,974 $927,886 $622,606 $392,457
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective June 7,
2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of substantially all
of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the fund,
the net investment income per share and the ratios would have been:
Net investment income(S)(S) $0.35 $0.28 $0.38 $0.49 $0.57
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.97 1.00 0.98 1.01 1.00
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 3.61 2.89 3.92 5.11 6.18
- -----------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns 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
YEARS ENDED 2/28, 2/29
--------------------------------------------------------------------------------
CLASS B 2005 2004 2003 2002 2001
Net asset value, beginning of period $9.83 $10.02 $9.72 $9.69 $9.14
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.29 $0.24 $0.33 $0.44 $0.52
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.18) (0.09) 0.41 0.12 0.56
- ----------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.11 $0.15 $0.74 $0.56 $1.08
- ----------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.30) $(0.34) $(0.44) $(0.46) $(0.53)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.07) --
- ----------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.30) $(0.34) $(0.44) $(0.53) $(0.53)
- ----------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $9.64 $9.83 $10.02 $9.72 $9.69
- ----------------------------------------------- ------ ------ ------ ------ ------
Total return (%) 1.12 1.53 7.84 5.98 12.20
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 2/28, 2/29
--------------------------------------------------------------------------------
CLASS B (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.55 1.59 1.58 1.61 1.58
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 3.00 2.42 3.32 4.52 5.60
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134 116 77
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $233,653 $255,512 $408,553 $263,964 $163,756
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective June
7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of substantially
all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees 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 $0.23 $0.32 $0.43 $0.51
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.65 1.64 1.63 1.66 1.65
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.90 2.37 3.27 4.47 5.53
- -----------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+++ Per share amount was less than $0.01.
# 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
YEARS ENDED 2/28, 2/29
--------------------------------------------------------------------------------
CLASS C 2005 2004 2003 2002 2001
Net asset value, beginning of period $9.87 $10.06 $9.76 $9.73 $9.18
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.28 $0.25 $0.33 $0.44 $0.52
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (0.17) (0.10) 0.41 0.12 0.56
- ----------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.11 $0.15 $0.74 $0.56 $1.08
- ----------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.30) $(0.34) $(0.44) $(0.46) $(0.53)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.07) --
- ----------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.30) $(0.34) $(0.44) $(0.53) $(0.53)
- ----------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $-- $-- $--
- ----------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $9.68 $9.87 $10.06 $9.76 $9.73
- ----------------------------------------------- ------ ------ ------ ------ ------
Total return (%) 1.13 1.54 7.81 5.97 12.17
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 2/28, 2/29
--------------------------------------------------------------------------------
CLASS C (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.55 1.59 1.58 1.61 1.58
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.92 2.47 3.32 4.51 5.60
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134 116 77
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $44,676 $63,609 $110,096 $81,397 $36,603
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective June
7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of substantially
all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment income per share and the ratios would have been:
Net investment income(S)(S) $0.27 $0.24 $0.32 $0.43 $0.51
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.65 1.64 1.63 1.66 1.65
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 2.82 2.42 3.27 4.46 5.53
- -----------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
+++ Per share amount was less than $0.01.
# 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
YEARS ENDED 2/28, 2/29
---------------------------------------------------------------------------------
CLASS I 2005 2004 2003 2002 2001
Net asset value, beginning of period $9.84 $10.03 $9.73 $9.71 $9.15
- -----------------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#(S)(S)
Net investment income(S) $0.39 $0.25 $0.33 $0.53 $0.61
- -----------------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments (0.20) (0.00)+++^ 0.51 0.13 0.56
- ---------------------------------------------- ------ ------ ------ ------ ------
Total from investment operations $0.19 $0.25 $0.84 $0.66 $1.17
- ---------------------------------------------- ------ ------ ------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.39) $(0.44) $(0.54) $(0.55) $(0.61)
- -----------------------------------------------------------------------------------------------------------------------------
In excess of net investment income -- -- -- (0.09) --
- ---------------------------------------------- ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.39) $(0.44) $(0.54) $(0.64) $(0.61)
- ---------------------------------------------- ------ ------ ------ ------ ------
Redemption fees added to
paid-in capital# $0.00+++ $-- $-- $-- $--
- ---------------------------------------------- ------ ------ ------ ------ ------
Net asset value, end of period $9.64 $9.84 $10.03 $9.73 $9.71
- ---------------------------------------------- ------ ------ ------ ------ ------
Total return (%) 2.03 2.55 8.92 6.99 13.34
- -----------------------------------------------------------------------------------------------------------------------------
Financial Highlights - continued
YEARS ENDED 2/28, 2/29
---------------------------------------------------------------------------------
CLASS I (CONTINUED) 2005 2004 2003 2002 2001
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 0.55 0.62 0.58 0.61 0.58
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 4.04 2.57 3.64 5.49 6.60
- -----------------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134 116 77
- -----------------------------------------------------------------------------------------------------------------------------
Net assets at end of period
(000 Omitted) $278,983 $168,124 $33,682 $1,797 $4,821
- -----------------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective June
7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of substantially
all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these fees had been incurred by the
fund, the net investment income per share and the ratios would have been:
Net investment income(S)(S) $0.38 $0.25** $0.33** $0.52 $0.61**
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 0.65 0.67 0.63 0.66 0.65
- -----------------------------------------------------------------------------------------------------------------------------
Net investment income(S)(S) 3.94 2.52 3.59 5.44 6.53
- -----------------------------------------------------------------------------------------------------------------------------
(S)(S) As required, effective March 1, 2001, the fund has adopted the provisions of the AICPA Audit and Accounting Guide for
Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
February 28, 2002 was to decrease net investment income per share by $0.04, increase net realized and unrealized gains
and losses per share by $0.04, and decrease the ratio of net investment income to average net assets by 0.45%. Per
share, ratios, and supplemental data for periods prior to March 1, 2001 have not been restated to reflect this change in
presentation.
** Waiver impact per share was less than $0.01.
+++ Per share amount was less than $0.01.
# 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 YEAR ENDED PERIOD ENDED
CLASS R1 2/28/05 2/29/04 2/28/03*
Net asset value, beginning of period $9.84 $10.03 $10.03^^
- ----------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.34 $0.18 $0.16
- ----------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments
and foreign currency (0.19) 0.02(ct) (0.08)
- --------------------------------------------------------------- ------- ------ ------
Total from investment operations $0.15 $0.20 $0.08
- --------------------------------------------------------------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.35) $(0.39) $(0.08)
- --------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- --------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $9.64 $9.84 $10.03
- --------------------------------------------------------------- ------- ------ ------
Total return (%) 1.53 2.05 0.78++^^
- ----------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.06 1.14 1.08+
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 3.59 1.87 3.04+
- ----------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134
- ----------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $9,408 $6,188 $79
- ----------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition, effective June
7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional share of substantially
all of Independent Chief Compliance Officer services paid to Tarantino LLC. If these fees had been incurred by the fund,
the net investment income per share and the ratios would have been:
Net investment income $0.33 $0.18** $0.16**
- ----------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.16 1.19 1.13+
- ----------------------------------------------------------------------------------------------------------------------
Net investment income 3.49 1.82 2.99+
- ----------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R1 shares, December 31, 2002, through February
28, 2003.
** Waiver impact per share was less than $0.01.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# 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.
^^ The net asset value and total return previously reported as $10.02 and 0.88%, respectively, have been revised to reflect
the net asset value from the day prior to the class" inception date. The net asset value and total return previously
reported were from inception date, the date the share class was first available to public shareholders.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED PERIOD ENDED
CLASS R2 2/28/05 2/29/04*
Net asset value, beginning of period $9.84 $9.69^^
- -------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.37 $0.02
- -------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments and
foreign currency (0.25) 0.23^
- ------------------------------------------------------------------------ ------ ------
Total from investment operations $0.12 $0.25
- ------------------------------------------------------------------------ ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.32) $(0.10)
- ------------------------------------------------------------------------ ------ ------
Redemption fees added to paid-in capital# $0.00+++ $--
- ------------------------------------------------------------------------ ------ ------
Net asset value, end of period $9.64 $9.84
- ------------------------------------------------------------------------ ------ ------
Total return (%) 1.27 2.58++^^
- -------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.36 1.37+
- -------------------------------------------------------------------------------------------------------
Net investment income 3.89 0.72+
- -------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143
- -------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $422 $41
- -------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In
addition, effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of substantially all of Independent Chief Compliance Officer
services paid to Tarantino LLC. If these fees had been incurred by the fund, the net investment
income per share and the ratios would have been:
Net investment income $0.36 $0.02**
- -------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.46 1.42+
- -------------------------------------------------------------------------------------------------------
Net investment income 3.79 0.67+
- -------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R2 shares, October 31, 2003, through February 29, 2004.
** Waiver impact per share was less than $0.01.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# 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.
^^ The net asset value and total return previously reported as $9.70 and 2.48%, respectively, have
been revised to reflect the net asset value from the day prior to the class" inception date. The
net asset value and total return previously reported were from inception date, the date the
share class was first available to public shareholders.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED YEAR ENDED PERIOD ENDED
CLASS 529A 2/28/05 2/29/04 2/28/03*
Net asset value, beginning of period $9.83 $10.02 $9.81^^
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.33 $0.26 $0.28
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (0.19) (0.07) 0.20
- --------------------------------------------------------------- ------- ------ ------
Total from investment operations $0.14 $0.19 $0.48
- --------------------------------------------------------------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.34) $(0.38) $(0.27)
- --------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- --------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $9.63 $9.83 $10.02
- --------------------------------------------------------------- ------- ------ ------
Total return (%)(+) 1.42 1.94 4.97++^^
- ---------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.15 1.20 1.18+
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 3.43 2.69 3.05+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $388 $332 $312
- ---------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In
addition, effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the
fund for its proportional share of substantially all of Independent Chief Compliance Officer
service fees paid to Tarantino LLC. If these fees had been incurred by the fund, the net
investment income per share and the ratios would have been:
Net investment income $0.32 $0.26** $0.28**
- ---------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.25 1.25 1.23+
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 3.33 2.64 3.00+
- ---------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529A shares, July 31, 2002, through February 28, 2003.
** Waiver impact per share was less than $0.01.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
(+) Total returns shares do not include the applicable sales charge. If the charge had been
included, the results would have been lower.
^^ The net asset value and total return previously reported as $9.86 and 4.44%, respectively, have
been revised to reflect the net asset value from the day prior to the class" inception date. The
net asset value and total return previously reported were from inception date, the date the
share class was first available to public shareholders.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED YEAR ENDED PERIOD ENDED
CLASS 529B 2/28/05 2/29/04 2/28/03*
Net asset value, beginning of period $9.82 $10.01 $9.80^^
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.26 $0.20 $0.24
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (0.18) (0.08) 0.21
- --------------------------------------------------------------- ------- ------ ------
Total from investment operations $0.08 $0.12 $0.45
- --------------------------------------------------------------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.27) $(0.31) $(0.24)
- --------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- --------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $9.63 $9.82 $10.01
- --------------------------------------------------------------- ------- ------ ------
Total return (%) 0.87 1.27 4.58++^^
- ---------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.80 1.85 1.83+
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 2.68 2.07 2.53+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $404 $524 $522
- ---------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition,
effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of substantially all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these
fees had been incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.25 $0.20** $0.23
- ---------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.90 1.90 1.88+
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 2.58 2.02 2.48+
- ---------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529B shares, July 31, 2002, through February 28, 2003.
** Waiver impact per share was less than $0.01.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^^ The net asset value and total return previously reported as $9.85 and 4.05%, respectively, have been revised to
reflect the net asset value from the day prior to the class" inception date. The net asset value and total
return previously reported were from inception date, the date the share class was first available to public
shareholders.
SEE NOTES TO FINANCIAL STATEMENTS
Financial Highlights - continued
YEAR ENDED YEAR ENDED PERIOD ENDED
CLASS 529C 2/28/05 2/29/04 2/28/03*
Net asset value, beginning of period $9.87 $10.06 $9.84^^
- ---------------------------------------------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS#
Net investment income(S) $0.26 $0.22 $0.20
- ---------------------------------------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments and foreign currency (0.19) (0.10) 0.26
- --------------------------------------------------------------- ------- ------ ------
Total from investment operations $0.07 $0.12 $0.46
- --------------------------------------------------------------- ------- ------ ------
LESS DISTRIBUTIONS DECLARED TO SHAREHOLDERS
From net investment income $(0.27) $(0.31) $(0.24)
- --------------------------------------------------------------- ------- ------ ------
Redemption fees added to paid-in capital# $0.00+++ $-- $--
- --------------------------------------------------------------- ------- ------ ------
Net asset value, end of period $9.67 $9.87 $10.06
- --------------------------------------------------------------- ------- ------ ------
Total return (%) 0.78 1.28 4.66++^^
- ---------------------------------------------------------------------------------------------------------------------
RATIOS (%) TO AVERAGE NET ASSETS
AND SUPPLEMENTAL DATA(S):
Expenses## 1.80 1.84 1.83+
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 2.72 2.15 2.37+
- ---------------------------------------------------------------------------------------------------------------------
Portfolio turnover 126 143 134
- ---------------------------------------------------------------------------------------------------------------------
Net assets at end of period (000 Omitted) $297 $283 $383
- ---------------------------------------------------------------------------------------------------------------------
(S) The investment adviser contractually waived a portion of its fee for the periods indicated. In addition,
effective June 7, 2004, the investment adviser has voluntarily agreed to reimburse the fund for its proportional
share of substantially all of Independent Chief Compliance Officer service fees paid to Tarantino LLC. If these
fees had been incurred by the fund, the net investment income per share and the ratios would have been:
Net investment income $0.25 $0.21 $0.20**
- ---------------------------------------------------------------------------------------------------------------------
RATIOS (%) (TO AVERAGE NET ASSETS):
Expenses## 1.90 1.89 1.88+
- ---------------------------------------------------------------------------------------------------------------------
Net investment income 2.62 2.10 2.32+
- ---------------------------------------------------------------------------------------------------------------------
* For the period from the inception of Class 529C shares, July 31, 2002, through February 28, 2003.
** Waiver impact per share was less than $0.01.
+ Annualized.
++ Not annualized.
+++ Per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## Ratios do not reflect reductions from fees paid indirectly.
^^ The net asset value and total return previously reported as $9.89 and 4.14%, respectively, have been
revised to reflect the net asset value from the day prior to the class" inception date. The net asset value and
total return previously reported were from inception date, the date the share class was first available to
public shareholders.
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) ACQUISITIONS
At close of business on November 19, 2004 the fund acquired all of the assets
and liabilities of MFS Government Mortgage Fund. The acquisition was
accomplished by a tax-free exchange of 48,701,178 shares of the fund (valued
at $473,323,224) for all of the assets and liabilities of MFS Government
Mortgage Fund. MFS Government Mortgage Fund then converted all of its
outstanding shares for the shares of the fund and distributed those shares to
its shareholders. MFS Government Mortgage Fund's net assets on that date were
$473,323,224, including $3,693,881 of unrealized appreciation, $157,151 of
accumulated distributions in excess of net investment income, and $31,781,771
of accumulated net realized loss on investments. These assets were combined
with those of the fund. The aggregate net assets of the fund after the
acquisition were $1,217,628,851.
(3) SIGNIFICANT ACCOUNTING POLICIES
GENERAL - The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
INVESTMENT VALUATIONS - 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. Futures contracts are valued at the
settlement price as reported by an independent pricing service on the primary
exchange on which they are traded. 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 approximates market value as determined by the Board of
Trustees. When pricing service information or market quotations are not
readily available, securities are priced at fair value as determined under the
direction of the Board of Trustees.
REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements with
institutions that the fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the fund to obtain those
securities in the event of a default under the repurchase agreement. The fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the fund
under each such repurchase agreement. The fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a
joint trading account for the purpose of entering into one or more
repurchase agreements.
FUTURES CONTRACTS - The fund may enter into futures contracts for the delayed
delivery of securities or currency, or contracts based on financial indices at
a fixed price on a future date. In entering such contracts, the fund is
required to deposit with the broker, either in cash or securities, an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the fund each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes
as unrealized gains or losses by the fund. The fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Investments in interest rate futures
for purposes other than hedging may be made to modify the duration of the
portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Investments in currency futures
for purposes other than hedging may be made to change the fund's relative
position in one or more currencies without buying and selling portfolio
assets. Investments in equity index contracts or contracts on related options
for purposes other than hedging, may be made when the fund has cash on hand
and wishes to participate in anticipated market appreciation while the cash is
being invested. Should interest or exchange rates or securities prices move
unexpectedly, the fund may not achieve the anticipated benefits of the futures
contracts and may realize a loss.
DOLLAR ROLL TRANSACTIONS - The fund enters into dollar roll transactions, with
respect to mortgage backed securities issued by Ginnie Mae, Fannie Mae, and
Freddie Mac, in which the fund sells mortgage backed securities to financial
institutions and simultaneously agrees to accept substantially similar (same
type, coupon, and maturity) securities at a later date at an agreed-upon
price. During the period between the sale and repurchase in a dollar roll
transaction the fund will not be entitled to receive interest and principal
payments on the securities sold but is compensated by interest earned on the
proceeds of the initial sale and by a lower purchase price on the securities
to be repurchased which enhances the fund's total return. The fund accounts
for dollar roll transactions as purchases and sales. If certain criteria are
met these dollar roll transactions may be considered a financing transaction
whereby the difference in the sales price and the future purchase price is
recorded as an adjustment to interest income.
SHORT TERM FEES - For purchases made on or after July 1, 2004 and before April
1, 2005, the fund will charge a 2% redemption fee (which is retained by the
fund) on proceeds from Class A, Class B, Class C, and Class I shares redeemed
or exchanged within 5 business days following their acquisition (either by
purchase or exchange). Effective April 1, 2005, the fund will no longer charge
a redemption fee. See the fund's prospectus for details. Any redemption fees
charged are accounted for as an addition to paid-in-capital.
INVESTMENT TRANSACTIONS AND INCOME - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with U.S. generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. 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 into "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.
The fund may enter into "TBA" (to be announced) 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 28, 2005, 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 amortization and accretion on debt securities, derivatives,
wash sales, and non-deductible pension expense.
The tax character of distributions declared for the years ended February 28,
2005 and February 29, 2004 was as follows:
2/28/05 2/29/04
Distributions declared from:
- ------------------------------------------------------------------------------
Ordinary income $48,761,052 $55,327,053
- ------------------------------------------------------------------------------
During the year ended February 28, 2005, accumulated distributions in excess
of net investment income increased by $460,012, accumulated net realized loss
on investments increased by $17,652,346, and paid-in capital increased by
$18,112,358 due to differences between book and tax accounting for expiration
of capital loss carryforward, amortization and accretion on debt securities,
and capital loss carryforward assumed as a result of the acquisition. This
change had no effect on the net assets or net asset value per share.
As of February 28, 2005, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $1,006,873
----------------------------------------------------------
Capital loss carryforward (57,454,896)
----------------------------------------------------------
Unrealized appreciation (depreciation) 898,761
----------------------------------------------------------
Other temporary differences (5,288,879)
----------------------------------------------------------
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, 2006 $(5,100,994)
----------------------------------------------------------
February 28, 2007 (5,253,445)
----------------------------------------------------------
February 29, 2008 (15,270,459)
----------------------------------------------------------
February 28, 2009 (3,477,230)
----------------------------------------------------------
February 28, 2011 (11,527,172)
----------------------------------------------------------
February 29, 2012 (5,729,829)
----------------------------------------------------------
February 28, 2013 (11,095,767)
----------------------------------------------------------
Total $(57,454,896)
----------------------------------------------------------
The availability of a portion of the capital loss carryforwards, which were
acquired on November 19, 2004, in connection with the MFS Government Mortgage
Fund merger, may be limited in a given year.
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.
(4) 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.
As part of a settlement agreement with the New York Attorney General
concerning market timing and related matters (See Legal Proceedings footnote),
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,
which is shown as a reduction of total expenses in the Statement of
Operations. 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.
Management fees incurred for the year ended February 28, 2005 were an
effective rate of 0.30% of average daily net assets on an annualized basis.
The fund pays compensation to its Independent Trustees in the form of a
retainer, attendance fees, and additional compensation to Board and Committee
chairpersons, 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 Independent Trustees and an
unfunded retirement benefit deferral plan for certain current Independent
Trustees. Included in Trustees" compensation is net increase of $515 as a
result of the change in the fund's unfunded retirement benefit deferral plan
for certain current Independent Trustees and a pension expense of $58,741 for
retired Independent Trustees for the year ended February 28, 2005.
This fund and certain other MFS funds (the "funds") have entered into a
services agreement (the "Agreement") which provides for payment of fees by the
funds to Tarantino LLC in return for the provision of services of an
Independent Chief Compliance Officer (ICCO) for the funds. The ICCO is an
officer of the funds and the sole member of Tarantino LLC. MFS has agreed to
reimburse each of the funds for a proportional share of substantially all of
the payments made by the funds to Tarantino LLC and also to provide office
space and other administrative support and supplies to the ICCO. The funds can
terminate the Agreement with Tarantino LLC at any time under the terms of the
Agreement.
ADMINISTRATOR - MFS provides certain financial, legal, shareholder
communications, compliance, and other administrative services to certain funds
for which MFS acts as investment adviser. Under an administrative services
agreement between the funds and MFS, MFS is entitled to partial reimbursement
of the costs MFS incurs to provide these services, subject to review and
approval by the Board of Trustees. Each fund is allocated a portion of these
administrative costs based on its size and relative average net assets. The
fund paid MFS an administrative fee up to the following annual percentage
rates of the fund's average daily net assets:
BEGINNING OF
PERIOD 4/01/04
EFFECTIVE DATE THROUGH 3/31/04 THROUGH 2/28/05 3/01/05
First $2 billion 0.0175% 0.01120% 0.01626%
- -----------------------------------------------------------------------------
Next $2.5 billion 0.0130% 0.00832% 0.01206%
- -----------------------------------------------------------------------------
Next $2.5 billion 0.0005% 0.00032% 0.00056%
- -----------------------------------------------------------------------------
In excess of $7 billion 0.0000% 0.00000% 0.00000%
- -----------------------------------------------------------------------------
The March 1, 2005 rates were not effective during the current reporting
period. For the year ended February 28, 2005, the fund paid MFS $107,121
equivalent to 0.0081% of average daily net assets, to partially reimburse MFS
for the costs of providing administrative services.
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
$62,264 and $402 for the year ended February 28, 2005, 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 as compensation for services provided by MFD and financial
intermediaries in connection with the distribution and servicing of its
shares. One component of the plan is a distribution fee and another is a
service fee paid by MFD to financial intermediaries that enter into sales or
service agreements with MFD or its affiliates based on the average daily net
assets of accounts attributable to such intermediaries. 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 may retain all or a portion of the service fee, including for accounts for which there is no financial intermediary of
record. Service fees retained by MFD for the year ended February 28, 2005 amounted to:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Service Fee Retained by MFD $56,440 $1,276 $2,958 $41 $204
- -----------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Service Fee Retained by MFD $27 $13 $53
- -----------------------------------------------------------------------------------------------------------------------
Fees incurred under the distribution plan during the year ended February 28, 2005 were as follows:
CLASS A CLASS B CLASS C CLASS R1 CLASS R2
Effective Annual Percentage Rates 0.32% 1.00% 1.00% 0.50% 0.50%
- -----------------------------------------------------------------------------------------------------------------------
CLASS 529A CLASS 529B CLASS 529C
Effective Annual Percentage Rates 0.35% 1.00% 1.00%
- ---------------------------------------------------------------------------------------
For the period March 1, 2004 through November 19, 2004, payment of the 0.10%
per annum Class A distribution fee was charged in full. Effective November 20,
2004 payment of the 0.10% per annum Class A distribution fee is not charged
and will not be implemented until such date as the Trustees of the Trust may
determine.
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 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 Class
529C shares, the first year 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 of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges
imposed during the year ended February 28, 2005 were as follows:
CLASS A CLASS B CLASS C CLASS 529A CLASS 529B CLASS 529C
Contingent Deferred Sales
Charges Imposed $31,304 $624,855 $13,851 $-- $3,320 $--
- --------------------------------------------------------------------------------------------------------------------------
The fund has and may from time to time enter into contracts with program
managers and other parties that 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 0.35% 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, which is calculated as a percentage of
the fund's average daily net assets is set periodically under the supervision
of the fund's Trustees. Prior to April 1, 2004, the fee was set at 0.11% of
the fund's average daily net assets. For the period April 1, 2004 through June
30, 2004, the fee was set at 0.10% of the fund's average daily net assets. For
the period July 1, 2004 through December 31, 2004, the fund was charged up to
0.0861% of its average daily net assets. For the period January 1, 2005
through February 28, 2005, the fund is charged up to 0.1035% of its average
daily net assets. For the year ended February 28, 2005, the fund paid MFSC a
fee of $1,245,512 for shareholder services which equated to 0.0942% of the
fund's average daily net assets. Effective March 1, 2005, the fund is charged
up to 0.1159% of its average daily net assets. Shareholder service costs
include out of pocket expenses and sub accounting services expenses paid by
MFSC on behalf of the fund and subsequently reimbursed to MFSC which amounted
to $456,100, and other costs paid by the fund directly to unaffiliated vendors
for the year ended February 28, 2005.
(5) 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 $1,579,767,192 $1,872,110,077
- ----------------------------------------------------------------------------------------------------
Investments (non-U.S. government securities) $11,605,860 $1,135,000
- ----------------------------------------------------------------------------------------------------
$1,591,373,052 $1,873,245,077
- ----------------------------------------------------------------------------------------------------
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 $1,455,543,351
- ------------------------------------------------------------------------------
Gross unrealized appreciation $11,489,079
- ------------------------------------------------------------------------------
Gross unrealized depreciation $(10,590,318)
- ------------------------------------------------------------------------------
Net unrealized appreciation (depreciation) $898,761
- ------------------------------------------------------------------------------
(6) 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 2/28/05 Year ended 2/29/04
SHARES AMOUNT SHARES AMOUNT
CLASS A SHARES
Shares sold 16,308,514 $158,080,874 88,974,135 $882,178,226
- -----------------------------------------------------------------------------------------------------------
Shares issued in connection
with acquisition of MFS
Government Mortgage Fund 43,483,744 422,661,943 -- --
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 2,742,230 26,585,292 3,148,855 31,030,457
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (47,574,507) (463,184,495) (102,922,448) (1,017,159,186)
- -----------------------------------------------------------------------------------------------------------
Net change 14,959,981 $144,143,614 (10,799,458) $(103,950,503)
- -----------------------------------------------------------------------------------------------------------
CLASS B SHARES
Shares sold 2,350,771 $22,878,329 6,213,517 $61,465,689
- -----------------------------------------------------------------------------------------------------------
Shares issued in connection
with acquisition of MFS
Government Mortgage Fund 5,217,434 50,661,281 -- --
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 623,908 6,040,560 1,009,807 9,951,257
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (9,941,512) (96,185,082) (21,996,142) (215,913,138)
- -----------------------------------------------------------------------------------------------------------
Net change (1,749,399) $(16,604,912) (14,772,818) $(144,496,192)
- -----------------------------------------------------------------------------------------------------------
CLASS C SHARES
Shares sold 599,402 $5,839,934 2,314,505 $22,917,630
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 132,437 1,287,771 249,846 2,472,075
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (2,559,242) (24,892,501) (7,061,804) (69,553,941)
- -----------------------------------------------------------------------------------------------------------
Net change (1,827,403) $(17,764,796) (4,497,453) $(44,164,236)
- -----------------------------------------------------------------------------------------------------------
CLASS I SHARES
Shares sold 11,066,890 $107,326,816 13,567,977 $133,136,806
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 989,445 9,583,025 372,255 3,689,606
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (215,330) (2,076,073) (206,254) (2,045,202)
- -----------------------------------------------------------------------------------------------------------
Net change 11,841,005 $114,833,768 13,733,978 $134,781,210
- -----------------------------------------------------------------------------------------------------------
Year ended 2/28/05 Year ended 2/29/04
SHARES AMOUNT SHARES AMOUNT
CLASS R1 SHARES
Shares sold 639,146 $6,203,334 1,126,253 $11,098,044
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 26,173 253,587 10,104 98,413
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (318,931) (3,087,488) (515,170) (5,061,439)
- -----------------------------------------------------------------------------------------------------------
Net change 346,388 $3,369,433 621,187 $6,135,018
- -----------------------------------------------------------------------------------------------------------
Year ended 2/28/05 Period ended 2/29/04*
SHARES AMOUNT SHARES AMOUNT
CLASS R2 SHARES
Shares sold 78,487 $763,365 4,130 $4,020
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 556 5,380 33 320
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (39,439) (382,182) -- --
- -----------------------------------------------------------------------------------------------------------
Net change 39,604 $386,563 4,163 $4,340
- -----------------------------------------------------------------------------------------------------------
Year ended 2/28/05 Year ended 2/29/04
SHARES AMOUNT SHARES AMOUNT
CLASS 529A SHARES
Shares sold 11,540 $111,687 18,974 $186,975
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,285 12,435 1,415 13,913
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (6,347) (61,446) (17,746) (172,984)
- -----------------------------------------------------------------------------------------------------------
Net change 6,478 $62,676 2,643 $27,904
- -----------------------------------------------------------------------------------------------------------
CLASS 529B SHARES
Shares sold 1,825 $17,703 24,441 $241,533
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 1,401 13,549 1,961 19,277
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (14,658) (141,070) (25,182) (243,458)
- -----------------------------------------------------------------------------------------------------------
Net change (11,432) $(109,818) 1,220 $17,352
- -----------------------------------------------------------------------------------------------------------
CLASS 529C SHARES
Shares sold 8,504 $83,637 22,163 $219,790
- -----------------------------------------------------------------------------------------------------------
Shares issued to shareholders
in reinvestment of
distributions 890 8,649 1,213 12,021
- -----------------------------------------------------------------------------------------------------------
Shares reacquired (7,381) (72,985) (32,844) (330,277)
- -----------------------------------------------------------------------------------------------------------
Net change 2,013 $19,301 (9,468) $(98,466)
- -----------------------------------------------------------------------------------------------------------
* For the period from the inception of Class R2, October 31, 2003, through February 29, 2004.
The fund is one of several MFS mutual funds in which the MFS Asset Allocation
Funds may invest. The MFS Asset Allocation Funds do not invest in the
underlying MFS funds for the purpose of exercising management or control. At
the end of the period, the MFS Conservative Allocation Fund, MFS Moderate
Allocation Fund, and MFS Growth Allocation Fund were the owners of record of
approximately 4%, 10%, and 5%, respectively, of the total outstanding shares.
(7) 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 Federal
Reserve funds rate plus 0.50%. In addition, a commitment fee, based on the
average daily, unused portion of the line of credit, is allocated among the
participating funds at the end of each calendar quarter. The commitment fee
allocated to the fund for the year ended February 28, 2005 was $7,193, and is
included in miscellaneous expense. The fund had no significant borrowings
during the year ended February 28, 2005.
(8) FINANCIAL INSTRUMENTS
The fund trades financial instruments with off-balance-sheet risk in the normal
course of its investing activities in order to manage exposure to market risks
such as interest rates and foreign currency exchange rates. These financial
instruments include futures contracts. The notional or contractual amounts of
these instruments represent the investment the fund has in particular classes of
financial instruments and does not necessarily represent the amounts potentially
subject to risk. The measurement of the risks associated with these instruments
is meaningful only when all related and offsetting transactions are considered.
Futures Contracts
UNREALIZED
APPRECIATION
DESCRIPTION EXPIRATION CONTRACTS POSITION (DEPRECIATION)
U.S. Treasury Notes 10 Year March 2005 44 Short $65,516
- ------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes 5 Year June 2005 625 Short 236,047
- ------------------------------------------------------------------------------------------------------------------
$301,563
- ------------------------------------------------------------------------------------------------------------------
At February 28, 2005, the fund had sufficient cash and/or securities to cover
any margin requirements under these contracts.
(9) LEGAL PROCEEDINGS
On March 31, 2004, MFS settled an administrative proceeding with the
Securities and Exchange Commission ("SEC") regarding disclosure of brokerage
allocation practices in connection with MFS fund sales (the term "MFS funds"
means the open-end registered management investment companies sponsored by
MFS). 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 developed
by an independent distribution consultant. The brokerage allocation practices
which were the subject of this proceeding were discontinued by MFS in November
2003. The agreement with the SEC is reflected in an order of the SEC. The SEC
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 SEC settlement order states that MFS had in place policies designed to
obtain best execution of all MFS fund trades. As part of the settlement, MFS
retained an independent compliance consultant to review the completeness of
its current policies and practices regarding disclosure to MFS fund trustees
and to MFS fund shareholders of strategic alliances between MFS or its
affiliates and broker-dealers and other financial intermediaries who support
the sale of MFS fund shares. Pursuant to the SEC order, on July 28, 2004, MFS
transferred these settlement amounts to the SEC, and those MFS funds entitled
to these settlement amounts accrued an estimate of their pro rata portion of
these amounts. The final distribution plan was approved by the SEC on January
21, 2005 and the affected MFS funds received the payment on February 16, 2005.
In addition, in February, 2004, MFS reached agreement with the 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 open-end retail fund ("MFS
retail funds") prospectuses regarding market timing and related matters (the
"February Settlements"). These regulators alleged that prospectus language for
certain MFS retail funds was false and misleading because, although the
prospectuses for those funds in the regulators" view indicated that they
prohibited market timing, MFS did not limit trading activity in 11 domestic
large cap stock, high grade bond and money market retail funds. MFS" former
Chief Executive Officer and former President also reached agreement with the
SEC in which they agreed to, among other terms, monetary fines and temporary
suspensions from association with any investment adviser or registered
investment company. These individuals have resigned their positions with, and
will not be returning to, MFS and the MFS funds. 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 MFS 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 Board of Trustees of the MFS retail funds, and acceptable to the SEC.
MFS has further agreed with 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 retained $250,000 and $750,000 was
contributed to the North American Securities Administrators Association's
Investor Protection Trust). In addition, under the terms of the February
Settlements, MFS is in the process of adopting certain governance changes and
reviewing its policies and procedures.
Since December 2003, MFS, MFS Fund Distributors, Inc., MFS Service Center,
Inc., MFS Corporation Retirement Committee, Sun Life Financial Inc., various
MFS funds, certain current and/or former 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 MFS funds during specified periods, as ERISA
actions by participants in certain retirement plan accounts on behalf of those
accounts, or as derivative actions on behalf of the MFS funds. The lawsuits
relating to market timing and related matters have been transferred to, and
consolidated before, the United States District Court for the District of
Maryland, as part of a multi-district litigation of market timing and related
claims involving several other fund complexes (In re Mutual Funds Investment
Litigation (Alger, Columbia, Janus, MFS, One Group, Putnam, Allianz Dresdner),
No. 1:04-md-15863 (transfer began March 19, 2004)). The market timing cases
related to the MFS complex are Riggs v. MFS et al., Case No. 04-cv-01162-JFM
(direct), Hammerslough v. MFS et al., Case No. 04-md-01620 (derivative) and
Anita Walker v. MFS et al., Case No. 1:04-CV-01758 (ERISA). The plaintiffs in
these consolidated lawsuits generally seek injunctive relief including removal
of the named Trustees, adviser and distributor, rescission of contracts and
12b-1 Plans, disgorgement of fees and profits, monetary damages, punitive
damages, attorney's fees and costs and other equitable and declaratory relief.
Two lawsuits alleging improper brokerage allocation practices and excessive
compensation are pending in the United States District Court for the District
of Massachusetts (Forsythe v. Sun Life Financial Inc., et al., No. 04cv10584
(GAO) (a consolidated action) and Marcus Dumond, et al. v. Massachusetts
Financial Servs. Co., et al., No. 04cv11458 (GAO)). The plaintiffs in these
lawsuits generally seek compensatory damages, punitive damages, recovery of
fees, rescission of contracts, an accounting, restitution, declaratory relief,
equitable and/or injunctive relief and attorney's fees and costs. The various
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 (ii) received excessive compensation as fiduciaries to the MFS
funds, or (iii) permitted or acquiesced in the improper use of fund assets by
MFS to support the distribution of MFS 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. 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 MFS 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 certain MFS retail funds for damages that they
allegedly sustained as a result of market timing or late trading in certain of
the MFS retail funds, and distributed $50 million to affected MFS funds to
compensate those funds based upon the amount of brokerage commissions
allocated in recognition of MFS 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 MFS 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 MFS funds.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
- -------------------------------------------------------------------------------
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 (the "Fund"), including the portfolio of
investments, as of February 28, 2005, and the related statement of operations
for the year then ended, the statements of changes in net assets for each of
the two years in the period then ended, and the financial highlights for each
of the five years in the period then ended. These financial statements and
financial highlights are the responsibility of the 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Fund is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Fund's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of February 28, 2005,
by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Government Securities Fund as of February 28, 2005, 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 five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 22, 2005
- --------------------------------------------------------------------------------------------------------------
TRUSTEES AND OFFICERS -- IDENTIFICATION AND BACKGROUND
- --------------------------------------------------------------------------------------------------------------
The Trustees and officers of the Trust, as of April 1, 2005, are listed below, together with their principal
occupations during the past five years. (Their titles may have varied during that period.) The address of each
Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.
PRINCIPAL OCCUPATIONS
DURING
POSITION(s) HELD TRUSTEE/OFFICER THE PAST FIVE YEARS &
NAME, DATE OF BIRTH WITH FUND SINCE(1) OTHER DIRECTORSHIPS(2)
- ------------------- ---------------- --------------- ------------------------
INTERESTED TRUSTEES
Robert J. Manning(3) Trustee and February 2004 Massachusetts Financial
(born 10/20/63) President Services Company, Chief
Executive Officer,
President, Chief Investment
Officer and Director
Robert C. Pozen(3) Trustee February 2004 Massachusetts Financial
(born 08/08/46) Services Company, Chairman
(since February 2004);
Harvard Law School
(education), John Olin
Visiting Professor (since
July 2002); Secretary of
Economic Affairs, The
Commonwealth of
Massachusetts (January 2002
to December 2002); Fidelity
Investments, Vice Chairman
(June 2000 to December
2001); Fidelity Management
& Research Company
(investment adviser),
President (March 1997 to
July 2001); Bell Canada
Enterprises
(telecommunications),
Director; Medtronic, Inc.
(medical technology),
Director; Telesat
(satellite communications),
Director
INDEPENDENT TRUSTEES
Lawrence H. Cohn, M.D. Trustee August 1993 Brigham and Women's
(born 03/11/37) Hospital, Chief of Cardiac
Surgery; Harvard Medical
School, Professor of
Surgery
David H. Gunning Trustee January 2004 Cleveland-Cliffs Inc.
(born 05/30/42) (mining products and
service provider), Vice
Chairman/Director (since
April 2001); Encinitos
Ventures (private
investment company),
Principal (1997 to April
2001); Lincoln Electric
Holdings, Inc. (welding
equipment manufacturer),
Director; Southwest Gas
Corporation (natural gas
distribution company),
Director
William R. Gutow Trustee December 1993 Private investor and real
(born 09/27/41) estate consultant; Capitol
Entertainment Management
Company (video franchise),
Vice Chairman
Michael Hegarty Trustee December 2004 Retired; AXA Financial
(born 12/21/44) (financial services and
insurance), Vice Chairman
and Chief Operating Officer
(until May 2001); The
Equitable Life Assurance
Society (insurance),
President and Chief
Operating Officer (until
May 2001)
Amy B. Lane Trustee January 2004 Retired; Merrill Lynch &
(born 02/08/53) Co., Inc., Managing
Director, Investment
Banking Group (1997 to
February 2001); Borders
Group, Inc. (book and music
retailer), Director;
Federal Realty Investment
Trust (real estate
investment trust), Trustee
Lawrence T. Perera Trustee July 1981 Hemenway & Barnes
(born 06/23/35) (attorneys), Partner
J. Dale Sherratt Trustee August 1993 Insight Resources, Inc.
(born 09/23/38) (acquisition planning
specialists), President;
Wellfleet Investments
(investor in health care
companies), Managing
General Partner (since
1993); Cambridge
Nutraceuticals
(professional nutritional
products), Chief Executive
Officer (until May 2001)
Laurie J. Thomsen Trustee March 2005 Private investor; Prism
(born 08/05/57) Venture Partners (venture
capital), Co-founder and
General Partner (until June
2004); St. Paul Travelers
Companies (commercial
property liability
insurance), Director
OFFICERS
Robert J. Manning(3) President and February 2004 Massachusetts Financial
(born 10/20/63) Trustee Services Company, Chief
Executive Officer,
President, Chief Investment
Officer and Director
James R. Bordewick, Jr.(3) Assistant Secretary September 1990 Massachusetts Financial
(born 03/06/59) and Assistant Clerk Services Company, Senior
Vice President and
Associate General Counsel
Jeffrey N. Carp(3) Secretary and Clerk September 2004 Massachusetts Financial
(born 12/1/56) Services Company, Executive
Vice President, General
Counsel and Secretary
(since April 2004); Hale
and Dorr LLP (law firm),
Partner (prior to April
2004)
Stephanie A. DeSisto(3) Assistant Treasurer May 2003 Massachusetts Financial
(born 10/01/53) Services Company, Vice
President (since April
2003); Brown Brothers
Harriman & Co., Senior Vice
President (November 2002 to
April 2003); ING Groep
N.V./Aeltus Investment
Management, Senior Vice
President (prior to
November 2002)
James F. DesMarais(3) Assistant Secretary September 2004 Massachusetts Financial
(born 03/09/61) and Assistant Clerk Services Company, Assistant
General Counsel
Richard M. Hisey(3) Treasurer August 2002 Massachusetts Financial
(born 08/29/58) Services Company, Senior
Vice President (since July
2002); The Bank of New
York, Senior Vice President
(September 2000 to July
2002); Lexington Global
Asset Managers, Inc.,
Executive Vice President
and Chief Financial Officer
(prior to September 2000);
Lexington Funds, Chief
Financial Officer (prior to
September 2000)
Brian T. Hourihan(3) Assistant Secretary September 2004 Massachusetts Financial
(born 11/11/64) and Assistant Clerk Services Company, Vice
President, Senior Counsel
and Assistant Secretary
(since June 2004);
Affiliated Managers Group,
Inc., Chief Legal Officer/
Centralized Compliance
Program (January to April
2004); Fidelity Research &
Management Company,
Assistant General Counsel
(prior to January 2004)
Ellen Moynihan(3) Assistant Treasurer April 1997 Massachusetts Financial
(born 11/13/57) Services Company, Vice
President
Frank L. Tarantino Independent Chief June 2004 Tarantino LLC (provider of
(born 03/07/44) Compliance Officer compliance services),
Principal (since June
2004); CRA Business
Strategies Group
(consulting services),
Executive Vice President
(April 2003 to June 2004);
David L. Babson & Co.
(investment adviser),
Managing Director, Chief
Administrative Officer and
Director (February 1997 to
March 2003)
James O. Yost(3) Assistant Treasurer September 1990 Massachusetts Financial
(born 06/12/60) Services Company, Senior
Vice President
- ------------
(1) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously
since appointment unless indicated otherwise.
(2) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
(3) "Interested person" of the Trust within the meaning of the Investment Company Act of 1940 (referred to as
the 1940 Act), which is the principal federal law governing investment companies like the fund, as a
result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.
Each Trustee has been elected by shareholders and each Trustee and officer holds office until his or her
successor is chosen and qualified or until his or her earlier death, resignation, retirement or removal.
Messrs. Ives and Sherratt and Mses. Lane and Thomsen are members of the Trust's Audit Committee.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor, and, in the case of the officers, with certain
affiliates of MFS. As of December 31, 2004, each Trustee served as a board member of 99 funds within the MFS
Family of Funds.
The Trust held a shareholders" meeting in 2005, and will hold a shareholder's meeting at least once every five
years thereafter, to elect Trustees.
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 02116-3741 225 Franklin Street, Boston, MA 02110
DISTRIBUTOR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
MFS Fund Distributors, Inc. Deloitte & Touche LLP
500 Boylston Street, Boston, MA 02116-3741 200 Berkeley Street, Boston, MA 02116
PORTFOLIO MANAGEMENT
The MFS Fixed Income Strategy Group
- -------------------------------------------------------------------------------
PROXY VOTING POLICIES AND INFORMATION
- -------------------------------------------------------------------------------
A general description of the MFS funds" proxy voting policies and procedures is
available without charge, upon request, by calling 1-800-225-2606, by visiting
the About MFS section of mfs.com or by visiting the SEC's Web site at
http://www.sec. gov.
Information regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30 is available
without charge by visiting the Proxy Voting section of mfs.com or by visiting
the SEC's Web site at http://www.sec.gov.
- -------------------------------------------------------------------------------
QUARTERLY PORTFOLIO DISCLOSURE
- -------------------------------------------------------------------------------
The fund will file a complete schedule of portfolio holdings with the
Securities and Exchange Commission (the Commission) for the first and third
quarters of each fiscal year on Form N-Q. The fund's Form N-Q may be reviewed
and copied at the:
Public Reference Room
Securities and Exchange Commission
Washington, D.C. 20549-0102
Information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-800-SEC-0330. The fund's Form N-Q is available on
the EDGAR database on the Commission's Internet website at http://www.sec.gov,
and copies of this information may be obtained, upon payment of a duplicating
fee, by electronic request at the following e-mail address: publicinfo@sec.gov
or by writing the Public Reference Section at the above address.
A shareholder can also obtain the quarterly portfolio holdings report at
mfs.com.
- -------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (UNAUDITED)
In January 2006, shareholders will be mailed a Form 1099-DIV reporting the
federal tax status of all distributions paid during the calendar year 2005.
- --------------------------------------------------------------------------------
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.
INVESTOR SERVICE
Write to us at: MFS Service Center, Inc.
P.O. Box 55824
Boston, MA 02205-5824
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
- --------------------------------------------------------------------------------
M F S(SM)
INVESTMENT MANAGEMENT(R)
(C) 2005 MFS Investment Management(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116.
MFG-ANN-04/05 90M
ITEM 2. CODE OF ETHICS.
The Registrant has adopted a Code of Ethics pursuant to Section 406 of the
Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant's
principal executive officer and principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Mr. J. Atwood Ives and Mses. Amy B. Lane and Laurie J. Thomsen, members of the
Audit Committee, have been determined by the Board of Trustees in their
reasonable business judgment to meet the definition of "audit committee
financial expert" as such term is defined in Form N-CSR. In addition, Mr. Ives
and Mses. Lane and Thomsen are "independent" members of the Audit Committee as
defined in 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 (hereinafter the "Registrant" or
the "Fund"). The tables below set forth the audit fees billed to the Fund as
well as fees for non-audit services provided to the Fund and/or to the Fund's
investment adviser, Massachusetts Financial Services Company ("MFS") and to
various entities either controlling, controlled by, or under common control with
MFS that provide ongoing services to the Fund ("MFS Related Entities").
For the fiscal years ended February 28, 2005 and 2004, audit fees billed to the
Fund by Deloitte were as follows:
Audit Fees
FEES BILLED BY DELOITTE: 2005 2004
---- ----
MFS Government Securities Fund $39,070 $35,300
------- -------
TOTAL $39,070 $35,300
For the fiscal years ended February 28, 2005 and 2004, fees billed by Deloitte
for audit-related, tax and other services provided to the Fund and for
audit-related, tax and other services provided to MFS and MFS Related Entities
that relate directly to the operations and financial reporting of the Fund were
as follows:
Audit-Related Fees(1) Tax Fees(2) All Other Fees(3)
FEES BILLED BY DELOITTE: 2005 2004 2005 2004 2005 2004
---- ---- ---- ---- ---- ----
To Government Securities Fund $0 $0 $10,350 $5,700 $2,500 $0
-- -- ------- ------ ------ --
TOTAL FEES BILLED BY DELOITTE $0 $0 $10,350 $5,700 $2,500 $0
TO ABOVE FUND
To MFS and MFS Related $1,146,170 $356,150 $62,000 $55,000 $602,500 $0
Entities of MFS
Government Securities
Fund*
AGGREGATE FEES FOR NON-AUDIT
SERVICES:
2005 2004
---- ----
To MFS Government $1,859,210 $520,045
Securities Fund, MFS and
MFS Related Entities#
* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the
operations and financial reporting of the Fund (portions of which services also related to the operations and financial
reporting of other funds within the MFS Funds complex).
# This amounts reflects the aggregate fees billed by Deloitte for non-audit services rendered to the Fund and for
non-audit services rendered to MFS and the MFS Related Entities.
(1) The fees included under "Audit-Related Fees" are fees related to assurance and related services that are reasonably
related to the performance of the audit or review of financial statements, but not reported under "Audit Fees,"
including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal
control reviews.
(2) The fees included under "Tax Fees" are fees associated with tax compliance, tax advice and tax planning, including
services relating to the filing or amendment of federal, state or local income tax returns, regulated investment
company qualification reviews and tax distribution and analysis.
(3) The fees included under "All Other Fees" are fees for products and services provided by Deloitte other than those
reported under "Audit Fees," "Audit-Related Fees" and "Tax Fees."
For periods prior to May 6, 2003, the amounts shown above under "Audit-Related
Fees," "Tax Fees" and "All Other Fees" relate to permitted non-audit services
that would have been subject to pre-approval if the Securities and Exchange
Commission's rules relating to pre-approval of non-audit services had been in
effect.
ITEM 4(E)(1):
Set forth below are the policies and procedures established by the Audit
Committee of the Board of Trustees relating to the pre-approval of audit and
non-audit related services: To the extent required by applicable law,
pre-approval by the Audit Committee of the Board is needed for all audit and
permissible non-audit services rendered to the Funds and all permissible
non-audit services rendered to MFS or MFS Related Entities if the services
relate directly to the operations and financial reporting of the Registrant.
Pre-approval is currently on an engagement-by-engagement basis. In the event
pre-approval of such services is necessary between regular meetings of the Audit
Committee and it is not practical to wait to seek pre-approval at the next
regular meeting of the Audit Committee, pre-approval of such services may be
referred to the Chair of the Audit Committee for approval; provided that the
Chair may not pre-approve any individual engagement for such services exceeding
$50,000 or multiple engagements for such services in the aggregate exceeding
$100,000 between such regular meetings of the Audit Committee. Any engagement
pre-approved by the Chair between regular meetings of the Audit Committee shall
be presented for ratification by the entire Audit Committee at its next
regularly scheduled meeting.
ITEM 4(E)(2):
None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and
All Other Fees paid by the Fund and MFS and MFS Related Entities relating
directly to the operations and financial reporting of the Registrant disclosed
above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C)
of Rule 2-01 of Regulation S-X (which permits audit committee approval after the
start of the engagement with respect to services other than audit review or
attest services, if certain conditions are satisfied).
ITEM 4(F): Not applicable.
ITEM 4(H): The Registrant's Audit Committee has considered whether the provision
by a Registrant's independent registered public accounting firm of non-audit
services to MFS and MFS Related Entities that were not pre-approved by the
Committee (because such services were provided prior to the effectiveness of SEC
rules requiring pre-approval or because such services did not relate directly to
the operations and financial reporting of the Registrant) was compatible with
maintaining the independence of the independent registered public accounting
firm as the Registrant's principal auditors.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable to the Registrant.
ITEM 6. SCHEDULE OF INVESTMENTS
A schedule of investments of the Registrant is included as part of the report to
shareholders of such series under Item 1 of this Form N-CSR.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not applicable to the Registrant.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable to the Registrant.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no material changes to the procedures by which shareholders may send
recommendations to the Board for nominees to the Registrant's Board since the
Registrant last provided disclosure as to such procedures in response to the
requirements of Item 7(d)(2)(ii)(G) of Schedule 14A or this Item.
ITEM 11. CONTROLS AND PROCEDURES.
(a) Based upon their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-3(c) under the Act) 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 second fiscal quarter covered by the report that has materially
affected, or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
ITEM 12. EXHIBITS.
(a) File the exhibits listed below as part of this Form. Letter or number the
exhibits in the sequence indicated.
(1) Any code of ethics, or amendment thereto, that is the subject of the
disclosure required by Item 2, to the extent that the registrant intends
to satisfy the Item 2 requirements through filing of an exhibit: Code of
Ethics attached hereto.
(2) A separate certification for each principal executive officer and
principal financial officer of the registrant as required by Rule 30a-2
under the Act (17 CFR 270.30a-2): Attached hereto.
(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 22, 2005
--------------
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 22, 2005
--------------
By (Signature and Title)* RICHARD M. HISEY
-----------------------------------------------------
Richard M. Hisey, Treasurer (Principal Financial
Officer and Accounting Officer)
Date: April 22, 2005
--------------
* Print name and title of each signing officer under his or her signature.