<PAGE>
[Logo] MFS(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
[graphic omitted]
MFS(R) GOVERNMENT
SECURITIES FUND
SEMIANNUAL REPORT o AUGUST 31, 1998
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DIVERSIFYING YOUR INVESTMENT PORTFOLIO (see page 27)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 13
Notes to Financial Statements ............................................. 21
Trustees and Officers ..................................................... 29
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HIGHLIGHTS
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o FOR THE SIX MONTHS ENDED AUGUST 31, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 4.80%, CLASS B SHARES 4.46%,
CLASS C SHARES 4.47%, AND CLASS I SHARES 5.09%. (PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS. SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o IN SPITE OF TURMOIL IN GLOBAL EQUITY AND FIXED-INCOME MARKETS, THE FUND HAS
BENEFITED FROM ITS OVERWEIGHTING IN U.S. TREASURY SECURITIES, WHICH HAVE
PROVEN TO BE THE INVESTMENT OF CHOICE FOR INVESTORS AS THEY HAVE SHIFTED
THEIR ALLOCATIONS AWAY FROM RISKIER ASSET CLASSES.
o THE FUND HAS DECREASED ITS EXPOSURE TO MORTGAGE-BACKED SECURITIES BECAUSE
DECLINING INTEREST RATES HAVE LED TO QUICK INCREASES IN MORTGAGE PREPAYMENT
RATES.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
In the coming year, MFS will celebrate its 75\t/\h/ anniversary. In 1924, our
Massachusetts Investors Trust, the nation's first mutual fund, opened to the
public and helped launch a revolution in investing that continues today. In the
75 years since, MFS has grown with its investors not only through bear markets,
economic and political turmoil, wars, and oil shortages, but also through long
periods of growth and prosperity. We are very proud of our record of investment
management and service to shareholders throughout our history.
One of the best ways for us to serve our shareholders is to help them understand
some of the reasons behind developments in the investment markets and, when
necessary, to take a more cautious outlook. This is particularly important
during periods of market volatility such as we are experiencing this year, when
equity prices do not follow a straight course. In light of this summer's
volatility, it is clear that equity valuations have risen to a point at which
stock prices have become vulnerable to changes in the investment environment
such as a slowing economy, earnings disappointments, and global economic and
political turmoil. While we continue to hold a favorable long-term outlook for
the equity markets, we also believe that this market correction is overdue and
could continue for several months. However, in our view, this is a healthy
near-term event that should rid the financial system of excesses that have
developed.
Currently, equity investors seem to be focused on the slowdown in corporate
earnings and, more recently, on the continuing uncertainty overseas,
particularly in Russia and some of the emerging markets. In the second quarter,
for example, average earnings growth for companies in the Standard & Poor's 500
Composite Index (the S&P 500), a popular, unmanaged index of common stock total
return performance, was about 3%, well below what people were expecting a year
ago. As a result of this and continuing concerns about Asia and emerging
markets, the stock markets pulled back from the record-high levels set in
mid-July. This retreat has helped correct some -- but not all -- of the
overvaluations that have been building in the markets for some time. Prior to
July, equity prices had been rising without a corresponding increase in
corporate earnings. As a result, price-to-earnings (P/E) ratios, or the amount
investors paid for stocks in relation to companies' earnings per share, also
went up. A year ago this July, the average P/E ratio for stocks in the S&P 500
stood at approximately 23; this July, it was at about 28, and it declined to
approximately 25 by early September. If this summer's downturn helps create more
reasonable valuations, we believe it could provide a sounder long-term
foundation for the equity markets. On another positive note, interest rates have
been relatively stable for several months as inflation has remained low. In an
environment of low interest rates, stocks become more attractive than most
fixed-income investments, while low inflation helps control companies' costs.
Internationally, the economic turmoil in Asia continues to be a concern to us,
while Russia is facing political gridlock and economic uncertainty and Latin
American economies are feeling substantial pressure. We believe the United
States has yet to see the full impact of this crisis. There have been brief
periods of improvement in a few countries but, for the most part, most of these
economies are still very weak and the situation could turn worse before getting
better. At the same time, the Asian turmoil has had the beneficial effect of
moderating U.S. growth and keeping inflation in check, which has helped
establish a favorable interest-rate environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility this
summer. But as these countries move toward economic union, they are benefiting
from a convergence of interest rates to lower levels, a rapid expansion of
manufacturing and service businesses, and an increasingly strong consumer
sector. This has helped American exporters offset some of their Asian losses
while providing investment opportunities in developed and emerging European
markets.
Given the uncertainty arising from these conflicting developments, we believe
that it is prudent to remind investors of the need to take a long-term view and
to diversify their investments across a range of asset classes. This includes
portfolios that focus on bond and international investments as well as on the
U.S. stock market. At MFS, we also believe our decades-long commitment to
original, company-by-company research gives us an advantage by helping us find
companies that we think can keep growing or gain market share during periods of
turmoil. To help fulfill this commitment and to provide the broadest possible
coverage of industry sectors and individual companies, MFS continues to increase
its number of full-time research analysts, who thoroughly investigate each
company's earnings potential and position in its industry as well as the overall
prospects for that industry.
We also use active portfolio management on the fixed-income side, using our
extensive research and credit analysis to help reduce the potential for price
declines and enhance the opportunity for appreciation. Every year, both
fixed-income and equity managers meet with thousands of credit issuers and
companies. They also attend many presentations, closely follow sources of
industry research, and keep track of competitors.
As we have for 75 years, we will continue to apply this discipline of thorough,
bottom-up research to both the equity and fixed-income markets because we
believe it offers the best potential for providing favorable long-term
performance for our shareholders -- regardless of changes in the overall market
environment.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
September 14, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of Steven E. Nothern]
Steven E. Nothern
For the six months ended August 31, 1998, Class A shares of the Fund provided a
total return of 4.80%, Class B shares 4.46%, Class C shares 4.47%, and Class I
shares 5.09%. These returns, which include the reinvestment of distributions but
exclude the effects of any sales charges, compare to a 4.92% return for the
Lehman Brothers Government/Mortgage Index (the Lehman Index), an unmanaged index
of U.S. Treasury, government-agency, and mortgage-backed securities. During the
same period, the average government securities fund as monitored by Lipper
Analytical Services, Inc., an independent firm that reports mutual fund
performance, returned 4.60%.
Q. LET'S START BY TALKING ABOUT THE INVESTMENT ENVIRONMENT. WHAT DO YOU THINK
IS BEHIND THE RECENT TURMOIL IN GLOBAL FIXED-INCOME AND EQUITY MARKETS?
A. First, it is important to realize that the economic downturn overseas has
not been triggered by tightened monetary conditions aimed at reducing excess
demand. In fact, the opposite is occurring. Lenders have made too much money
available, which has led to an excess of investment in the capacity to
produce tradable goods. Tightening of monetary conditions intended to offset
falling currency prices has served to undermine economic activity, further
exacerbating the imbalance between supply and demand. This has exposed
structural economic weaknesses and threatened a growing number of economic
systems. Because global growth expectations are being pared back fairly
dramatically, expectations for corporate profits are also being reduced,
impacting equity markets around the globe.
Q. HOW HAS THIS AFFECTED THE FUND'S PERFORMANCE?
A. Performance has, on balance, been favorably impacted. U.S. Treasuries have
proven to be the investment of choice for investors who have shifted their
allocations away from potentially riskier asset classes, such as stocks, as
prices of Treasuries have appreciated. Government-agency securities,
however, have also felt the negative effects of the flight to quality and
have not kept up with Treasuries. This caused a slight drag on the Fund's
performance during the sharp rally in Treasuries in August.
Q. WHAT'S BEHIND THE FLIGHT OF CAPITAL TO U.S. TREASURIES?
A. The major event this summer was the effective default of Russia on its
domestic debt. Russia had been deemed "too big to fail," and it was expected
that an eventual bailout would protect investors against a potential
default. Beyond Russia, many had expected the Southeast Asian economic
decline to begin to stabilize by this summer. Not only were they
disappointed in this, but the decline seemed to deepen and broaden. More
recently, economic slowing has spread to include commodity-based economies
in Latin America -- much closer to our shores. As a consequence amid this
spreading uncertainty, investors around the world have moved to the
highest-quality securities available, that is, U.S. Treasury securities.
Q. DOES THIS MEAN OTHER GOVERNMENT-AGENCY AND MORTGAGE-BACKED SECURITIES ARE
LESS SAFE, RELATIVELY SPEAKING?
A. No. They continue to enjoy if not explicit, at least implicit backing from
the U.S. Treasury. Agency securities continue to represent very good value
over the longer term. In turbulent markets, they will often be overlooked as
the focus shifts to the Treasury market. In such a market environment,
investors are able to purchase government-agency securities at very
attractive yield spreads to Treasuries. So it becomes a good opportunity to
acquire higher-yielding, quality securities.
Q. HOW HAVE YOU CHANGED THE FUND'S ALLOCATIONS AMONG DIFFERENT TYPES OF
GOVERNMENT SECURITIES, GIVEN THIS INTEREST-RATE ENVIRONMENT?
A. We have somewhat decreased our exposure to mortgage-backed securities
because declining interest-rates have led to quick increases in mortgage
prepayment rates. But this environment has also shown the value of investing
in Ginnie Mae (Government National Mortgage Association) securities versus
other types of mortgage securities. Ginnie Maes have smaller loan balances
and are less sensitive to prepayments than securities such as Fannie Maes
(Federal National Mortgage Association) and Freddie Macs (Federal Home Loan
Mortgage Corporation). We've also found value in 15-year securities. Even if
interest rates come down a little, people with 15-year loans probably won't
refinance into new 15-year loans, because when they add up the extra
interest costs of extending their mortgages they will probably prefer to get
their current mortgages paid off. So we're selectively buying these
mortgages.
Q. WHAT ABOUT THE FUND'S DURATION, OR SENSITIVITY TO CHANGES IN INTEREST
RATES? HAVE YOU CHANGED THIS SIGNIFICANTLY?
A. We have increased the duration somewhat relative to the Lehman Index
because, as interest rates continue to decline, we believe a longer duration
should help the Fund's total return benefit from rising bond prices.
Currently, the duration is approximately five years; a duration that more
closely mirrors the benchmark would be about four-and-a-quarter years.
Q. WHAT DO YOU SEE AS THE GREATEST RISK TO THE FUND IN THE NEXT
SEVERAL MONTHS?
A. The biggest risk would be a sudden reversal of the favorable inflation
trends that we've seen in the past several quarters, coupled with an
unexpected acceleration in the world economy. These events would lead to a
substantial correction in the fixed-income market, with interest rates
rising and bond prices falling. Right now, however, we think this risk is
fairly remote. If anything, the focus is beginning to shift toward the
possibility of deflationary risks to the global economy.
Q. LOOKING AHEAD, WHAT DIRECTION DO YOU SEE FOR THE GENERAL ECONOMIC
ENVIRONMENT, AND HOW ARE YOU POSITIONING THE FUND FOR IT?
A. Developments overseas have contributed to reduction of inflationary
pressures and to a slowdown in the domestic economy. Whereas the Federal
Reserve Board (the Fed) had worried that low unemployment would contribute
to increased inflationary pressures, more recently the Fed appears to have
shifted its focus to the risks that global deflationary forces could spill
over to our shores. Thus, the Fed's next move is more likely to be an easing
of monetary conditions. We believe this would help maintain a constructive
environment for the government bond market, especially if inflation remains
dormant.
For the Fund, this means we would continue to invest in longer-maturity
Treasuries as these securities would appreciate when interest rates decline.
We will continue to reduce our mortgage-backed holdings because homeowners'
refinancing options limit this sector's potential for price appreciation in
a bond market rally.
/s/ Steven E. Nothern
Steven E. Nothern
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
only through the end of the period of the report as stated on the cover. The
manager's views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
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PORTFOLIO MANAGER'S PROFILE
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STEVEN E. NOTHERN IS A SENIOR VICE PRESIDENT AND A MEMBER OF THE FIXED INCOME
POLICY COMMITTEE OF MFS INVESTMENT MANAGEMENT(R). HE IS PORTFOLIO MANAGER OF
MFS(R) GOVERNMENT SECURITIES FUND, MFS(R) INTERMEDIATE INCOME FUND, AND THE
GOVERNMENT SECURITIES SERIES OFFERED THROUGH MFS(R)/SUN LIFE ANNUITY
PRODUCTS. HE ALSO MANAGES MFS(R) GOVERNMENT MARKETS INCOME TRUST, A
CLOSED-END FUND.
MR. NOTHERN JOINED MFS IN 1986 IN THE FIXED INCOME DEPARTMENT AND WAS
NAMED VICE PRESIDENT IN 1989 AND SENIOR VICE PRESIDENT IN 1993.
HE IS A GRADUATE OF MIDDLEBURY COLLEGE AND HOLDS A MASTER OF BUSINESS
ADMINISTRATION DEGREE FROM BOSTON UNIVERSITY. HE IS A CHARTERED
FINANCIAL ANALYST AND A MEMBER OF
THE BOSTON SECURITY ANALYSTS SOCIETY, INC.
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS CURRENT INCOME AND CAPITAL PRESERVATION.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JULY 25, 1984
CLASS INCEPTION: CLASS A JULY 25, 1984
CLASS B AUGUST 30, 1993
CLASS C APRIL 1, 1996
CLASS I JANUARY 2, 1997
SIZE: $494.1 MILLION NET ASSETS AS OF AUGUST 31, 1998
PERFORMANCE SUMMARY
Because mutual funds are designed for investors with long-term goals, we have
provided cumulative results as well as the average annual total returns for the
applicable time periods. Investment results reflect the percentage change in net
asset value, including reinvestment of dividends.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
THROUGH AUGUST 31, 1998
<TABLE>
<CAPTION>
CLASS A
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.80% +10.58% +23.92% +34.39% +123.40%
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Average Annual Total Return -- +10.58% + 7.41% + 6.09% + 8.37%
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SEC Results -- + 5.33% + 5.68% + 5.06% + 7.84%
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<CAPTION>
CLASS B
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.46% + 9.84% +21.37% +29.71% +115.69%
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Average Annual Total Return -- + 9.84% + 6.67% + 5.34% + 7.99%
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SEC Results -- + 5.84% + 5.78% + 5.03% + 7.99%
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<CAPTION>
CLASS C
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +4.47% + 9.95% +21.99% +32.31% +119.92%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return -- + 9.95% + 6.85% + 5.76% + 8.20%
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SEC Results -- + 8.95% + 6.85% + 5.76% + 8.20%
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<CAPTION>
CLASS I
6 Months 1 Year 3 Years 5 Years 10 Years/Life
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<S> <C> <C> <C> <C> <C>
Cumulative Total Return +5.09% +11.10% +24.79% +35.34% +125.06%
- -------------------------------------------------------------------------------------------------
Average Annual Total Return -- +11.10% + 7.66% + 6.24% + 8.45%
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</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class B
share ("B") SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C shares ("C") have
no initial sales charge but, like B, have higher annual fees and expenses than
A. C SEC results reflect the 1% CDSC applicable to shares redeemed within 12
months. Class I shares ("I") have no sales charge or Rule 12b-1 fees and are
only available to certain institutional investors.
B and C results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of B and C. Because
operating expenses of B and C are higher than those of A, B and C performance
generally would have been lower than A performance. The A performance included
in the B and C SEC performance has been adjusted to reflect the CDSC generally
applicable to B and C rather than the initial sales charge generally applicable
to A.
I results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of I. Because operating expenses
of A are greater than those of I, I performance generally would have been higher
than A performance. The A performance included in the I performance has been
adjusted to reflect the fact that I have no initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and waivers
may be rescinded at any time. See the prospectus for details. All results are
historical and assume the reinvestment of dividends and capital gains.
Government guarantees apply to individual securities only and not to prices and
yields of shares in a managed portfolio.
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.
PORTFOLIO CONCENTRATION AS OF AUGUST 31, 1998
PORTFOLIO STRUCTURE
Mortgaged-Backed Securities 35.0%
U.S. Treasuries 32.4%
Other Government Agencies 32.6%
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- August 31, 1998
Bonds - 91.8%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Federal Agencies - 32.6%
Federal Home Loan Mortgage Corp., 5.75s, 2003 $ 10,000 $ 10,159,400
Federal Home Loan Mortgage Corp., 6.79s, 2005 5,000 5,182,812
Federal National Mortgage Assn., 5.75s,
2003 - 2005 17,500 17,776,475
Federal National Mortgage Assn., 6.5s, 2013 7,387 7,477,424
Federal National Mortgage Assn., 6.55s, 2007 1,979 1,988,689
Federal National Mortgage Assn., 6.6s, 2007 1,986 2,047,809
Federal National Mortgage Assn., 6.695s, 2007 2,105 2,102,546
Federal National Mortgage Assn., 6.95s, 2006 10,000 10,398,400
Federal National Mortgage Assn., 7.5s,
2010 - 2013 28,593 29,397,479
Financing Corp., 10.7s, 2017 20,790 32,325,124
Financing Corp., 9.8s, 2018 16,500 24,267,870
Financing Corp., 10.35s, 2018 5,000 7,681,250
United States Department of Veteran Affairs,
6.3s, 2010 10,000 10,021,800
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$160,827,078
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U.S. Government Guaranteed - 59.2%
Government National Mortgage Association - 22.3%
GNMA, 6.5s, 2027 - 2028 $ 11,716 $ 11,792,498
GNMA, 7s, 2008 - 2025 34,907 35,694,246
GNMA, 7.5s, 2002 - 2027 16,025 16,523,916
GNMA, 8s, 2026 - 2027 33,432 34,664,916
GNMA, 8.5s, 2001 - 2009 5,784 6,059,817
GNMA, 9.25s, 2001 3,121 3,307,204
GNMA, 10.75s, 2015 - 2016 143 157,146
GNMA, 11.5s, 2010 - 2019 779 888,416
GNMA, 12s, 2013 - 2019 543 628,139
GNMA, 12.5s, 2011 598 698,550
------------
$110,414,848
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Small Business Administration - 4.4%
SBA, 8.625s, 2011 $ 3,382 $ 3,707,634
SBA, 8.8s, 2011 1,645 1,821,062
SBA, 9.05s, 2009 1,867 2,040,025
SBA, 9.1s, 2009 2,277 2,497,982
SBA, 9.25s, 2010 2,140 2,368,552
SBA, 9.3s, 2010 3,611 4,035,253
SBA, 9.5s, 2010 226 252,155
SBA, 9.65s, 2010 1,224 1,372,105
SBA, 9.7s, 2010 1,111 1,243,874
SBA, 9.9s, 2008 947 1,047,137
SBA, 10.05s, 2008 - 2009 1,255 1,397,520
------------
$ 21,783,299
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U.S. Treasury Obligations - 32.5%
U.S. Treasury Notes, 8.5s, 2000 $ 15,000 $ 15,714,900
U.S. Treasury Notes, 8s, 2001 14,750 15,851,680
U.S. Treasury Notes, 5.25s, 2003 20,000 20,321,800
U.S. Treasury Bonds, 11.875s, 2003 2,000 2,617,500
U.S. Treasury Bonds, 12.375s, 2004 10,650 14,450,666
U.S. Treasury Bonds, 10.375s, 2012 4,200 5,744,172
U.S. Treasury Bonds, 9.875s, 2015 7,050 10,557,375
U.S. Treasury Bonds, 8.875s, 2017 6,000 8,417,820
U.S. Treasury Bonds, 6.125s, 2027 10,500 11,663,190
U.S. Treasury Bonds, 6.625s, 2027 14,000 16,428,160
U.S. Treasury Bonds, 3.625s, 2028 20,111 19,683,445
U.S. Treasury Bonds, 5.5s, 2028 18,450 19,026,562
------------
$160,477,270
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Total U.S. Government Guaranteed $292,675,417
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Total Bonds (Identified Cost, $440,696,971) $453,502,495
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Repurchase Agreement - 4.2%
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Goldman Sachs, dated 8/31/98, due 9/01/98,
total to be received $20,922,353
(secured by various U.S. Treasury and
Federal Agency obligations in a
jointly traded account), at Cost $ 20,919 $ 20,919,000
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Total Investments (Identified Cost, $461,615,971) $474,421,495
Other Assets, Less Liabilities - 4.0% 19,643,229
- --------------------------------------------------------------------------------
Net Assets - 100.0% $494,064,724
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See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
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AUGUST 31, 1998
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Assets:
Investments, at value (identified cost, $461,615,971) $474,421,495
Cash 10,045
Receivable for Fund shares sold 14,782,981
Interest receivable 5,688,062
Other assets 2,766
------------
Total assets $494,905,349
------------
Liabilities:
Payable for Fund shares reacquired $ 418,588
Payable to affiliates -
Management fee 11,626
Shareholder servicing agent fee 4,360
Distribution and service fee 231,798
Administrative fee 581
Accrued expenses and other liabilities 173,672
------------
Total liabilities $ 840,625
------------
Net assets $494,064,724
------------
Net assets consist of:
Paid-in capital $512,894,238
Unrealized appreciation on investments 12,805,524
Accumulated net realized loss on investments (32,155,826)
Accumulated undistributed net investment income 520,788
------------
Total $494,064,724
============
Shares of beneficial interest outstanding 50,150,807
==========
Class A shares:
Net asset value per share
(net assets of $312,249,368 / 31,691,331 shares of
beneficial interest outstanding) $ 9.85
======
Offering price per share (100 / 95.25) $10.34
======
Class B shares:
Net asset value and offering price per share
(net assets of $147,727,910 / 15,007,657 shares of
beneficial interest outstanding) $ 9.84
======
Class C shares:
Net asset value and offering price per share
(net assets of $26,151,674 / 2,646,658 shares of
beneficial interest outstanding) $ 9.88
======
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $7,935,772 / 805,161 shares of
beneficial interest outstanding) $ 9.86
======
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
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
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SIX MONTHS ENDED AUGUST 31, 1998
- -------------------------------------------------------------------------------
Net investment income:
Interest income $ 15,171,682
------------
Expenses -
Management fee $ 865,684
Trustees' compensation 21,482
Shareholder servicing agent fee 244,231
Distribution and service fee (Class A) 508,760
Distribution and service fee (Class B) 601,395
Distribution and service fee (Class C) 77,020
Administrative fee 32,564
Custodian fee 66,619
Printing 22,759
Postage 32,310
Auditing fees 19,925
Legal fees 13,604
Miscellaneous 139,704
------------
Total expenses $ 2,646,057
Fees paid indirectly (64,157)
Preliminary reduction of expenses by investment adviser (214,401)
------------
Net expenses $ 2,367,499
------------
Net investment income $12,804,183
------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) on investment
transactions $ 979,007
Change in unrealized appreciation on investments 6,476,611
------------
Net realized and unrealized gain on investments $ 7,455,618
------------
Increase in net assets from operations $ 20,259,801
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998
(UNAUDITED)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 12,804,183 $ 25,775,670
Net realized gain on investments 979,007 4,173,134
Net unrealized gain on investments 6,476,611 7,678,440
------------ ------------
Increase in net assets from operations $ 20,259,801 $ 37,627,244
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (8,710,762) $(18,372,972)
From net investment income (Class B) (3,219,675) (6,423,382)
From net investment income (Class C) (392,312) (424,810)
From net investment income (Class I) (246,697) (98,923)
------------ ------------
Total distributions declared to shareholders $(12,569,446) $(25,320,087)
------------ ------------
Net increase (decrease) in net assets from Fund
share transactions $ 67,574,572 $ (8,169,658)
------------ ------------
Total increase in net assets $ 75,264,927 $ 4,137,499
Net assets:
At beginning of period 418,799,797 414,662,298
------------ ------------
At end of period (including accumulated
undistributed net investment income of $520,788 and
$286,051, respectively) $494,064,724 $418,799,797
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
SIX MONTHS ENDED ---------------------------------------------------------- ELEVEN MONTHS
FEBRUARY 28, ENDED
AUGUST 31, ----------------------- FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1998 1997 1996 1995 1994
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning
of period $ 9.69 $ 9.40 $ 9.67 $ 9.22 $ 9.79 $10.00
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income(S) $ 0.30 $ 0.62 $ 0.62 $ 0.66 $ 0.67 $ 0.63
Net realized and unrealized
gain (loss) on investments 0.16 0.28 (0.28) 0.45 (0.58) (0.20)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.46 $ 0.90 $ 0.34 $ 1.11 $ 0.09 $ 0.43
------ ------ ------ ------ ------ ------
Less distributions declared
to shareholders --
From net investment income
$(0.30) $(0.61) $(0.61) $(0.66) $(0.66) $(0.58)(++)
In excess of net realized
gain on investments -- -- -- -- -- (0.06)
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.30) $(0.61) $(0.61) $(0.66) $(0.66) $(0.64)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 9.85 $ 9.69 $ 9.40 $ 9.67 $ 9.22 $ 9.79
====== ====== ====== ====== ====== ======
Total return(+) 4.80%++ 9.91% 3.67% 12.29% 1.21% 6.57%+
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.93%+ 0.94% 0.91% 0.84% 0.79% 0.68%+
Net investment income 6.11%+ 6.50% 6.56% 6.83% 7.24% 6.83%+
Portfolio turnover 85% 212% 339% 352% 385% 167%
Net assets at end of period
(000 omitted) $312,249 $282,809 $293,286 $322,740 $318,116 $372,702
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to February 28, 1994, are 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 investment income of less than $0.001 per share for the period indicated.
(S) The investment adviser voluntarily waived a portion of its management fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.30 $ 0.61 $ 0.61 $ 0.64 $ 0.65 $ 0.59
Ratios (to average net assets):
Expenses## 1.03%+ 1.04% 1.06% 1.05% 1.05% 1.17%+
Net investment income 6.01%+ 6.40% 6.41% 6.62% 6.98% 6.34%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED MARCH 31, 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
CLASS A
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <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 $ 9.56 $10.22
------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.67 $ 0.75 $ 0.78 $ 0.82 $ 0.86 $ 0.87
Net realized and unrealized
gain (loss) on investments 0.60 0.14 0.19 0.04 (0.51) (0.59)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 1.27 $ 0.89 $ 0.97 $ 0.86 $ 0.35 $ 0.28
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.70) $(0.75) $(0.78) $(0.81) $(0.86) $(0.88)
In excess of net realized gain
on investments -- -- -- -- -- (0.06)
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.70) $(0.75) $(0.78) $(0.81) $(0.86) $(0.94)
------ ------ ------ ------ ------ ------
Net asset value - end of period $10.00 $ 9.43 $ 9.29 $ 9.10 $ 9.05 $ 9.56
====== ====== ====== ====== ====== ======
Total return(+) 13.94% 9.96% 11.13% 9.72% 3.84% 3.11%
Ratios (to average net assets)/
Supplemental data:
Expenses 1.20% 1.25% 1.28% 1.29% 1.40% 1.18%
Net investment income 7.18% 7.95% 8.56% 8.81% 9.25% 9.10%
Portfolio turnover 264% 270% 95% 260% 346% 417%
Net assets at end of period (000
omitted) $356,735 $356,366 $323,612 $327,877 $348,617 $397,239
(+) 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
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
---------------------------------------------------------
SIX MONTHS ENDED FEBRUARY 28, PERIOD ENDED
AUGUST 31, ----------------------- FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
1998 1998 1997 1996 1995 1994**
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of
period $ 9.68 $ 9.39 $ 9.66 $ 9.22 $ 9.78 $10.16
------ ------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income(S) $ 0.26 $ 0.55 $ 0.55 $ 0.59 $ 0.59 $ 0.30
Net realized and unrealized
gain (loss) on investments 0.16 0.28 (0.28) 0.44 (0.56) (0.43)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.42 $ 0.83 $ 0.27 $ 1.03 $ 0.03 $(0.13)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders from net
investment income $(0.26) $(0.54) $(0.54) $(0.59) $(0.59) $(0.25)(++)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $ 9.84 $ 9.68 $ 9.39 $ 9.66 $ 9.22 $ 9.78
====== ====== ====== ====== ====== ======
Total return 4.46%++ 9.17% 2.92% 11.46% 0.57% (1.29)%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.58%+ 1.59% 1.62% 1.56% 1.51% 1.39%+
Net investment income 5.47%+ 5.84% 5.85% 6.09% 6.52% 5.92%+
Portfolio turnover 85% 212% 339% 352% 385% 167%
Net assets at end of period
(000 omitted) $147,728 $117,077 $114,861 $124,921 $105,178 $113,107
** For the period from the inception of Class B, August 30, 1993, through February 28, 1994.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to February 28, 1994, are 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 investment income of less than $0.001 per share for the period indicated.
(S) The investment adviser voluntarily waived a portion of its management fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.26 $ 0.54 $ 0.54 $ 0.57 $ 0.57 $ 0.28
Ratios (to average net assets):
Expenses## 1.68%+ 1.69% 1.77% 1.77% 1.77% 1.87%+
Net investment income 5.37%+ 5.74% 5.70% 5.88% 6.26% 5.44%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998 FEBRUARY 28, 1997***
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
CLASS C
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.72 $ 9.43 $ 9.51
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.27 $ 0.55 $ 0.47
Net realized and unrealized
gain (loss) on investments 0.16 0.29 (0.09)
------ ------ ------
Total from investment
operations $ 0.43 $ 0.84 $ 0.38
------ ------ ------
Less distributions declared to
shareholders from net
investment income $(0.27) $(0.55) $(0.46)
------ ------ ------
Net asset value - end of period $ 9.88 $ 9.72 $ 9.43
====== ====== ======
Total return 4.47%++ 9.15% 4.06%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.58%+ 1.59% 1.55%+
Net investment income 5.52%+ 5.85% 5.97%+
Portfolio turnover 85% 212% 339%
Net assets at end of period
(000 omitted) $26,152 $11,354 $6,046
*** For the period from the inception of Class C, April 1, 1996, through February 28, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The investment adviser voluntarily waived a portion of its management fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.26 $ 0.54 $ 0.46
Ratios (to average net assets):
Expenses## 1.68%+ 1.69% 1.70%+
Net investment income 5.42%+ 5.75% 5.82%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ---------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED PERIOD ENDED
AUGUST 31, 1998 FEBRUARY 28, 1998 FEBRUARY 28, 1997****
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
CLASS I
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.69 $ 9.40 $ 9.41
------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.32 $ 0.62 $ 0.10
Net realized and unrealized
gain (loss) on
investments 0.16 0.31 (0.01)
------ ------ ------
Total from investment
operations $ 0.48 $ 0.93 $ 0.09
------ ------ ------
Less distributions declared
to shareholders from net
investment income $(0.31) $(0.64) $(0.10)
------ ------ ------
Net asset value - end of period $ 9.86 $ 9.69 $ 9.40
====== ====== ======
Total return 5.09%++ 10.31% 1.03%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.58%+ 1.58% 0.48%+
Net investment income 6.48%+ 6.85% 7.22%+
Portfolio turnover 85% 212% 339%
Net assets at end of period
(000 omitted) $7,936 $7,560 $470
**** For the period from the inception of Class I, January 2, 1997, through February 28, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
(S) The investment adviser voluntarily waived a portion of its management fee for the periods indicated. If this fee had been
incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.32 $ 0.61 $ 0.09
Ratios (to average net assets):
Expenses## 0.68%+ 0.63% 0.63%+
Net investment income 6.38%+ 6.75% 7.07%+
</TABLE>
See notes to financial statements
<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.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Fund to obtain those securities
in the event of a default under the repurchase agreement. The Fund monitors, on
a daily basis, the value of the collateral to ensure that its value, including
accrued interest, is greater than amounts owed to the Fund under each such
repurchase agreement. The Fund, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
discount is amortized or accreted for financial statement and tax reporting
purposes as required by federal income tax regulations. Interest payments
received in additional securities are recorded on the ex-interest date in an
amount equal to the value of the security on such date. Some securities may be
purchased on a "when-issued" or "forward delivery" basis, which means that the
securities will be delivered to the Fund at a future date, usually beyond
customary settlement time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an arrangement
that measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required under
provisions of the Code, which may differ from generally accepted accounting
principles, the basis on which these financial statements are prepared.
Accordingly, the amount of net investment income and net realized gain reported
on these financial statements may differ from that reported on the Fund's tax
return and, consequently, the character of distributions to shareholders
reported in the financial highlights may differ from that reported to
shareholders on Form 1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a 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 net realized gains.
At February 28, 1998, the Fund, for federal income tax purposes, had a capital
loss carryforward of $33,115,849 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, 2003, ($16,989,088), and February 28, 2005,
($16,126,761).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on 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. Class B shares will convert to Class A
shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services, and general
office facilities. The management fee is computed daily and paid monthly at an
annual rate equal to the lesser of (i) 0.40% of average daily net assets or (ii)
0.25% of average daily net assets plus 3.40% of investment income. The
investment adviser has voluntarily agreed to waive 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 officers and Trustees of the
Fund are officers or directors of MFS, MFS 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 $7,436 for the six months
ended August 31, 1998.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee at
the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$52,563 for the six months ended August 31, 1998, 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 paid to each
securities dealer that enters into a sales agreement with MFD of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer and 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. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $33,636 for the six months ended August 31,
1998. Fees incurred under the distribution plan during the six months ended
August 31, 1998, 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 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 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 $11,738 and $5 for Class B shares and Class C, respectively, for the
six months ended August 31, 1998. Fees incurred under the distribution plan
during the six months ended August 31, 1998, were 1.00% of average daily net
assets attributable to both Class B and Class C shares on an annualized basis.
Certain Class A shares and Class C shares are subject to a contingent deferred
sales charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemptions of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the six months ended August 31,
1998, were $2,050, $186,502, and $9,690 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
0.1125%.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions,
and short-term obligations, aggregated $382,104,793 and $348,860,477,
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 $461,615,971
------------
Gross unrealized appreciation $ 13,229,135
Gross unrealized depreciation (423,611)
------------
Net unrealized appreciation $ 12,805,524
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
SIX MONTHS ENDED AUGUST 31, 1998 YEAR ENDED FEBRUARY 28, 1998
-------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,977,547 $ $67,869,356 5,464,276 $ 52,177,939
Shares issued to shareholders in
reinvestment of distributions 610,985 5,901,128 1,227,491 11,623,317
Shares reacquired (5,089,083) (49,379,300) (8,693,936) (82,954,183)
-------------- --------------- -------------- ----------------
Net increase (decrease) 2,499,449 $ 24,391,184 (2,002,169) $ (19,152,927)
============== =============== ============== ================
<CAPTION>
Class B Shares
SIX MONTHS ENDED AUGUST 31, 1998 YEAR ENDED FEBRUARY 28, 1998
-------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,334,299 $ 61,635,042 3,856,898 $ 36,904,049
Shares issued to shareholders in
reinvestment of distributions 223,757 2,160,254 429,480 4,065,291
Shares reacquired (3,645,038) (35,286,695) (4,422,381) (42,111,012)
-------------- --------------- -------------- ----------------
Net increase (decrease) 2,913,018 $ 28,508,601 (136,003) $ (1,141,672)
============== =============== ============== ================
<CAPTION>
Class C Shares
SIX MONTHS ENDED AUGUST 31, 1998 YEAR ENDED FEBRUARY 28, 1998
-------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,290,158 $ 22,323,599 746,832 $ 7,168,488
Shares issued to shareholders in
reinvestment of distributions 29,187 283,146 31,482 299,383
Shares reacquired (841,206) (8,174,370) (251,237) (2,396,844)
-------------- --------------- -------------- ----------------
Net increase 1,478,139 $ 14,432,375 527,077 $ 5,071,027
============== =============== ============== ================
<CAPTION>
Class I Shares
SIX MONTHS ENDED AUGUST 31, 1998 YEAR ENDED FEBRUARY 28, 1998
-------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,138 $ 20,838 733,115 $ 7,080,671
Shares issued to shareholders in
reinvestment of distributions 25,546 246,719 10,257 98,774
Shares reacquired (2,582) (25,145) (13,261) (125,531)
-------------- --------------- -------------- ----------------
Net increase 25,102 $ 242,412 730,111 $ 7,053,914
============== =============== ============== ================
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $805 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
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, 1998, was $1,562.
<PAGE>
Trustees Secretary
Richard B. Bailey* - Private Stephen E. Cavan*
Investor; Former Chairman and
Director (until 1991), MFS Assistant Secretary
Investment Management James R. Bordewick, Jr.*
Peter G. Harwood - Private Custodian
Investor State Street Bank and Trust
Company
J. Atwood Ives - Chairman and
Chief Executive Officer, Eastern Investor Information
Enterprises (diversified services For MFS stock and bond market
company) outlooks, call toll free:
1-800-637-4458 anytime from
Lawrence T. Perera - Partner, a touch-tone telephone.
Hemenway & Barnes (attorneys)
For information on MFS mutual
William J. Poorvu - Adjunct funds, call your financial adviser
Professor, Harvard University or, for an information kit, call
Graduate School of Business toll free: 1-800-637-2929 any
Administration business day from 9 a.m. to 5 p.m.
Eastern time (or leave a message
Charles W. Schmidt - Private anytime).
Investor
Investor Service
Arnold D. Scott* - Senior MFS Service Center, Inc.
Executive Vice President, P.O. Box 2281
Director, and Secretary, MFS Boston, MA 02107-9906
Investment Management
For general information, call toll
Jeffrey L. Shames* - Chairman, free: 1-800-225-2606 any business
Chief Executive Officer, and day from 8 a.m. to 8 p.m. Eastern
Director, MFS Investment time.
Management
For service to speech- or
Elaine R. Smith - Independent hearing-impaired, call toll free:
Consultant 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern
David B. Stone - Chairman and time. (To use this service, your
Director, North American phone must be equipped with a
Management Corp. (investment Telecommunications Device for the
advisers) Deaf.)
Investment Adviser For share prices, account
Massachusetts Financial balances, and exchanges, call toll
Services Company free: 1-800-MFS-TALK
500 Boylston Street (1-800-637-8255) anytime from a
Boston, MA 02116-3741 touch-tone telephone.
Distributor World Wide Web
MFS Fund Distributors, Inc. www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
Portfolio Manager
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
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MFS(R) GOVERNMENT Bulk Rate
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Paid
MFS
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INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MGS-3 10/98 45M 26/226/326/826
