<PAGE>
[logo] M F S(R) ANNUAL REPORT FOR
THE FIRST NAME IN MUTUAL FUNDS YEAR ENDED
FEBRUARY 29, 1996
MFS(R) GOVERNMENT SECURITIES FUND
<PAGE>
<TABLE>
<CAPTION>
MFS(R) GOVERNMENT SECURITIES FUND
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; INVESTOR INFORMATION
Director, Cambridge Trust Company For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
Peter G. Harwood - Private Investor a touch-tone telephone.
J. Atwood Ives - Chairman and For information on MFS mutual funds,
Chief Executive Officer, Eastern Enterprises call your financial adviser or, for an
information kit, call toll free:
Lawrence T. Perera - Partner, 1-800-637-2929 any business day from
Hemenway & Barnes 9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of INVESTOR SERVICE
Business Administration MFS Service Center, Inc.
P.O. Box 2281
Charles W. Schmidt - Private Investor Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Elaine R. Smith - Independent Consultant (To use this service, your phone must be
equipped with a Telecommunications Device for
David B. Stone - Chairman, North American the Deaf.)
Management Corp. (investment adviser)
For share prices, account balances and
INVESTMENT ADVISER exchanges, call toll free: 1-800-MFS-TALK
Massachusetts Financial Services Company (1-800-637-8255) anytime from a touch-tone
500 Boylston Street telephone.
Boston, MA 02116-3741
DISTRIBUTOR --------------------------------------------
MFS Fund Distributors, Inc.
500 Boylston Street TOP RATED SERVICE
Boston, MA 02116-3741 For the second year in a row,
[DALBAR MFS earned a #1 ranking in
PORTFOLIO MANAGER LOGO] DALBAR, Inc.'s Broker/Dealer
Steven E. Nothern* Survey, Main Office Operations
Service Quality category. The
TREASURER firm achieved a 3.49 overall score - on a
W. Thomas London* scale of 1 to 4 - in the 1995 survey. A total
of 71 firms responded, offering input on the
ASSISTANT TREASURER quality of service they receive from 36
James O. Yost* mutual fund companies nationwide. The survey
contained questions about service quality in
SECRETARY 17 categories, including "knowledge of phone
Stephen E. Cavan* service contracts," "accuracy of transaction
processing," and "overall ease of doing
ASSISTANT SECRETARY business with the firm."
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the 12-month period ended February 29, 1996, the fixed-income market
provided investors with opportunities for attractive total returns as interest
rates declined sharply and reversed most of the increases of the previous year.
Economic growth showed signs of a broad-based deceleration, and the Federal
Reserve Board, encouraged that inflation pressures would remain moderate,
elected to lower short-term interest rates by 0.25% on three separate occasions,
moves which reduced the federal funds' rate from 6% to 5.25%. The fixed-income
market responded positively to this, and yields on two-year Treasury bonds,
which were at 6.75% at the end of February 1995, declined to 5.41% by February
29, 1996, while yields on 10-year Treasuries declined from 7.20% to 6.10%. In
this environment, an investment in two-year Treasuries would have produced a
total return of 8.43%, while an investment in 10-year Treasuries would have
produced a total return of 14.13% (principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity). The Fund,
which seeks to provide investors with current income and preservation of
capital, was an active participant in this rally. During this 12-month period,
Class A shares of the Fund provided a total return of 12.29%, while the total
return for Class B shares was 11.46%. Both of these returns assume the
reinvestment of distributions but exclude the effects of any sales charges. The
Lehman Brothers Government/Mortgage Index (the Lehman Index), an unmanaged index
of Treasury, government-agency, and mortgage-backed securities increased 11.87%
during this period. Complete performance information for the Fund is provided on
pages five and six of this report.
Economic Environment
We believe the U.S. economy will continue to grow in 1996 -- although "subdued"
may be the best way to describe this growth. One factor holding growth in check
is the continued sluggishness of the consumer sector, an area that represents
approximately two-thirds of the economy. Going into this year, consumers have
been left in a somewhat weakened position, due in part to an increase in
consumer installment debt of some 30% over the past two years. A second reason
for the economy's weakness is the "lag effect" of increases in short-term
interest rates by the Federal Reserve in 1994 and into 1995. This lag effect can
last up to two years, although a series of reductions in short-term rates by the
Fed, which began late last year, could provide some support to the economy
through 1996. A third reason for weakness is the ongoing economic doldrums in
Europe and Japan, important markets for U.S. exports. Here again, we are seeing
a few signs, particularly in Japan, of modest recoveries that could lead to
improved prospects for U.S. exporters. Also, we believe lower interest rates
will give a boost to the U.S. housing market, an important segment of the
economy because it also affects such industries as major appliances, furniture,
and building-supply companies. Finally, although the first few weeks of 1996 saw
some signs of inflationary pressures, caused primarily by rising energy prices
and followed by an upward movement in gold, we believe inflation will remain
under control this year, due mainly to the subdued level of economic growth.
Bond Markets
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996 and, we believe, will
lead to some additional reductions as the year progresses. In the beginning of
the year, bond markets were trading in a narrow range as investors shifted
between concern about the lack of a budget resolution in Washington and hopes
that sluggish economic reports and low inflation might lead to lower interest
rates. In the recent trading period not covered by this report, the fixed-income
markets have reacted to conflicting signals regarding the strength of the
economy with more-volatile trading patterns marked by an upward bias in interest
rates. However, we believe the fundamentals of moderate economic growth and low
inflation will continue to benefit long-term investors. Barring an unexpected
shock, we anticipate that the still-cheap dollar, low interest rates, and strong
total employment will likely cushion the economy from a sharp decline. Still,
given the subdued state of the economy, we believe that some additional interest
rate reductions by the Fed are possible, although their timing and magnitude is
uncertain, and that bonds continue to represent good value.
Portfolio Performance and Strategy
During the past 12 months, we have increased the overall interest rate
sensitivity of the portfolio, seeking to benefit from opportunities for capital
appreciation. The portfolio duration (a measure of interest rate sensitivity) is
currently 6 1/2 years, approximately equivalent to an eight-year Treasury in
overall interest rate sensitivity and approximately 50% greater in duration than
the Lehman Brothers Government/Mortgage Index. We anticipate maintaining this
exposure because we believe a continued positive outlook for the bond market is
suggested by a number of investment themes. First, inflation remains well
contained at a relatively low 2 1/2% to 3% level. Second, real (adjusted for
inflation) interest rates are high by historical standards, with
inflation-adjusted federal funds significantly greater than the long-term
average of 1.8%; such high rates will limit how much growth in domestic product
can rebound. Currently, while Federal Reserve policy remains modestly
restrictive, we recognize that, until political and economic uncertainties are
resolved, bond market investors likely will remain tentative and yields may
remain volatile.
The Fund's allocation to agency mortgage-backed pass-through securities
currently stands at 40% of the portfolio versus the Lehman Index, which is at
35%. We feel that the mortgage market represents an attractive opportunity for
several reasons. First, the yield advantage above U.S. Treasury securities
ranges between 1.0% and 1.7%. Given the current interest rate environment, these
issues add substantial incremental yield to the portfolio. Second, given our
economic outlook, we feel that investors are expecting too high a level of new
home purchase mortgage originations and mortgage refinancings over the next
year. While the market underestimated the level of refinancings in the low-rate
environment of 1993, we believe the market is overestimating the near-term level
of refinancings, and this slower pace of prepayments could add additional yield
to the portfolio. We are, however, avoiding more recently originated 30-year
mortgages that have coupons between 8% and 9%. Finally, we expect other
financial institutions to increase their purchases of mortgage instruments. For
regulatory reasons, insurance companies have not been active in this market over
the past few years, and banks have been making loans instead of buying
securities. We believe these trends could be reversed in the near future.
Our ability to invest in government agencies, Treasuries, and
mortgage-backed securities within a range of maturities has proven helpful in
this rapidly changing environment. The Fund remains substantially invested in
government-sponsored or agency securities, as we are able to add attractive
incremental yield to the portfolio in this sector. Government guarantees apply
only to the underlying securities held in the portfolio and not to the
portfolio's share price.
As always, we will maintain our commitment to seek competitive and
consistent returns over the long term. We appreciate your support and welcome
any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin /s/ Steven E. Nothern
A. Keith Brodkin Steven E. Nothern
Chairman and President Portfolio Manager
March 14, 1996
<PAGE>
PORTFOLIO MANAGER PROFILE
Steven Nothern began his career at MFS in 1986 in the Fixed Income Department. A
graduate of Middlebury College and Boston University's Graduate School of
Management, he was named Assistant Vice President in 1987, Vice President in
1989 and Senior Vice President in 1993. Mr. Nothern has served as Portfolio
Manager of MFS Government Securities Fund since 1992.
OBJECTIVE AND POLICIES
The Fund seeks to provide current income and preservation of capital.
The Fund seeks to achieve its objective by investing in debt obligations that
are issued or guaranteed as to principal and interest by the U.S. government,
its agencies, authorities or instrumentalities.* Such debt obligations include
U.S. Treasury bills, notes and bonds and direct pass-through certificates of
the Government National Mortgage Association (GNMA), as well as other U.S.
government securities that are not backed by the full faith and credit of the
U.S. government.
*The U.S. government guarantee does not apply to shares of the Fund, which
will fluctuate with changes in market conditions.
TAX FORM SUMMARY
In January 1996, shareholders were mailed a Tax Form Summary reporting the
federal tax status of all distributions paid during the calendar year 1995.
PERFORMANCE
The information below and on the following page illustrates the historical
performance of MFS Government Securities Fund Class A shares in comparison to
various market indicators. Fund results in the graph reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do not
reflect any fees or expenses. You cannot invest in an index. All results reflect
the reinvestment of all dividends and capital gains.
Class B shares were offered effective August 30, 1993. Information on Class B
share performance appears on page six.
Please note that the performance of other classes will be greater than or less
than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-Year Period Ended February 29, 1996)
$10,000 5-Year period ended 2/29/96
MFS Government Lehman Brothers
Days Securities Fund-A Government/Mortgage Index CPI
---- ----------------- ------------------------- ---
3/1/91 0 9,525 10,000 10,000
2/29/92 366 10,603 11,236 10,282
2/28/93 730 11,927 12,566 10,616
2/28/94 1095 12,526 13,212 10,883
2/28/95 1460 12,677 13,455 11,194
2/29/96 1826 14,236 15,508 11,491
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-Year Period Ended February 29, 1996)
$10,000 10-Year period ended 2/29/96
MFS Government Lehman Brothers
Days Securities Fund-A Government/Mortgage Index CPI
---- ----------------- ------------------------- ---
3/1/86 0 9,525 10,000 10,000
2/28/87 365 10,286 11,246 10,211
2/29/88 731 10,711 11,867 10,611
2/28/89 1095 10,985 12,286 11,123
2/28/90 1460 12,074 13,870 11,708
2/28/91 1825 13,364 15,595 12,330
2/29/92 2191 14,872 17,523 12,678
2/28/93 2556 16,728 19,597 13,089
2/28/94 2921 17,569 20,605 13,419
2/28/95 3286 17,781 20,984 13,803
2/29/96 3652 19,967 24,185 14,169
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Government Securities Fund (Class A)
including 4.75% sales charge + 6.96% +4.36% +7.32% +7.16%
- ----------------------------------------------------------------------------------------
MFS Government Securities Fund (Class A)
at net asset value +12.29% +6.08% +8.36% +7.69%
- ----------------------------------------------------------------------------------------
MFS Government Securities Fund (Class B)
with CDSC<F1> + 7.47% -- -- +3.05%<F2>
- ----------------------------------------------------------------------------------------
MFS Government Securities Fund (Class B)
without CDSC +11.46% -- -- +4.13%<F2>
- ----------------------------------------------------------------------------------------
Average general U.S. government fund<F3> +10.83% +5.03% +7.63% +7.57%
- ----------------------------------------------------------------------------------------
Lehman Brothers Government/Mortgage Index<F4> +11.87% +6.20% +8.52% +8.91%
- ----------------------------------------------------------------------------------------
Consumer Price Index<F5><F3> + 2.65% +2.68% +2.82% +3.55%
- ----------------------------------------------------------------------------------------
<FN>
<F1> These returns reflect the current Class B contingent deferred sales charge (CDSC)
of 4% for the 1-year period and 3% for the period commencing August 30, 1993.
<F2> For the period from the commencement of offering of Class B shares, August 30, 1993
to February 29, 1996.
<F3> Source: Lipper Analytical Services, Inc.
<F4> Source: Asset Investment Management (AIM) software.
<F5> The Consumer Price Index is a popular measure of change in prices.
</TABLE>
All results are historical and are not an indication of future results. The
investment return and principal value of an investment in a mutual fund will
vary with changes in market conditions, and shares, when redeemed, may be worth
more or less than their original cost.
All Fund results reflect the applicable expense subsidy which is explained in
the Notes to Financial Statements. Had the subsidy not been in effect, the
results would have been less favorable.
<PAGE>
PORTFOLIO OF INVESTMENTS - February 29, 1996
<TABLE>
<CAPTION>
Bonds - 97.7%
- ---------------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Mortgage Corporation - 3.1%
FHLMC, 9s, 2001 - 2006 $ 2,451 $ 2,579,229
FHLMC, 8.5s, 2025 10,890 11,308,990
------------
$ 13,888,219
- ---------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 8.7%
FNMA, 7.5s, 2009 - 2011 $16,350 $ 16,676,721
FNMA, 8.46s, 2002 5,740 6,080,342
FNMA, 8.5s, 2001 - 2010 8,366 8,724,336
FNMA, 9s, 2001 - 2007 7,163 7,561,871
------------
$ 39,043,270
- ---------------------------------------------------------------------------------------------------------
Financing Corporation - 13.0%
Financing Corp., 10.7s, 2017 $20,790 $ 29,408,079
Financing Corp., 9.8s, 2018 16,500 21,743,865
Financing Corp., 10.35s, 2018 5,000 6,908,600
------------
$ 58,060,544
- ---------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 29.8%
GNMA, 7s, 2022 - 2025 $47,931 $ 47,376,103
GNMA, 7.5s, 2002 - 2025 39,689 40,323,739
GNMA, 8.5s, 2001 - 2009 10,670 11,206,331
GNMA, 9s, 2004 - 2025 19,651 20,694,715
GNMA, 10.5s, 2020 7,925 8,783,880
GNMA, 10.75s, 2016 381 424,760
GNMA, 11.5s, 2010 - 2019 1,732 1,976,147
GNMA, 12s, 2013 - 2019 964 1,116,485
GNMA, 12.5s, 2011 1,127 1,323,024
------------
$133,225,184
- ---------------------------------------------------------------------------------------------------------
Small Business Administration - 9.2%
SBA, 10.35s, 1997 $ 2,440 $ 2,562,924
SBA, 9.9s, 2008 1,255 1,429,359
SBA, 10.05s, 2008 543 622,057
SBA, 9.05s, 2009 2,603 2,881,644
SBA, 9.1s, 2009 3,354 3,727,003
SBA, 10.05s, 2009 953 1,094,763
SBA, 9.25s, 2010 3,377 3,786,533
SBA, 9.3s, 2010 4,840 5,451,660
SBA, 9.45s, 2010 7,811 8,823,076
SBA, 9.5s, 2010 330 374,403
SBA, 9.65s, 2010 1,629 1,854,881
SBA, 9.7s, 2010 1,514 1,725,095
SBA, 8.625s, 2011 4,035 4,430,423
SBA, 8.8s, 2011 2,074 2,301,606
------------
$ 41,065,427
- ---------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 34.0%
U.S. Treasury Notes, 7.75s, 2000 $ 6,350 $ 6,800,470
U.S. Treasury Notes, 7.5s, 2005 7,000 7,639,870
U.S. Treasury Bonds, 12s, 2013 19,000 27,998,210
U.S. Treasury Bonds, 12.5s, 2014 25,000 38,496,000
U.S. Treasury Bonds, 7.25s, 2022 66,500 71,476,860
------------
$152,411,410
- ---------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $443,082,373) $437,694,054
- ---------------------------------------------------------------------------------------------------------
Repurchase Agreement - 1.3%
- ---------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 2/29/96, due 3/01/96, total to be received
$5,671,851 (secured by FMAC Discount Note, 5.4s, due 3/20/96,
market value $5,801,926), at Cost and Value $ 5,671 $ 5,671,000
- ---------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $448,753,373) $443,365,054
Other Assets, Less Liabilities - 1.0% 4,295,461
- ---------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $447,660,515
- ---------------------------------------------------------------------------------------------------------
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
February 29, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $448,753,373) $443,365,054
Cash 249
Receivable for investments sold 9,645,184
Receivable for Fund shares sold 851,616
Interest receivable 4,236,592
Other assets 11,592
------------
Total assets $458,110,287
------------
Liabilities:
Payable for investments purchased $ 9,247,500
Payable for Fund shares reacquired 775,545
Payable to affiliates -
Management fee 3,065
Shareholder servicing agent fee 2,078
Distribution fee 201,700
Accrued expenses and other liabilities 219,884
------------
Total liabilities $ 10,449,772
------------
Net assets $447,660,515
============
Net assets consist of:
Paid-in capital $474,076,115
Unrealized depreciation on investments (5,388,319)
Accumulated net realized loss (21,052,672)
Accumulated undistributed net investment income 25,391
------------
Total $447,660,515
============
Shares of beneficial interest outstanding 46,309,404
============
Class A shares:
Net asset value and redemption price per share
(net assets of $322,739,827 / 33,375,369 shares of
beneficial interest outstanding) $ 9.67
======
Offering price per share (100/95.25) $10.15
======
Class B shares:
Net asset value and offering price per share
(net assets of $124,920,688 / 12,934,035 shares of
beneficial interest outstanding) $ 9.66
======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares. See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended February 29, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $33,865,292
-----------
Expenses -
Management fee $ 1,769,675
Trustees' compensation 36,974
Shareholder servicing agent fee (Class A) 484,846
Shareholder servicing agent fee (Class B) 257,900
Distribution and service fee (Class A) 1,131,307
Distribution and service fee (Class B) 1,172,276
Custodian fee 193,719
Postage 86,184
Printing 66,136
Auditing fees 63,115
Legal fees 6,453
Miscellaneous 230,666
-----------
Total expenses $ 5,499,251
Fees paid indirectly (74,890)
Reduction of expenses by investment adviser (930,351)
-----------
Net expenses $ 4,494,010
-----------
Net investment income $29,371,282
===========
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) on investment
transactions $21,953,585
Change in unrealized depreciation on investments (1,577,449)
-----------
Net realized and unrealized gain on investments $20,376,136
-----------
Increase in net assets from operations $49,747,418
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- -----------------------------------------------------------------------------------------------------------------
Year Ended Year Ended
February 29, 1996 February 28, 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 29,371,282 $ 30,647,310
Net realized gain (loss) on investments 21,953,585 (30,049,219)
Net unrealized gain (loss) on investments (1,577,449) 2,074,012
------------- -------------
Increase in net assets from operations $ 49,747,418 $ 2,672,103
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (22,143,801) $ (23,920,995)
From net investment income (Class B) (7,225,640) (6,552,834)
------------- -------------
Total distributions declared to shareholders $ (29,369,441) $ (30,473,829)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 127,188,219 $ 76,797,389
Net asset value of shares issued to shareholders in
reinvestment of distributions 18,255,772 18,466,757
Cost of shares reacquired (141,455,811) (129,977,096)
------------- -------------
Increase (decrease) in net assets from Fund share
transactions $ 3,988,180 $ (34,712,950)
------------- -------------
Total increase (decrease) in net assets $ 24,366,157 $ (62,514,676)
Net assets:
At beginning of period 423,294,358 485,809,034
------------- -------------
At end of period (including accumulated undistributed
net investment income of $25,391 and $1,104,312,
respectively) $ 447,660,515 $ 423,294,358
============= =============
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
Eleven Months
Year Ended Year Ended Ended Year Ended
February 29, February 28, February 28, March 31,
1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.22 $ 9.79 $10.00 $ 9.43
------ ------ ------ ------
Income from investment operations<F3> -
Net investment income<F6> $ 0.66 $ 0.67 $ 0.63 $ 0.67
Net realized and unrealized gain (loss) on investments 0.45 (0.58) (0.20) 0.60
------ ------ ------ ------
Total from investment operations $ 1.11 $ 0.09 $ 0.43 $ 1.27
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.66) $(0.66) $(0.58)<F5> $(0.70)
In excess of net realized gain on investments -- -- (0.06) --
------ ------ ------ ------
Total distributions declared to shareholders $(0.66) $(0.66) $(0.64) $(0.70)
------ ------ ------ ------
Net asset value - end of period $ 9.67 $ 9.22 $ 9.79 $10.00
====== ====== ====== ======
Total return<F2> 12.29% 1.21% 6.57%<F1> 13.94%
Ratios (to average net assets)/Supplemental data<F6>:
Expenses<F4> 0.84% 0.79% 0.68%<F1> 1.20%
Net investment income 6.83% 7.24% 6.83%<F1> 7.18%
Portfolio turnover 352% 385% 167% 264%
Net assets at end of period (000 omitted) $322,740 $318,116 $372,702 $356,735
<FN>
<F1> Annualized.
<F2> Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
<F3> Per share data for the periods subsequent to February 28, 1994 is based on average shares outstanding.
<F4> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<F5> Amount includes distribution in excess of net investment income of less than $0.001 per share for the period indicated.
<F6> The investment adviser did not impose a portion of its management fee for certain of the periods indicated. If this fee had
been incurred by the Fund, the net investment income per share and ratios would have been:
</FN>
<S> <C> <C> <C>
Net investment income $ 0.64 $ 0.65 $ 0.59
Ratios (to average net assets):
Expenses 1.05% 1.05% 1.17%<F1>
Net investment income 6.62% 6.98% 6.34%<F1>
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended March 31, 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.29 $ 9.10 $ 9.05 $ 9.56 $10.22
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.75 $ 0.78 $ 0.82 $ 0.86 $ 0.87
Net realized and unrealized gain (loss) on
investments 0.14 0.19 0.04 (0.51) (0.59)
------ ------ ------ ------ ------
Total from investment operations $ 0.89 $ 0.97 $ 0.86 $ 0.35 $ 0.28
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.75) $(0.78) $(0.81) $(0.86) $(0.88)
In excess of net realized gain on
investments -- -- -- -- (0.06)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.75) $(0.78) $(0.81) $(0.86) $(0.94)
------ ------ ------ ------ ------
Net asset value - end of period $ 9.43 $ 9.29 $ 9.10 $ 9.05 $ 9.56
====== ====== ====== ====== ======
Total return<F1> 9.96% 11.13% 9.72% 3.84% 3.11%
Ratios (to average net assets)/Supplemental data:
Expenses 1.25% 1.28% 1.29% 1.40% 1.18%
Net investment income 7.95% 8.56% 8.81% 9.25% 9.10%
Portfolio turnover 270% 95% 260% 346% 417%
Net assets at end of period (000 omitted) $356,366 $323,612 $327,877 $348,617 $397,239
<FN>
<F1> Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended
-------------------------- Period Ended
February 29, February 28, February 28,
Year Ended March 31, 1987 1986 1996 1995 1994<F1>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $10.53 $ 9.95 $ 9.22 $ 9.78 $10.16
------ ------ ------ ------ ------
Income from investment
operations<F4> -
Net investment income<F7> $ 0.94 $ 1.07 $ 0.59 $ 0.59 $ 0.30
Net realized and unrealized gain (loss) on investments (0.20) 0.68 0.44 (0.56) (0.43)
------ ------ ------ ------ ------
Total from investment
operations $ 0.74 $ 1.75 $ 1.03 $ 0.03 $(0.13)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.94) $(1.08) $(0.59) $(0.59) $(0.25)<F6>
In excess of net realized gain on investments (0.11) (0.09) -- -- --
------ ------ ------ ------ ------
Total distributions declared
to shareholders $(1.05) $(1.17) $(0.59) $(0.59) $(0.25)
------ ------ ------ ------ ------
Net asset value - end of period $10.22 $10.53 $ 9.66 $ 9.22 $ 9.78
====== ====== ====== ====== ======
Total return<F3> 7.48% 18.70% 11.46% 0.57% (1.29)%<F2>
Ratios (to average net assets)/Supplemental data<F7>:
Expenses<F5> 1.18% 1.09% 1.56% 1.51% 1.39%<F2>
Net investment income 9.14% 10.43% 6.09% 6.52% 5.92%<F2>
Portfolio turnover 191% 128% 352% 385% 167%
Net assets at end of period
(000 omitted) $487,975 $343,270 $124,921 $105,178 $113,107
<FN>
<F1> For the period from the commencement of offering of Class B shares, August 30, 1993 to February 28, 1994.
<F2> Annualized.
<F3> Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
<F4> Per share data for the period subsequent to February 28, 1994 is based on average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<F6> Amount includes distribution in excess of net investment income of less than $0.001 per share for the period indicated.
<F7> The investment adviser did not impose a portion of its management fee for certain of the periods indicated. If this fee had
been incurred by the Fund, the net investment income per share and ratios would have been:
</FN>
<S> <C> <C> <C> <C> <C>
Net investment income -- -- $ 0.57 $ 0.57 $ 0.28
Ratios (to average net assets):
Expenses -- -- 1.77% 1.77% 1.87%<F2>
Net investment income -- -- 5.88% 6.26% 5.44%<F2>
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Government Securities Fund (the Fund) is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates market value. Securities
for which there are no such quotations or valuations are valued at fair value as
determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The 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 purchased 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 securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of 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 taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the year ended February 29, 1996, $1,080,762 was reclassified from
accumulated undistributed net investment income of which $1,065,133 was
reclassified to accumulated net realized gain on investments and $15,629 was
reclassified to paid-in-capital, due to differences between book and tax
accounting for mortgage-backed securities. This change had no effect on the net
assets or net asset value per share. At February 29, 1996, accumulated
undistributed net investment income and accumulated net realized losses on
investments under book accounting were different from tax accounting due to
significant temporary differences in accounting for capital losses.
At February 29, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of $20,992,515, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on February 28, 1999 ($272,762), and February 29, 2003 ($20,719,753).
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate equal to the
lesser of (i) 0.40% of the Fund's average daily net assets or (ii) 0.25% of
average daily net assets plus 3.40% of investment income. The investment adviser
did not impose a portion of its fee, which is reflected as a reduction of
expenses in the Statement of Operations.
The Fund 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 of the 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 all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $12,225 for the year ended
February 29, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$90,655 for the year ended February 29, 1996, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets attributable
to Class A shares, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer, which amounted to $79,136 for the year
ended February 29, 1996. Fees incurred under the distribution plan during the
year ended February 29, 1996 were 0.35% of average daily net assets attributable
to Class A shares on an annualized basis.
The Class B distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B shares. MFD retains the service fee for accounts not attributable to
a securities dealer, which amounted to $30,937 for the year ended February 29,
1996. Fees incurred under the distribution plan during the year ended February
29, 1996 were 1.00% of average daily net assets attributable to Class B shares
on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more and on purchases by certain
retirement plans, in the event of a shareholder redemption within 12 months
following the share purchase. A contingent deferred sales charge is imposed on
shareholder redemptions of Class B 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 29, 1996 were $1,066 and $310,387 for Class A and Class B shares,
respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively. (4) Portfolio Securities Purchases and sales of
investments, other than purchased option transactions and short-term
obligations, aggregated $1,511,872,860 and $1,511,303,759, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $448,779,623
============
Gross unrealized depreciation $(11,090,267)
Gross unrealized appreciation 5,675,698
------------
Net unrealized depreciation $ (5,414,569)
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
Year Ended Year Ended
February 29, 1996 February 28, 1995
------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 5,924,628 $ 57,343,342 3,766,026 $ 34,652,633
Shares issued to shareholders in
reinvestment of distributions 1,417,405 13,598,580 1,546,361 14,188,551
Shares reacquired (8,453,776) (81,475,284) (8,908,608) (82,026,936)
---------- ------------ ---------- ------------
Net decrease (1,111,743) $(10,533,362) (3,596,221) $(33,185,752)
========== ============ ========== ============
<CAPTION>
Class B Shares
Year Ended Year Ended
February 29, 1996 February 28, 1995
------------------------- --------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 7,243,533 $ 69,844,877 4,578,868 $ 42,144,756
Shares issued to shareholders in
reinvestment of distributions 485,387 4,657,192 466,207 4,278,206
Shares reacquired (6,202,442) (59,980,527) (5,201,800) (47,950,160)
--------- ------------ --------- ------------
Net increase (decrease) 1,526,478 $ 14,521,542 (156,725) $ (1,527,198)
========= ============ ========= ============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended February
29, 1996 was $7,925.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Government Securities Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Government Securities Fund as of February
29, 1996, the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended February 29, 1996 and
February 28, 1995, and the financial highlights for each of the years in the
two-year period ended February 29, 1996, the eleven months ended February 28,
1994 and each of the years in the eight-year period ended March 31, 1993. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at
February 29, 1996 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Securities Fund at February 29, 1996, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 29, 1996
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) GOVERNMENT [DALBAR logo] -------------
SECURITIES BULK RATE
FUND U.S. POSTAGE
PAID
500 Boylston Street PERMIT #55638
Boston, MA 02116 BOSTON, MA
-------------
[logo] M F S(R)
THE FIRST NAME IN MUTUAL FUNDS
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