Table of Contents
Letter from the Chairman 1
Fund Manager's Overview 3
Fund Manager's Profile 4
Performance Summary 5
Portfolio Concentration 6
Fund Facts 6
Portfolio of Investments 7
Financial Statements 9
Notes to Financial Statements 15
Trustees and Officers 21
- -------------------------------------------------------------------------------
Highlights
[bullet] Class A shares of the Fund provided a total return of -1.07%
over the past six months, while the total return on Class B shares
was -1.44%. Both of these returns reflect net asset value. The Lehman
Brothers Government/Mortgage Index declined by -0.42% over the same
period.
[bullet] The Fund's interest rate sensitivity has been decreased to
help protect principal in a rising interest rate environment.
[bullet] The Fund's portfolio duration (a measure of interest rate
sensitivity) is currently 4.6 years, approximately equivalent to that
of a five-year U.S. Treasury security.
[bullet] The Fund is 40% invested in mortgage-backed pass-through
securities, a sector we favor due to lower levels of price
sensitivity and their yield advantage versus Treasury securities.
- -------------------------------------------------------------------------------
<PAGE>
Letter from the Chairman
Dear Shareholders:
[Photo: A. Keith Brodkin]
With over half of 1996 behind us, the U.S. economy appears to have settled
into a pattern of moderate growth and inflation -- two factors that we think
can be important contributors to a favorable long-term investment climate.
During the first quarter of 1996, real (inflation-adjusted) economic growth
was 2.3% on an annualized basis, followed by a rate of 4.7% in the second
quarter. Real growth in gross domestic product has surpassed our expectations
so far this year, and we now expect growth for all of 1996 could exceed 2.5%.
Although the individual consumer appears to be carrying an excessive debt
load, the consumer sector itself, which represents two-thirds of the economy,
continues to be impressive as the automobile and housing markets remain
resilient. Consumer spending has also been positively impacted by widespread
job growth. However, the economies of Europe and Japan continue to be in the
doldrums, weakening U.S. export markets while subduing the capital spending
plans of American corporations.
In the bond market, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. Should signs of economic growth and, particularly, of higher
inflation continue, we would expect the Fed to maintain its anti-
inflationary stance. In the beginning of the year, bond market traded in a
narrow range as investors shifted between concern for the lack of a budget
resolution in Washington and hope that sluggish economic reports and low
inflation might lead to lower interest rates. Later, fixed-income market
began reacting to conflicting signals regarding the economy's strength with
more volatile trading patterns marked by an upward bias in interest rates.
Interest rates may move even higher over the coming months, but we believe
the current rise in bond yields is reaching a point where fixed-income market
are equitably valued.
Finally, you may notice, this shareholders' report incorporates a number
of changes which we hope you will find informative and useful. Following the
Fund Manager's Overview, we have added new information on the
1
<PAGE>
Letter from the Chairman -- continued
Fund's holdings, including charts illustrating the portfolio's concentration
in the investments that meet its criteria. Near the back of the report,
telephone numbers and addresses are listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
September 17, 1996
2
<PAGE>
Fund Manager's Overview
Dear Shareholders:
[Photo: Steven E. Nothern]
During the six-month period ended August 31, 1996, the fixed-income market
saw increased volatility and a return to somewhat higher interest rates as
the economy shifted from the anemic growth of winter to robust growth during
spring and summer. With stronger growth, the fixed-income market began to
respond negatively to the possibility that relatively higher levels of
resource utilization might trigger inflationary bottlenecks, leading the
Federal Reserve Board to reverse course and begin raising short-term interest
rates. Two-year U.S. Treasury yields, which were at 5.42% at the end of
February 1996, increased to 6.33% by August 31, 1996, while yields on 10-year
Treasury securities increased from 6.10% to 6.95%. An investment in two-year
U.S. Treasuries over this period would have provided a total return of 1.50%,
while an investment in 10-year U.S. Treasury securities would have produced a
total return of -2.50%.
During this period, Class A shares of the Fund provided a total return of
- -1.07%, while the total return on Class B shares was -1.44%. Both of these
returns assume the reinvestment of distributions but exclude the effects of
any sales charges. During the same period, the Lehman Brothers
Government/Mortgage Index (the Lehman Index), an unmanaged index of Treasury,
government-agency, and mortgage-backed securities, decreased by -0.42%.
The most significant portfolio shift since February has been a decrease in
overall interest rate sensitivity -- a shift undertaken in order to protect
principal in the rising interest rate environment. The Fund's portfolio
duration (a measure of interest rate sensitivity) is currently 4.6 years
(down from over 6 years), approximately equivalent to the duration of a
five-year Treasury and to that of the Lehman Index. Our overall inflation
outlook has not changed. We continue to see a structurally healthy economy
rather than one that is overheating due to excessive demand. Pipeline
inflation pressures look muted, and we are unconvinced that the pickup in
wages poses a clear inflation risk. But we also remain sensitive to the role
of inflationary expectations and Federal Reserve credibility in the inflation
process. Especially if the core Consumer Price Index were to show signs of
tilting upward, the Federal Reserve would likely feel compelled to tighten
monetary conditions. Consequently, we anticipate maintaining a neutral to
defensive overall interest rate exposure in the portfolio until uncertainties
surrounding Federal Reserve policies are resolved.
3
<PAGE>
Fund Manager's Overview -- continued
In terms of sector allocations, the portfolio is currently 38% invested in
mortgage-backed pass-through securities. We have been in favor of an
overweighting in this sector due to lower levels of price sensitivity, the
substantial yield advantage versus Treasury securities, and our positive
supply/ demand outlook for this sector over the remainder of the year. The
portfolio contains both 15-year and 30-year agency pass-throughs, but
currently no collateralized mortgage obligations (CMOs). The levels of new
originations for 15-year pass-throughs have been extremely low and their
yields are approximately 0.75% greater than those of five-year Treasuries. We
remain optimistic about this sector. Yields on 30-year issues are
approximately 1.10% greater than those of 10-year Treasuries. New issuance
continues to be light, and spreads this year have traded in a very narrow
range.
While banks and insurance companies have not been large buyers in this
year's market, marginal buyers have been found among international accounts
as well as federal agencies. The majority of the 30-year issues held by the
portfolio are 7% and 7.5% coupons, so the possibility of refinancing has not
had an influence on the price performance of these lower coupon issues. Since
we expect the housing market to slow as interest rates increase, we believe
the supply/demand picture should remain favorable. It would take a
substantial (approximately 0.50%) decline in 10-year Treasury rates for the
mortgage sector to underperform the Treasury universe. However the principal
value and interest on Treasury securities are guaranteed by the U.S.
Government if held to maturity.
The Fund remains substantially invested in government-sponsored or agency
securities, as we have been able to add attractive incremental yield to the
portfolio in this sector as well. Our ability to invest in government-agency,
Treasury, and mortgage-backed securities within a range of maturities has
proven helpful in this rapidly changing environment. As always, we maintain
our commitment to seek competitive returns over the long term.
Respectfully,
/s/ Steven E. Nothern
Steven E. Nothern
Fund Manager
- -------------------------------------------------------------------------------
Fund Manager's 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. In
1991, he became Fund Manager of MFS Government Securities Fund. Mr.
Nothern is a Chartered Financial Analyst (C.F.A.).
- -------------------------------------------------------------------------------
4
<PAGE>
Performance Summary
Because mutual funds like MFS Government Securities Fund are designed for
investors with long-term goals, we have provided cumulative results as well
as the average annual total returns for Class A, Class B, and Class C shares
for the applicable time periods. Performance results reflect applicable
expense subsidies and waivers, without which performance results would have
been less favorable. Subsidies and waivers may be rescinded at any time. See
the prospectus for details.
Average Annual and Cumulative Total Rates of Return
Class A Investment Results
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------
Cumulative Total Return -1.07% +2.65% +40.52% +99.49%
- --------------------------------------------------------------------------
Average Annual Total Return -- +2.65% +7.04% +7.15%
- --------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the Securities and Exchange
Commission (the SEC), with all distributions reinvested and reflecting the
maximum sales charge of 4.75% on the initial investment for the 1-, 5-, and
10-year periods ended June 30, 1996, were -1.27%, +6.73%, and +7.00%,
respectively.
Class B Investment Results
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------
Cumulative Total Return -1.44% +1.92% +37.52% +95.25%
- --------------------------------------------------------------------------
Average Annual Total Return -- +1.92% +6.58% +6.92%
- --------------------------------------------------------------------------
SEC -- -0.88% +7.03% +7.30%
- --------------------------------------------------------------------------
Class C Investment Results
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- --------------------------------------------------------------------------
Cumulative Total Return -1.43% +2.28% +39.99% +98.75%
- --------------------------------------------------------------------------
Average Annual Total Return -- +2.28% +6.96% +7.11%
- --------------------------------------------------------------------------
SEC -- +2.37% +7.71% +7.49%
- --------------------------------------------------------------------------
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost.
Class B SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%.
Class C shares have no initial sales charge but, along with Class B shares,
have higher annual fees and expenses than Class A shares. Class C shares
redeemed within 12 months of purchase will be subject to a 1%
5
<PAGE>
Performance Summary -- continued
CDSC. See the prospectus for details. Class B and Class C share performance
includes the performance of the Fund's Class A shares for periods prior to
the commencement of offering of Class B shares on August 30, 1993 and of
Class C shares on April 1, 1996. Sales charges and operating expenses for
Class A, Class B, and Class C shares differ.
Portfolio Concentration as of August 31, 1996
- --------------------------------------------------------------------------------
[Pie Chart]
Largest Sectors
Mortgage-Backed Securities 38%
Treasuries 38%
Other Government Agencies 22%
Cash 2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Fund Facts
Strategy: The Fund's investment objective is to seek current
income and preservation of capital.
Commencement of
investment operations: July 25, 1984
Size: $427.5 million as of August 31, 1996
- --------------------------------------------------------------------------------
6
<PAGE>
Portfolio of Investments (Unaudited) -- August 31, 1996
Bonds - 96.6%
-----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 8.1%
FHLMC, 6.5s, 2026 $11,918 $11,031,868
FHLMC, 7.5s, 2025 21,853 21,368,087
FHLMC, 9s, 2001 - 2006 2,176 2,250,758
--------------
$34,650,713
- -----------------------------------------------------------------------------
Federal National Mortgage Association - 9.3%
FNMA, 7s, 2026 $12,197 $11,606,151
FNMA, 7.5s, 2009 - 2011 14,955 14,936,422
FNMA, 8.46s, 2002 5,720 5,848,654
FNMA, 8.5s, 2001 - 2010 7,262 7,498,274
FNMA, 9s, 2001 - 2007 167 172,866
--------------
$40,062,367
- -----------------------------------------------------------------------------
Financing Corporation - 12.7%
FICO, 10.7s, 2017 $20,790 $27,536,979
FICO, 9.8s, 2018 16,500 20,320,740
FICO, 10.35s, 2018 5,000 6,455,450
--------------
$54,313,169
- -----------------------------------------------------------------------------
Government National Mortgage Association - 20.1%
GNMA, 7s, 2022 - 2025 $46,793 $44,379,875
GNMA, 7.5s, 2002 - 2023 26,141 25,847,220
GNMA, 8.5s, 2001 - 2009 9,406 9,747,428
GNMA, 9s, 2019 - 2024 1,538 1,605,145
GNMA, 10.75s, 2016 379 422,707
GNMA, 11.5s, 2010 - 2019 1,455 1,653,876
GNMA, 12s, 2013 - 2019 840 972,052
GNMA, 12.5s, 2011 1,017 1,186,223
--------------
$85,814,526
- -----------------------------------------------------------------------------
Small Business Administration - 8.8%
SBA, 10.35s, 1997 $ 2,440 $ 2,510,287
SBA, 9.9s, 2008 1,190 1,294,059
SBA, 10.05s, 2008 505 551,339
SBA, 9.05s, 2009 2,387 2,527,118
SBA, 9.1s, 2009 3,293 3,496,147
SBA, 10.05s, 2009 878 963,756
SBA, 9.25s, 2010 3,045 3,259,234
SBA, 9.3s, 2010 4,660 5,006,593
SBA, 9.45s, 2010 7,622 8,216,929
SBA, 9.5s, 2010 299 324,019
SBA, 9.65s, 2010 1,522 1,652,044
SBA, 9.7s, 2010 1,400 1,520,864
SBA, 8.625s, 2011 3,925 4,116,837
SBA, 8.8s, 2011 1,984 2,099,621
--------------
$37,538,847
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 37.6%
U.S. Treasury Notes, 6s, 1999 $30,000 $29,578,200
U.S. Treasury Notes, 9.125s, 1999 17,000 18,086,470
U.S. Treasury Notes, 7.75s, 2000 29,000 29,996,730
7
<PAGE>
U.S. Treasury Obligations - continued
U.S. Treasury Notes, 6.625s, 2001 $30,000 $ 29,868,600
U.S. Treasury Bonds, 12.75s, 2010 16,250 22,440,275
U.S. Treasury Bonds, 11.25s, 2015 21,750 30,626,610
--------------
$160,596,885
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $422,832,706) $412,976,507
- -----------------------------------------------------------------------------
Repurchase Agreement - 0.4%
- -----------------------------------------------------------------------------
Goldman Sachs, dated 8/30/96, due 9/03/96,
total to be received $1,729,014 (secured
by various U.S. Treasury and Federal
Agency obligations in a jointly traded
account), at Cost $ 1,728 $ 1,728,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost,
$424,560,706) $414,704,507
Other Assets, Less Liabilities - 3.0% 12,754,566
- -----------------------------------------------------------------------------
Net Assets - 100.0% $427,459,073
- -----------------------------------------------------------------------------
See notes to financial statements
8
<PAGE>
Financial Statements
Statement of Assets and Liabilities (Unaudited)
-----------------------------------------------------------------------------
August 31, 1996
------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $424,560,706) $414,704,507
Cash 781
Receivable for Fund shares sold 360,300
Receivable for investments sold 9,086,789
Interest receivable 5,353,018
Other assets 5,118
---------------
Total assets $429,510,513
---------------
Liabilities:
Distributions payable $ 1,156
Payable for Fund shares reacquired 325,608
Payable for investments purchased 1,358,906
Payable to affiliates -
Management fee 5,883
Shareholder servicing agent fee 3,995
Distribution fee 203,156
Accrued expenses and other liabilities 152,736
---------------
Total liabilities $ 2,051,440
---------------
Net assets $427,459,073
---------------
Net assets consist of:
Paid-in capital $472,980,365
Unrealized depreciation on investments (9,856,199)
Accumulated net realized loss on investments (35,840,576)
Accumulated undistributed net investment income 175,483
---------------
Total $427,459,073
---------------
Shares of beneficial interest outstanding 46,184,039
---------------
Class A shares:
Net asset value per share
(net assets of $303,127,659 / 32,740,450 shares of
beneficial interest outstanding) $9.26
---------------
Offering price per share (100/95.25) $9.72
---------------
Class B shares:
Net asset value and offering price per share
(net assets of $120,660,651 / 13,048,279 shares of
beneficial interest outstanding) $9.25
---------------
Class C shares:
Net asset value and offering price per share
(net assets of $3,670,763 / 395,310 shares of beneficial
interest outstanding) $9.29
---------------
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,
Class B and Class C shares.
See notes to financial statements
9
<PAGE>
Statement of Operations (Unaudited)
-----------------------------------------------------------------------------
Six Months Ended August 31, 1996
-----------------------------------------------------------------------------
Net investment income:
Interest income $ 16,307,560
-----------------
Expenses -
Management fee $ 878,126
Trustees' compensation 18,031
Shareholder servicing agent fee (Class A) 235,432
Shareholder servicing agent fee (Class B) 134,358
Shareholder servicing agent fee (Class C) 1,146
Distribution and service fee (Class A) 549,342
Distribution and service fee (Class B) 610,716
Distribution and service fee (Class C) 7,637
Custodian fee 89,559
Postage 62,873
Printing 21,283
Auditing fees 16,050
Legal fees 3,175
Miscellaneous 147,829
-----------------
Total expenses $ 2,775,557
Fees paid indirectly (33,993)
Reduction of expenses by investment adviser (331,150)
-----------------
Net expenses $ 2,410,414
-----------------
Net investment income $ 13,897,146
-----------------
Realized and unrealized gain (loss) on investments:
Realized loss on investment transactions $(14,787,904)
Change in unrealized depreciation on investments (4,467,880)
-----------------
Net realized and unrealized loss on investments $(19,255,784)
-----------------
Decrease in net assets from operations $ (5,358,638)
-----------------
See notes to financial statements
10
<PAGE>
Statement of Changes in Net Assets
-----------------------------------------------------------------------------
Six Months Ended
August 31, 1996 Year Ended
(Unaudited) February 29, 1996
- ------------------------------------------ ---------------- ------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 13,897,146 $ 29,371,282
Net realized gain (loss) on investments (14,787,904) 21,953,585
Net unrealized loss on investments (4,467,880) (1,577,449)
---------------- ------------------
Increase (decrease) in net assets from
operations $ (5,358,638) $ 49,747,418
---------------- ------------------
Distributions declared to shareholders -
From net investment income (Class A) $(10,192,563) $ (22,143,801)
From net investment income (Class B) (3,516,982) (7,225,640)
From net investment income (Class C) (37,509) --
---------------- ------------------
Total distributions declared to
shareholders $(13,747,054) $ (29,369,441)
---------------- ------------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 44,028,143 $ 127,188,219
Net asset value of shares issued to
shareholders in reinvestment of
distributions 8,677,277 18,255,772
Cost of shares reacquired (53,801,170) (141,455,811)
---------------- ------------------
Increase (decrease) in net assets from
Fund share transactions $ (1,095,750) $ 3,988,180
---------------- ------------------
Total increase (decrease) in net
assets $(20,201,442) $ 24,366,157
Net assets:
At beginning of period 447,660,515 423,294,358
---------------- ------------------
At end of period (including accumulated
undistributed net investment income of
$175,483 and $25,391, respectively) $427,459,073 $ 447,660,515
---------------- ------------------
See notes to financial statements
11
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
Six Eleven
Months Ended Year Ended Months Ended
August 31, February 29, February 28, February 28,
1996 ------------------------------- ---------------
(Unaudited) 1996 1995 1994
-------------------------------------------------- --------------- --------------- ---------------
Class A
-------------------------------------------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout each
period):
Net asset value - beginning of
period $ 9.67 $ 9.22 $ 9.79 $ 10.00
-------------- --------------- --------------- ---------------
Income from investment operations# -
Net investment income(S) $ 0.31 $ 0.66 $ 0.67 $ 0.63
Net realized and unrealized gain
(loss) on investments (0.41) 0.45 (0.58) (0.20)
-------------- --------------- --------------- ---------------
Total from investment operations $ (0.10) $ 1.11 $ 0.09 $ 0.43
-------------- --------------- --------------- ---------------
Less distributions declared to
shareholders -
From net investment income $ (0.31) $ (0.66) $ (0.66) $ (0.58)++++
In excess of net realized gain on
investments -- -- -- (0.06)
-------------- --------------- --------------- ---------------
Total distributions declared to
shareholders $ (0.31) $ (0.66) $ (0.66) $ (0.64)
-------------- --------------- --------------- ---------------
Net asset value - end of period $ 9.26 $ 9.67 $ 9.22 $ 9.79
-------------- --------------- --------------- ---------------
Total return++ (1.07)%+++ 12.29% 1.21% 6.57%+
Ratios (to average daily net assets)/
Supplemental data(S):
Expenses## 0.91%+ 0.84% 0.79% 0.68%+
Net investment income 6.55%+ 6.83% 7.24% 6.83%+
Portfolio turnover 194% 352% 385% 167%
Net assets at end of period
(000 omitted) $303,128 $322,740 $318,116 $372,702
</TABLE>
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to February 28, 1994 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
++Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
++++Amount includes distribution in excess of net invesment income of less
than $0.001 per share for the period indicated.
(S)The investment adviser did not impose a portion of its management fee for
certain of the periods indicated. If these fees had been incurred by the
Fund, the net investment income per share and the ratios would have been:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Net investment income $ 0.30 $ 0.64 $ 0.65 $ 0.59
Ratios (to average net assets):
Expenses## 1.07%+ 1.05% 1.05% 1.17%+
Net investment income 6.40%+ 6.62% 6.98% 6.34%+
</TABLE>
See notes to financial statements
12
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended March 31, 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.43 $ 9.29 $ 9.10 $ 9.05
----------- ----------- -----------------------
Income from investment operations -
Net investment income $ 0.67 $ 0.75 $ 0.78 $ 0.82
Net realized and unrealized gain on
investments 0.60 0.14 0.19 0.04
----------- ----------- -----------------------
Total from investment operations $ 1.27 $ 0.89 $ 0.97 $ 0.86
----------- ----------- -----------------------
Less distributions declared to shareholders
from net investment income $(0.70) $(0.75) $(0.78) $(0.81)
----------- ----------- -----------------------
Net asset value - end of period $10.00 $ 9.43 $ 9.29 $ 9.10
----------- ----------- -----------------------
Total return++ 13.94% 9.96% 11.13% 9.72%
Ratios (to average daily net
assets)/Supplemental data:
Expenses 1.20% 1.25% 1.28% 1.29%
Net investment income 7.18% 7.95% 8.56% 8.81%
Portfolio turnover 264% 270% 95% 260%
Net assets at end of period (000 omitted) $356,735 $356,366 $323,612 $327,877
</TABLE>
++Total returns for Class A shares do not include the applicable sales
charge. If the charge had been included, the results would have been lower.
<TABLE>
<CAPTION>
Year Ended March 31, 1989 1988 1987 1986
- -----------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.56 $10.22 $10.53 $ 9.95
----------- ----------- -----------------------
Income from investment operations -
Net investment income $ 0.86 $ 0.87 $ 0.94 $ 1.07
Net realized and unrealized gain (loss)
on investments (0.51) (0.59) (0.20) 0.68
----------- ----------- -----------------------
Total from investment operations $ 0.35 $ 0.28 $ 0.74 $ 1.75
----------- ----------- -----------------------
Less distributions declared to shareholders -
From net investment income $(0.86) $(0.88) $(0.94) $(1.08)
In excess of net realized gain on
investments -- (0.06) (0.11) (0.09)
----------- ----------- -----------------------
Total distributions declared to
shareholders $(0.86) $(0.94) $(1.05) $(1.17)
----------- ----------- -----------------------
Net asset value - end of period $ 9.05 $ 9.56 $10.22 $10.53
----------- ----------- -----------------------
Total return++ 3.84% 3.11% 7.48% 18.70%
Ratios (to average daily net
assets)/Supplemental data:
Expenses 1.40% 1.18% 1.18% 1.09%
Net investment income 9.25% 9.10% 9.14% 10.43%
Portfolio turnover 346% 417% 191% 128%
Net assets at end of period (000 omitted) $348,617 $397,239 $487,975 $343,270
</TABLE>
++Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge
had been included, the results would have been lower.
See notes to financial statements
13
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Six Months
Ended Period Ended
August 31, Year Ended Period Ended August 31,
1996 February 29, February 28, February 28, 1996**
(Unaudited) ------------------------------- --------------- (Unaudited)
Class B 1996 1995 1994* Class C
-------------------------------------------- --------------------------- ---------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.66 $ 9.22 $ 9.78 $10.16 $10.00
--------------------------- ---------------- --------------- -------------
Income from investment operations# -
Net investment income(S) $ 0.28 $ 0.59 $ 0.59 $ 0.30 $ 0.29
Net realized and unrealized gain (loss) on
investments (0.42) 0.44 (0.56) (0.43) (0.73)
--------------------------- ---------------- --------------- -------------
Total from investment operations $(0.14) $ 1.03 $ 0.03 $(0.13) $(0.44)
--------------------------- ---------------- --------------- -------------
Less distributions declared to shareholders
from net investment income $(0.27) $(0.59) $(0.59) $(0.25)++++ $(0.27)
--------------------------- ---------------- --------------- -------------
Total distributions declared to
shareholders $(0.27) $(0.59) $(0.59) $(0.25) $(0.27)
--------------------------- ---------------- --------------- -------------
Net asset value - end of period $ 9.25 $ 9.66 $ 9.22 $ 9.78 $ 9.29
--------------------------- ---------------- --------------- -------------
Total return (1.44)%+++ 11.46% 0.57% (1.29)%+ (0.42)%+++
Ratios (to average daily net
assets)/Supplemental data(S):
Expenses## 1.63%+ 1.56% 1.51% 1.39%+ 1.58%+
Net investment income 5.81%+ 6.09% 6.52% 5.92%+ 6.06%+
Portfolio turnover 194% 352% 385% 167% 194%
Net assets at end of period (000 omitted) $120,661 $124,921 $105,178 $113,107 $3,671
*For the period from the commencement of offering of Class B shares, August 30, 1993 to February 28, 1994.
**For the period from the commencement of offering of Class C shares, April 1, 1996 to August 31, 1996.
+Annualized.
+++Not annualized.
#Per share data for the periods subsequent to February 28, 1994 is based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
++++Amount includes distribution in excess of net invesment income of less than $0.001 per share for the period
indicated.
(S)The investment adviser did not impose a portion of its management fee for certain of the periods indicated. If these
fees had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $0.27 $0.57 $0.57 $0.28 $0.28
Ratios (to average net assets):
Expenses## 1.78%+ 1.77% 1.77% 1.87%+ 1.73%+
Net investment income 5.66%+ 5.88% 6.26% 5.44%+ 5.91%+
</TABLE>
See notes to financial statements
14
<PAGE>
Notes to Financial Statements (Unaudited)
(1) Business and Organization
MFS Government Securities Fund (the Fund) is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a diversified, open-end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with
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 - 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. 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.
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
15
<PAGE>
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 tax 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.
As of 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 Class A,
Class B, and Class C shares. The three 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 effective annual rate
equal to the lesser of (i) 0.40% of average daily net assets or (ii) 0.25% of
average daily net assets plus 3.40% of investment income. The investment
adviser did
16
<PAGE>
not impose a portion of its fee, which is reflected as a preliminary
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 $6,631 for the six months ended August 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$35,147 for the six months ended August 31, 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, Class B,
and Class C 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% 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 $49,772 for the six months ended August 31, 1996. Fees incurred
under the distribution plan during the six months ended August 31, 1996 were
0.35% of average daily net assets attributable to Class A shares on an
annualized basis.
The Class B and Class C distribution plans provide 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 and
Class C 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 and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $18,476
and $0 for Class B and Class C
17
<PAGE>
shares, respectively, for the six months ended August 31, 1996. Fees incurred
under the distribution plans during the six months ended August 31, 1996 were
1.00% of average daily net assets attributable to Class B and Class C shares
on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such 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. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
12 months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the six months ended August 31, 1996 were $590, $146,044, and $0 for
Class A, Class B, and Class C 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%, up to 0.22%, and up to 0.15%
attributable to Class A, Class B, and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, aggregated $793,467,881 and $794,539,441,
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 $424,560,706
================
Gross unrealized depreciation $(10,926,678)
Gross unrealized appreciation 1,070,479
----------------
Net unrealized depreciation $ (9,856,199)
================
(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:
18
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Six Months Ended Year Ended
August 31, 1996 February 29, 1996
------------------------------ ------------------------------
Shares Amount Shares Amount
- ----------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 2,318,084 $ 21,766,287 5,924,628 $ 57,343,342
Shares issued to shareholders in
reinvestment of distributions 679,470 6,400,617 1,417,405 13,598,580
Shares reacquired (3,632,473) (34,046,624) (8,453,776) (81,475,284)
-------------- --------------- -------------- ---------------
Net decrease (634,919) $ (5,879,720) (1,111,743) $(10,533,362)
-------------- --------------- -------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Six Months Ended Year Ended
August 31, 1996 February 29, 1996
------------------------------ ------------------------------
Shares Amount Shares Amount
- ----------------------------------- -------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Shares sold 1,973,163 $ 18,539,237 7,243,533 $ 69,844,877
Shares issued to shareholders in
reinvestment of distributions 238,121 2,242,014 485,387 4,657,192
Shares reacquired (2,097,041) (19,691,994) (6,202,442) (59,980,527)
-------------- --------------- -------------- ---------------
Net increase (decrease) 114,243 $ 1,089,257 1,526,478 $ 14,521,542
-------------- --------------- -------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
Class C Shares Period Ended
August 31, 1996*
-----------------------
Shares Amount
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 398,318 $3,722,619
Shares issued to shareholders in
reinvestment of distributions 3,700 34,646
Shares reacquired (6,708) (62,552)
--------- -------------
Net increase 395,310 $3,694,713
--------- -------------
</TABLE>
*For the period from the commencement of offering Class C shares, April 1,
1996 to August 31, 1996.
(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 six months
ended August 31, 1996 was $2,159.
------------------------------
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.
19
<PAGE>
MFS(R) Government Securities Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Fund Manager
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
Custodian
State Street Bank and Trust Company
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime
from a touch-tone telephone.
For information on MFS mutual funds, call
your financial adviser or, for an information
kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern
time (or leave a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
Web Site
http://www.mfs.com
DALBAR SEAL
[Dalbar seal:] For the second year in a
- ------------------- row, MFS earned a #1
MFS Rated #1 ranking in DALBAR,
TOP-RATED SERVICE Inc.'s Broker/Dealer
- ------------------- Survey, Main Office
Operations Service
Quality category. The
Firm achieved a 3.49
overall score -- on a scale of 1 to r -- in the 1995
survey. A total of 71 firms responded, offering
input on the quality of service they receive from
36 mutual fund companies nationwide. The
survey contained questions about service quality
in 17 categories, including "knowledge of phone
service contacts," "accuracy of trnasaction
processing," and "overall ease of doing business
with the firm." The 1996 survey results were not
available at the time of this printing.
21
<PAGE>
[Dalbar seal:]
MFS(R) -------------------
Government MFS Rated #1
Securities TOP-RATED SERVICE
Fund -------------------
500 Boylston Street
Boston, MA 02116
[MFS logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
(C) 1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
MGS-3-10/96 34M
[Front Cover]
[MFS logo]
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
MFS(R) Government Securities Fund
[Photo: two men speaking]
Semiannual Report
August 31, 1996
