[Front Cover]
[MFS logo]
INVESTMENT MANAGEMENT
Annual Report
for Year Ended
February 28, 1997
MFS(R) Government Securities Fund
[close up pictures of a flag]
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Letter from the Chairman ..................... 1
A Discussion with the Portfolio Manager ...... 2
Portfolio Manager's Profile .................. 5
Fund Facts .................................... 6
Performance Summary ........................... 6
Portfolio of Investments ..................... 9
Financial Statements ........................ 11
Notes to Financial Statements ............... 18
Independent Auditors' Report .................. 24
Trustees and Officers ........................ 25
</TABLE>
Highlights
[bullet] For the 12 months ended February 28, 1997, Class A shares of the Fund
provided a total return at net asset value of 3.67%, Class B shares
2.92%, Class C shares 3.00%, and Class I shares 3.75%.
[bullet] The fixed-income market has vacillated between concern that, with the
economy operating near full employment, inflationary pressures could be
building, and belief that, by some measures, inflationary pressures are
abating.
[bullet] The mortgage-backed pass-through sector posted strong relative
performance in the past 12 months. We anticipated a continuation of
this trend as mortgage-backed securities tend to outperform U.S.
Treasuries in uncertain market environments.
[bullet] The portfolio is shifting from intermediate-maturity Treasuries toward
an increased allocation in cash, offset by a greater emphasis on
longer-maturity 20-year Treasuries, in an effort to reduce overall
interest rate sensitivity.
<PAGE>
Letter from the Chairman
[PICTURE OF A. KEITH BRODKIN]
Dear Shareholders:
After more than six years of expansion, the U.S. economy appears to be
experiencing another year of moderate growth in 1997, although a few signs point
to the possibility of a modest rise in inflation during the year. On the
positive side, the pattern of moderate growth and inflation set over the past
few years now seems fairly well entrenched in the economy and, short of a major
international or domestic crisis, appears to have enough momentum to remain on
track for some time. Also, gains in such important sectors as housing,
automobiles, industrial production, and exports indicate a fair amount of
underlying strength in the economy. However, some reason for caution can be seen
in the continuing high levels of consumer debt and rising personal bankruptcies,
as well as in the ongoing tightness in labor markets, which could add some
inflationary pressures to the economy. Given these somewhat conflicting
indicators, we expect real (inflation-adjusted) growth to revolve around 2% in
1997, which would represent a modest decline from 1996.
In the bond markets, conflicting signals over the strength of the economy have
created near-term volatility, while comments by Federal Reserve Board Chairman
Alan Greenspan late in 1996 and earlier this year created some uncertainty about
the Federal Reserve's next move. However, we expect the Fed to maintain its
anti-inflationary stance should signs of more rapid economic growth and,
particularly, of higher inflation resurface. While inflationary forces largely
remained in check in 1996, the continued strength in the labor market means that
a pickup in inflation is still possible. At the same time, the U.S. budget
deficit continues to decline and, as a percentage of gross domestic product, is
now less than 2%, which we consider a positive development for the bond markets.
Although interest rates may move higher over the coming months, we believe that,
at current levels, fixed-income markets remain equitably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
[Signature A. Keith Brodkin]
A. Keith Brodkin
Chairman and President
March 12, 1997
1
<PAGE>
A Discussion with the Portfolio Manager
[PICTURE OF STEVEN E. NORTHERN]
For the 12 months ended February 28, 1997, Class A shares of the Fund provided a
total return of 3.67%, Class B shares 2.92%, Class C shares, which became
available on April 1, 1996, 3.00%, and Class I shares 3.75%. 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
(Lehman Index), an unmanaged index of Treasury, government agency and
mortgage-backed securities, returned 5.27%, while the average general U.S.
government fund returned 4.01% according to Lipper Analytical Services, an
independent firm that reports mutual fund performance.
Q. What do you see as some of the reasons for this performance?
A. Our underperformance over the past 12 months was experienced almost entirely
in the early part of 1996, and it was the result of our misjudging an important
turn in the momentum of economic activity. Whereas growth had been an anemic
1.3% during 1995 and the Federal Reserve Board, in response, had begun easing
interest rates, early indications in the first months of 1996 were that these
trends would continue. However, it turned out that this seemingly weaker growth
was, in large part, the result of severe weather conditions and the government
shutdown during the winter months. This apparent weakness served to mask the
fact that economic conditions were on the threshold of a significant rebound to
above-trend growth. As this shift took place, the risks in the market shifted
accordingly to reflect concern that full employment could lead to inflationary
pressures. Though these pressures have been slow to develop, the market was
quick to factor in the added risk by sharply increasing interest rates. We were
positioned incorrectly for this shift and lagged the market as a consequence.
Q. In general, how would you describe the fixed-income environment over the past
year?
A. With a backdrop of an economy operating near its long-term growth potential
for much of the year, the fixed-income market vacillated somewhat between two
opposing themes. The first was concern that, five years into this business
expansion and with the economy operating near what is commonly viewed as full
employment, inflationary pressures could be building. The second was belief
that, by some measures, inflationary pressures were actually abating. Stronger
momentum in the economy during the first half of 1996 led the fixed-income
market to focus on inflationary
2
<PAGE>
A Discussion with the Portfolio Manager - continued
risks, pushing yields on two-year and 30-year Treasury securities from lows of
5.19% and 6.33%, respectively, in March, to highs of 6.44% and 7.20% by the
summer. Slackening of growth later in the third quarter, accompanied by
encouraging reports that inflationary pressures remained contained, led the
market to rally, bringing yields back to 5.60% on two-year Treasuries and to
6.40% on 30-year Treasuries. By December, however, sentiment once again focused
on the risks to the market, and yields rose 30 to 40 basis points (0.30% to
0.40%) across all maturities.
As the fixed-income environment shifted from pessimism to optimism and back,
the underlying performance of the economy remained healthy as inflation remained
low and the economy continued to expand.
Q. And what about the government/mortgage environment? Has it seen any major
developments?
A. The government/mortgage sector has been largely bypassed by many traditional
domestic investors for some time now. Current conditions of low and stable
inflation and seemingly sustainable economic growth have generated healthy
financial market outcomes, notably a strong stock market and narrowing risk
premiums in corporate bonds relative to Treasuries. Though growth prospects are
expected to falter at some point and investors will inevitably adopt a less
sanguine attitude toward risk, until that time, domestic asset flows into this
sector will likely remain limited.
In the meantime, foreign flows into Treasuries have accelerated to record
levels, and it is likely that this trend will continue. The magnitude of these
flows raises some concern that their interruption or reversal would expose an
important vulnerability to our market. These concerns are, I believe,
exaggerated, as past experience confirms that even in an environment of net
foreign outflows, yields need not rise. Ultimately, domestic interest rates are
determined by domestic economic and monetary fundamentals.
Q. The biggest weighting in the Fund is in the mortgage-backed pass-through
sector, at about 40% of net assets. Why have you put so much emphasis on this
sector?
A. The mortgage-backed pass-through sector posted strong relative performance in
the past 12 months, and we anticipate a continuation of this trend in the months
ahead. Mortgage securities tend to outperform Treasuries in uncertain market
environments for two important reasons. The first is that they are, on average,
shorter in maturity than outstanding Treasuries and thus decline less in price
as yields increase, as they did in 1996. Also, because they are higher-yielding
securities, the additional coupon income provides a total return cushion to help
offset price declines (although, the
3
<PAGE>
A Discussion with the Portfolio Manager - continued
principal value and interest on Treasury securities are guaranteed by the U.S.
government if held to maturity).
An index or average allocation to this sector would be about 36%. For 1997, we
anticipate an economy that would produce growth close to current trends with
only modest inflationary pressures -- in other words, an environment in which we
expect mortgages would continue to provide good value.
Q. Another 22% of the portfolio is invested in U.S. Treasuries. What range of
maturities are you selecting in this sector, and why?
A. We are currently shifting our Treasury emphasis away from
intermediate-maturity Treasuries toward an increased allocation to cash, offset
by a slightly greater emphasis on longer-maturity 20-year Treasuries. Though it
remains uncertain whether the Federal Reserve Board will elect to raise
short-term interest rates during the next several months, the risks are
increasing that the Fed will perceive the need for a modest tightening. Should
it choose to raise interest rates, short- and intermediate-maturity securities
would be the most adversely affected. By repositioning our Treasury exposure
between cash and longer maturities, we believe we can reduce overall interest
rate sensitivity in the portfolio, while reducing exposure to intermediate
maturities.
Q. The third sector, government agency securities, makes up another 22% of the
portfolio. What kinds of agencies are represented here?
A. This includes agencies backed by the full faith and credit of the U.S.
government, such as the Small Business Administration and the Government
Financing Corporation. We feel these securities are attractive long-term
holdings for the portfolio and add significant incremental yield relative to
Treasury securities.
Q. In general, how do you decide how to allocate assets among the
mortgage-backed, Treasury, and government-agency sectors?
A. The allocation decision is guided by our outlook for interest rates and the
forces that shape the fixed-income environment. Generally, we would favor a
larger allocation to Treasuries and noncallable agencies if we believed the
environment was favorable for fixed-income markets. Conversely, in a
narrow-range or declining market environment, we would favor higher-yield
securities with call features, such as callable agencies or mortgage-backed
securities.
4
<PAGE>
A Discussion with the Portfolio Manager - continued
Q. Do you see any reason why these allocations might see significant changes in
the next several months?
A. One likely change would be an increase in mortgage-backed securities
weightings should their spreads over Treasuries increase over the next few
months. Also, we are always on the lookout to increase our holdings of
attractively priced agencies, so we might add to this sector opportunistically
over the coming year.
Q. How does the Fund's duration, or interest rate sensitivity, compare to your
benchmark, the Lehman Index, and why are you at that level?
A. A neutral, or index, duration would be 4.6 years. That is close to the
average duration of the portfolio today. Given that we believe our market will
likely continue to fret over the risk of late business-cycle inflationary
pressures, we think a cautious duration stance is warranted. Longer term,
however, these pressures will likely remain contained. Inflation is generated by
excess demand when growth exceeds the nation's long-term capacity to grow. But
as long as monetary policy constrains growth in spending and limits excess
demand, we see no inconsistency between low unemployment and low inflation.
[Signature of Steven E. Nothern]
Steven E. Nothern
Portfolio Manager
Portfolio Manager's Profile
Steven E. Nothern joined MFS in 1986 in the Fixed Income Department. He was
named Vice President in 1989 and Senior Vice President in 1993, and has been
Portfolio Manager of MFS Government Securities Fund since January 1991. Mr.
Nothern is a graduate of Middlebury College and holds a Master's of Business
Administration degree from Boston University. He is a Chartered Financial
Analyst and a member of the Boston Security Analysts Society.
5
<PAGE>
Fund Facts
Strategy: The Fund's investment objective is to seek current
income and preservation of capital. Government
guarantees apply to individual securities only and
not to prices and yields of shares in a managed
portfolio.
Commencement of
investment operations: Class A: July 25, 1984
Class B: August 30, 1993
Class C: April 1, 1996
Class I: January 2, 1997
Size: $414.7 million net assets as of February 28, 1997
Performance Summary
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. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are unmanaged
and do not reflect any fees or expenses. The performance of other share classes
will be greater than or less than the line shown, based on the differences in
loads and fees paid by shareholders investing in the different classes. It is
not possible to invest in an index.
Growth of a Hypothetical $10,000 Investment
(For the 5-Year Period Ended February 28, 1997)
MFS Government
Securities Fund Consumer Price Lehman Brothers
-Class A Index-U.S. Government/Mortgage Index
3/92 9521 10000 10000
2/93 10710 10325 11183
2/94 11248 10584 11758
2/95 11384 10887 11975
2/96 12783 11167 13396
2/97 13182 11515 14102
6
<PAGE>
Performance Summary - continued
Growth of a Hypothetical $10,000 Investment
(For the 10-Year Period Ended February 28, 1997)
MFS Government
Securities Fund Consumer Price Lehman Brothers
-Class A Index-U.S. Government/Mortgage Index
3/87 9529 10000 9955
2/89 10100 10890 10924
2/91 12288 12072 13867
2/93 15381 12816 17426
2/95 16349 13514 18659
2/97 18931 14294 21973
Average Annual Total Returns
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Government Securities Fund (Class A)
including 4.75% sales charge -1.23% +3.91% +5.80% +6.72%
- ------------------------------------------------------------------------------------------------
MFS Government Securities Fund (Class A)
at net asset value +3.67% +5.62% +6.84% +7.24%
- ------------------------------------------------------------------------------------------------
MFS Government Securities Fund (Class B) with CDSC -0.97% +4.00% +5.99% +6.97%
- ------------------------------------------------------------------------------------------------
MFS Government Securities Fund (Class B)
at net asset value +2.92% +4.88% +6.30% +6.97%
- ------------------------------------------------------------------------------------------------
MFS Government Securities Fund (Class C) with CDSC +2.03% +5.39% +6.70% +7.17%
- ------------------------------------------------------------------------------------------------
MFS Government Securities Fund (Class C)
at net asset value +3.00% +5.39% +6.70% +7.17%
- ------------------------------------------------------------------------------------------------
MFS Government Securities Fund (Class I)
at net asset value +3.75% +5.65% +6.85% +7.25%
- ------------------------------------------------------------------------------------------------
Average general U.S. government fund++ +3.86% +4.82% +6.18% +6.75%
- ------------------------------------------------------------------------------------------------
Lehman Brothers Government/Mortgage Index** +5.27% +6.24% +7.12% +8.19%
- ------------------------------------------------------------------------------------------------
Consumer Price Index*+ +3.12% +2.85% +2.86% +3.64%
- ------------------------------------------------------------------------------------------------
</TABLE>
*The Consumer Price Index is published by the U.S. Bureau of Statistics and
measures the cost of living (inflation).
**Source: AIM.
+Source: CDA/Wiesenberger.
++Source: Lipper Analytical Services.
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class B 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 share purchases are
subject
7
<PAGE>
Performance Summary - continued
to a 1% CDSC if redeemed within 12 months of purchase. Class I shares, which
became available on January 2, 1997 have no sales load or 12b-1 fees and are
only available to certain institutional investors.
Class B and Class C share results include the performance and operating expenses
(e.g., Rule 12b-1) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B and Class C shares. Because operating
expenses attributable to Class B and Class C shares are higher than those of
Class A shares, Class B and Class C share performance would have been lower had
Class B and Class C shares been outstanding during the entire period. The Class
A share performance included in the Class B and Class C share performance with
CDSC, had been adjusted to reflect the CDSC generally applicable to Class B and
Class C shares rather than the sales charge generally applicable to Class A
shares.
Class I share results include the performance and operating expenses (e.g., Rule
12b-1) of Class A shares, for periods prior to the commencement of offering of
Class I shares. Because operating expenses attributable to Class A shares are
greater than those of Class I shares, Class I share performance would have been
higher had Class I shares been outstanding during the entire period. The Class A
share performance included in Class I share performance has been adjusted to
reflect the fact that Class I shares have no initial sales load.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
Portfolio Concentration as of February 28, 1997
Largest Sectors
[pie chart]
Cash 16%
Mortgage Backed 40%
Other Government Agencies 22%
U.S. Treasuries 22%
For a more complete breakdown, refer to Portfolio of Investments.
Tax Form Summary
In January 1997, shareholders were mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
8
<PAGE>
Portfolio of Investments - February 28, 1997
Bonds - 83.9%
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Federal Agencies - 22.5%
Federal National Mortgage Assn., 6.95s, 2006 $10,000 $ 9,870,300
Federal National Mortgage Assn., 7s, 2026 21,455 20,912,166
Federal National Mortgage Assn., 8.46s, 2002 5,699 5,941,638
Financing Corp., 9.8s, 2018 16,500 21,176,760
Financing Corp., 10.35s, 2018 5,000 6,725,800
Financing Corp., 10.7s, 2017 20,790 28,622,009
------------
Total U.S. Federal Agencies (Identified Cost, $94,701,420) $ 93,248,673
- -------------------------------------------------------------------------------------
U.S. Government Guaranteed - 61.4%
Government National Mortgage Association - 31.1%
GNMA, 7s, 2022-2025 $45,325 $ 44,149,076
GNMA, 7.5s, 2002-2027 32,066 32,225,360
GNMA, 8s, 2026-2027 19,713 20,100,620
GNMA, 8.5s, 2001-2026 27,682 28,758,463
GNMA, 10.75s, 2015-2016 350 395,873
GNMA, 11.5s, 2010-2019 1,258 1,453,931
GNMA, 12s, 2013-2019 747 874,778
GNMA, 12.5s, 2011 932 1,099,870
------------
$129,057,971
-------------------------------------------------------------------------------------
Small Business Administration - 8.3%
SBA, 8.625s, 2011 $ 3,824 $ 4,062,094
SBA, 8.8s, 2011 1,900 2,036,678
SBA, 9.05s, 2009 2,276 2,432,159
SBA, 9.1s, 2009 3,010 3,225,972
SBA, 9.25s, 2010 2,927 3,163,065
SBA, 9.3s, 2010 4,581 4,978,228
SBA, 9.45s, 2010 6,914 7,518,503
SBA, 9.5s, 2010 284 309,997
SBA, 9.65s, 2010 1,449 1,586,818
SBA, 9.7s, 2010 1,362 1,492,482
SBA, 9.9s, 2008 1,109 1,213,355
SBA, 10.05s, 2008-2009 1,349 1,486,883
SBA, 10.35s, 1997 941 956,244
------------
$ 34,462,478
- -------------------------------------------------------------------------------------
U.S. Treasury Obligations - 22.0%
U.S. Treasury Bonds, 10.75s, 2005 $17,400 $ 22,035,534
U.S. Treasury Bonds, 11.25s, 2015 24,350 35,288,477
U.S. Treasury Bonds, 12.375s, 2004 10,650 14,181,114
U.S. Treasury Notes, 7.75s, 2000 15,000 15,595,350
U.S. Treasury Notes, 9.125s, 1999 3,750 3,976,763
------------
$ 91,077,238
- -------------------------------------------------------------------------------------
Total U.S. Government Guaranteed (Identified Cost, $254,494,467) $254,597,687
- -------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $349,195,887) $347,846,360
- -------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Portfolio of Investments - continued
Short-Term Obligations - 9.4%
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------------
<S> <C> <C>
Federal Home Loan Bank, due 03/03/97 $24,245 $ 24,237,861
Federal National Mortgage Assn., due 03/07/97 15,000 14,987,075
------------
Total Short-Term Obligations, at Amortized Cost $ 39,224,936
- -------------------------------------------------------------------------------------
Total Investments (Identified Cost, $388,420,823) $387,071,296
Other Assets, Less Liabilities - 6.7% 27,591,002
- -------------------------------------------------------------------------------------
Net Assets - 100.0% $414,662,298
- -------------------------------------------------------------------------------------
</TABLE>
See notes to financial statements
10
<PAGE>
Financial Statements
Statement of Assets and Liabilities
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
February 28, 1997
- ------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $388,420,823) $387,071,296
Cash 12,703
Receivable for investments sold 58,918,714
Receivable for Fund shares sold 738,547
Interest receivable 4,360,819
Other assets 5,118
------------
Total assets $451,107,197
------------
Liabilities:
Payable for investments purchased $ 35,409,554
Payable for Fund shares reaquired 639,261
Payable to affiliates -
Management fee 2,847
Shareholder servicing agent fee 1,481
Distribution fee 188,954
Accrued expenses and other liabilities 202,802
------------
Total liabilities $ 36,444,899
------------
Net assets $414,662,298
------------
Net assets consist of:
Paid-in capital $453,489,324
Unrealized depreciation on investments (1,349,527)
Accumulated net realized loss on investments (37,505,539)
Accumulated undistributed net investment income 28,040
------------
Total $414,662,298
------------
Shares of beneficial interest outstanding 44,116,083
------------
Class A shares:
Net asset value per share (net assets of $293,286,201 [divided by] 31,194,051 shares of
beneficial interest outstanding) $9.40
-----
Offering price per share (100 [divided by] 95.25) $9.87
-----
Class B shares:
Net asset value and offering price per share (net assets of $114,860,559 [divided by]
12,230,642 shares of beneficial interest outstanding) $9.39
-----
Class C shares:
Net asset value and offering price per share (net assets of $6,045,806 [divided by]
641,442 shares of beneficial interest outstanding) $9.43
-----
Class I shares:
Net asset value per share (net assets of $469,732 [divide by] 49,948 shares of beneficial
interest outstanding) $9.40
-----
</TABLE>
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
11
<PAGE>
Financial Statements - continued
Statement of Operations
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended February 28, 1997
- --------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 32,056,488
------------
Expenses -
Management fee $ 1,721,896
Trustees' compensation 36,325
Shareholder servicing agent fee (Class A) 388,145
Shareholder servicing agent fee (Class B) 223,729
Shareholder servicing agent fee (Class C) 3,462
Shareholder servicing agent fee (Common) 88,093
Distribution and service fee (Class A) 1,073,126
Distribution and service fee (Class B) 1,206,275
Distribution and service fee (Class C) 32,245
Custodian fee 176,004
Postage 104,664
Printing 55,219
Auditing fees 34,105
Legal fees 5,376
Miscellaneous 275,229
------------
Total expenses $ 5,423,893
Fees paid indirectly (79,065)
Reduction of expenses by investment adviser (645,570)
------------
Net expenses $ 4,699,258
------------
Net investment income $ 27,357,230
------------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) on investment transactions $(16,888,266)
Change in unrealized appreciation on investments 4,038,792
------------
Net realized and unrealized loss on investments $(12,849,474)
------------
Increase in net assets from operations $ 14,507,756
------------
</TABLE>
See notes to financial statements
12
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
February 28, 1997 February 29, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 27,357,230 $ 29,371,282
Net realized gain (loss) on investments (16,888,266) 21,953,585
Net unrealized gain (loss) on investments 4,038,792 (1,577,449)
------------- -------------
Increase in net assets from operations $ 14,507,756 $ 49,747,418
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (19,813,814) $ (22,143,801)
From net investment income (Class B) (6,922,954) (7,225,640)
From net investment income (Class C) (177,171) --
From net investment income (Class I) (5,243) --
------------- -------------
Total distributions declared to
shareholders $ (26,919,182) $ (29,369,441)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 78,440,786 $ 127,188,219
Net asset value of shares issued to
shareholders in reinvestment of
distributions 16,963,649 18,255,772
Cost of shares reacquired (115,991,226) (141,455,811)
------------- -------------
Increase (decrease) in net assets from Fund
share transactions $ (20,586,791) $ 3,988,180
------------- -------------
Total increase (decrease) in net assets $ (32,998,217) $ 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
$28,040 and $25,391, respectively) $ 414,662,298 $ 447,660,515
------------- -------------
</TABLE>
See notes to financial statements.
13
<PAGE>
Financial Statements - continued
Financial Highlights
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
February 28, February 29, February 28,
1997 1996 1995
--------------- --------------- ---------------
Class A
-----------------------------------------------
<S> <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
------- ------- -------
Income from investment operations# -
Net investment income[sec] $ 0.62 $ 0.66 $ 0.67
Net realized and unrealized
gain (loss) on
investments (0.28) 0.45 (0.58)
------- ------- -------
Total from investment
operations $ 0.34 $ 1.11 $ 0.09
------- ------- -------
Less distributions declared to shareholders -
From net investment
income $ (0.61) $ (0.66) $ (0.66)
In excess of net realized
gain on investments -- -- --
------- ------- -------
Total distributions
declared to
shareholders $ (0.61) $ (0.66) $ (0.66)
------- ------- -------
Net asset value - end of
period $ 9.40 $ 9.67 $ 9.22
------- ------- -------
Total return[dbldag] 3.67% 12.29% 1.21%
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## 0.91% 0.84% 0.79%
Net investment income 6.56% 6.83% 7.24%
Portfolio turnover 339% 352% 385%
Net assets, end of period
(000 omitted) $293,286 $322,740 $318,116
+Annualized.
[dbldag]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.
[dbldag][dbldag]Amount includes distribution in excess of net investment income
of less than $0.001 per share for the period indicated. #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.
[sec]The investment adviser did not impose a portion of its management fee for
certain periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and ratios would have been:
Net investment income $ 0.61 $ 0.64 $ 0.65
Ratios (to average net assets):
Expenses## 1.06% 1.05% 1.05%
Net investment income 6.41% 6.62% 6.98%
<CAPTION>
Eleven
Months
Ended Year Ended March 31,
February 28, ---------------------
1994 1993 1992
------------------------------------------ ---------- ----------
Class A
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $10.00 $ 9.43 $ 9.29
--------- ------- -------
Income from investment operations# -
Net investment income[sec] $ 0.63 $ 0.67 $ 0.75
Net realized and unrealized
gain (loss) on
investments (0.20) 0.60 0.14
--------- ------- -------
Total from investment
operations $ 0.43 $ 1.27 $ 0.89
--------- ------- -------
Less distributions declared to shareholders -
From net investment
income $(0.58)[dbldag][dbldag] $ (0.70) $ (0.75)
In excess of net realized
gain on investments (0.06) -- --
--------- ------- -------
Total distributions
declared to
shareholders $(0.64) $ (0.70) $ (0.75)
--------- ------- -------
Net asset value - end of
period $ 9.79 $ 10.00 $ 9.43
--------- ------- -------
Total return[dbldag] 6.57%+ 13.94% 9.96%
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## 0.68%+ 1.20% 1.25%
Net investment income 6.83%+ 7.18% 7.95%
Portfolio turnover 167% 264% 270%
Net assets, end of period
(000 omitted) $372,702 $356,735 $356,366
+Annualized.
[dbldag]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.
[dbldag][dbldag]Amount includes distribution in excess of net investment income
of less than $0.001 per share for the period indicated. #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.
[sec]The investment adviser did not impose a portion of its management fee for
certain periods indicated. If this fee had been incurred by the Fund, the net
investment income per share and ratios would have been:
Net investment income $0.59 -- --
Ratios (to average net assets):
Expenses## 1.17%+ -- --
Net investment income 6.34%+ -- --
</TABLE>
See notes to financial statements
14
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended March 31, 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.10 $ 9.05 $ 9.56 $ 10.22 $ 10.53
------- ------- ------- ------- -------
Income from investment operations -
Net investment income $ 0.78 $ 0.82 $ 0.86 $ 0.87 $ 0.94
Net realized and unrealized
gain (loss) on investments 0.19 0.04 (0.51) (0.59) (0.20)
------- ------- ------- ------- -------
Total from investment
operations $ 0.97 $ 0.86 $ 0.35 $ 0.28 $ 0.74
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.78) $ (0.81) $ (0.86) $ (0.88) $ (0.94)
In excess of net realized gain
on investments -- -- -- (0.06) (0.11)
------- ------- ------- ------- -------
Total distributions
declared to shareholders $ (0.78) $ (0.81) $ (0.86) $ (0.94) $ (1.05)
------- ------- ------- ------- -------
Net asset value - end of period $ 9.29 $ 9.10 $ 9.05 $ 9.56 $ 10.22
------- ------- ------- ------- -------
Total return[dbldag] 11.13% 9.72% 3.84% 3.11% 7.48%
Ratios (to average net assets)/
Supplemental data:
Expenses 1.28% 1.29% 1.40% 1.18% 1.18%
Net investment income 8.56% 8.81% 9.25% 9.10% 9.14%
Portfolio turnover 95% 260% 346% 417% 191%
Net assets, end of period
(000 omitted) $323,612 $327,877 $348,617 $397,239 $487,975
[dbldag]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>
See notes to financial statements
15
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
-------------------------------
February 28, February 29,
1997 1996
--------------- ---------------
Class B
-------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 9.66 $ 9.22
------- -------
Income from investment operations# -
Net investment income[sec] $ 0.55 $ 0.59
Net realized and unrealized gain
(loss) on investments (0.28) 0.44
------- -------
Total from investment
operations $ 0.27 $ 1.03
------- -------
Less distributions declared to
shareholders from net investment
income $ (0.54) $ (0.59)
------- -------
Net asset value - end of period $ 9.39 $ 9.66
------- -------
Total return 2.92% 11.46%
Ratios (to average net assets)/Supplemental
data[sec]:
Expenses## 1.62% 1.56%
Net investment income 5.85% 6.09%
Portfolio turnover 339% 352%
Net assets, end of period
(000 omitted) $114,861 $124,921
*For the period from the commencement of offering of Class B shares, August 30,
1993 to February 28, 1994.
+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.
[dbldag][dbldag]Amount includes distribution in excess of net investment income
of less than $0.001 per share for the period indicated.
[sec]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:
Net investment income $ 0.54 $ 0.57
Ratios (to average net assets):
Expenses 1.77% 1.77%
Net investment income 5.70% 5.88%
<CAPTION>
Year Ended Period Ended
--------------- --------------------
February 28, February 28,
1995 1994*
--------------- ---------------------
Class B
-------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 9.78 $10.16
------- ------
Income from investment operations# -
Net investment income[sec] $ 0.59 $ 0.30
Net realized and unrealized gain
(loss) on investments (0.56) (0.43)
------- ------
Total from investment
operations $ 0.03 $(0.13)
------- ------
Less distributions declared to
shareholders from net investment
income $ (0.59) $(0.25)[dbldag][dbldag]
------- ------
Net asset value - end of period $ 9.22 $ 9.78
------- ------
Total return 0.57% (1.29)%
Ratios (to average net assets)/Supplemental
data[sec]:
Expenses## 1.51% 1.39%+
Net investment income 6.52% 5.92%+
Portfolio turnover 385% 167%
Net assets, end of period
(000 omitted) $105,178 $113,107
*For the period from the commencement of offering of Class B shares, August
30, 1993 to February 28, 1994.
+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.
[dbldag][dbldag]Amount includes distribution in excess of net investment income
of less than $0.001 per share for the period indicated.
[sec]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:
Net investment income $0.57 $0.28
Ratios (to average net assets):
Expenses 1.77% 1.87%+
Net investment income 6.26% 5.44%+
</TABLE>
See notes to financial statements
16
<PAGE>
Financial Statements - continued
Financial Highlights - continued
- --------------------------------------------------------------------
<TABLE>
<CAPTION>
Period Ended Period Ended
February 28, February 28,
1997* 1997**
--------------- ---------------
Class C Class I
--------------- ---------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.51 $ 9.41
-------- --------
Income from investment operations# -
Net investment income[sec] $ 0.47 $ 0.10
Net realized and unrealized loss on investments (0.09) (0.01)
-------- --------
Total from investment operations $ 0.38 $ 0.09
-------- --------
Less distributions declared to shareholders from net
investment income $ (0.46) $ (0.10)
-------- --------
Net asset value - end of period $ 9.43 $ 9.40
-------- --------
Total return 4.06%++ 1.03%++
Ratios (to average net assets)/Supplemental data[sec]:
Expenses## 1.55%+ 0.48%+
Net investment income 5.97%+ 7.22%+
Portfolio turnover 339% 339%
Net assets, end of period (000 omitted) $ 6,046 $ 470
*For the period from the commencement of offering of Class C shares, April 1,
1996 to February 28, 1997.
**For the period from the commencement of offering of Class I shares, January 2,
1997 to February 28, 1997 +Annualized.
++Not annualized.
#Per share data is based on average shares outstanding.
##The Fund's expenses are calculated without reduction for fees paid indirectly.
[sec]The investment adviser did not impose a portion of its management fee for
certain of t periods indicated. If this fee had been incurred by the Fund, the
net investment income per share and ratios would have been:
Net investment income $ 0.46 $ 0.09
Ratios (to average net assets):
Expenses 1.70%+ 0.63%+
Net investment income 5.82%+ 7.07%+
</TABLE>
See notes to financial statements
17
<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
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.
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 Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
18
<PAGE>
Notes to Financial Statements - continued
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. During the year ended February 28, 1997, $435,399 was reclassified from
accumulated undistributed net investment income to accumulated net realized loss
on investments 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 28, 1997, accumulated undistributed net
investment income and accumulated net realized loss on investments under book
accounting were different from tax accounting due to significant temporary
differences in accounting for capital losses.
As of February 28, 1997, the Fund, for federal income tax purposes, had a
capital loss carryforward of $37,119,277 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), February 28, 2003
($20,719,753), and February 28, 2005 ($16,126,762).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, Class C, and Class I shares. The four classes of shares differ in their
respective 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.
19
<PAGE>
Notes to Financial Statements - continued
(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 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 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 of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $13,154 for the year ended
February 28, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$60,477 for the year ended February 28, 1997, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, and Class C
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD 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 $107,462 for the year ended February 28,
1997. Fees incurred under the distribution plan during the year ended February
28, 1997 were 0.35% of average daily net assets attributable to Class A shares
on an annualized basis.
The Fund's 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 and Class
20
<PAGE>
Notes to Financial Statements - continued
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 $38,742 and $92 for Class B and Class C
shares, respectively, for the year ended February 28, 1997. Fees incurred under
the distribution plans during the year ended February 28, 1997 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 twelve months of
purchases made on or after April 1, 1996. MFD receives all contingent deferred
sales charges. Contingent deferred sales charges imposed during the year ended
February 28, 1997 were $3,861, $279,385 and $789 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 Fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was 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 $1,371,991,466 and $1,436,922,251,
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:
<TABLE>
<S> <C>
Aggregate cost $388,427,073
------------
Gross unrealized depreciation $ (4,461,164)
Gross unrealized appreciation 3,105,387
------------
Net unrealized depreciation $ (1,355,777)
------------
</TABLE>
21
<PAGE>
Notes to Financial Statements - continued
(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:
Class A Shares
<TABLE>
<CAPTION>
February 28, 1997 February 29, 1996
----------------------------- --------------------------------
Shares Amount Shares Amount
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares sold 4,140,119 $ 38,922,278 5,924,628 $ 57,343,342
Shares issued to
shareholders in
reinvestment of
distributions 1,321,595 12,427,596 1,417,405 13,598,580
Shares transferred to
Class I (49,744) (468,094)
Shares reacquired (7,593,288) (71,389,880) (8,453,776) (81,475,284)
----------- ------------ ----------- ------------
Net decrease (2,181,318) $(20,508,100) (1,111,743) $(10,533,362)
----------- ------------ ----------- ------------
</TABLE>
Class B Shares
<TABLE>
<CAPTION>
February 28, 1997 February 29, 1996
----------------------------- --------------------------------
Shares Amount Shares Amount
------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Shares sold 3,497,240 $ 32,902,922 7,243,533 $ 69,844,877
Shares issued to
shareholders in
reinvestment of
distributions 466,248 4,381,846 485,387 4,657,192
Shares reacquired (4,666,881) (43,848,545) (6,202,442) (59,980,527)
----------- ------------ ----------- ------------
Net decrease (703,393) $ (6,563,777) 1,526,478 $ 14,521,542
----------- ------------ ----------- ------------
</TABLE>
Class C Shares
<TABLE>
<CAPTION>
Period Ended
February 28, 1997*
-----------------------
Shares Amount
---------- ------------
<S> <C> <C>
Shares sold 655,092 $6,142,479
Shares issued to
shareholders in
reinvestment of
distributions 15,823 148,965
Shares reacquired (29,473) (276,397)
-------- ----------
Net increase 641,442 $6,015,047
-------- ----------
</TABLE>
*For the period from the commencement of offering of Class C shares, April 1,
1996 to February 28, 1997.
22
<PAGE>
Notes to Financial Statements - continued
Class I Shares
<TABLE>
<CAPTION>
Period Ended
February 28, 1997**
-----------------------
Shares Amount
---------- ------------
<S> <C> <C>
Shares sold 529 $ 5,013
Shares issued to
shareholders in
reinvestment of
distributions 558 5,242
Shares transferred
from Class A 49,744 468,094
Shares reacquired (883) (8,310)
------ -------
Net increase
(decrease) 49,948 $470,039
------ -------
**For the period from the commencement of offering of Class I February 28, 1997.
</TABLE>
(7) 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 $400 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
28, 1997 was $4,341.
23
<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
28, 1997, the related statement of operations for the year then ended, the
statement of changes in net assets for the years ended February 28, 1997 and
February 29, 1996, and the financial highlights for each of the years in the
three-year period ended February 28, 1997, the eleven months ended February 28,
1994 and for each of the years in the seven-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 28, 1997 by correspondence with the custodian and brokers. 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 28, 1997, 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
April 3, 1997
---------------------------------------------------------------------
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.
24
<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
Portfolio Manager
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
*Affiliated with the Investment Adviser
Auditors
Deloitte & Touche LLP
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 general information, 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.
World Wide Web
www.mfs.com
[DALBAR LOGO]
For the third year in a row, MFS earned a #1 ranking in the DALBAR, Inc.
Broker/Dealer Survey, Main Office Operations Service Quality Category. The firm
achieved a 3.48 overall score on a scale of 1 to 4 in the 1996 survey. A total
of 110 firms responded, offering input on the quality of service they received
from 29 mutual fund companies nationwide. The survey contained questions about
service quality in 15 categories, including "knowledge of phone service
contacts," "accuracy of transaction processing," and "overall ease of doing
business with the firm."
25
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