<PAGE>
[LOGO] Semiannual Report
THE FIRST NAME IN MUTUAL FUNDS January 31, 1995
MFS(R) GOVERNMENT MORTGAGE FUND
<PAGE>
<TABLE>
<S> <C>
MFS(R) GOVERNMENT MORTGAGE FUND
TRUSTEES CUSTODIAN
A. Keith Brodkin<F1> - Chairman and President State Street Bank and Trust Company
Richard B. Bailey<F1> - Private Investor; INDEPENDENT AUDITORS
Former Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company
INVESTOR INFORMATION
Peter G. Harwood - Former Financial Vice For MFS stock and bond market outlooks,
President, Treasurer and Director (until 1988), call toll-free: 1-800-637-4458 anytime from
Loomis, Sayles & Co., Inc. a touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds
Officer, Eastern Enterprises call your financial adviser or, for an
information kit, call toll-free:
Lawrence T. Perera - Partner, Hemenway & Barnes 1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or, leave
William J. Poorvu - Adjunct Professor, Harvard a message anytime).
University Graduate School of Business
Administration INVESTOR SERVICE
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor; P.O. Box 2281
Former Senior Vice President and Group Executive Boston, MA 02107-9906
(until 1990), Raytheon Company
For current account service, call toll free:
Arnold D. Scott<F1> - Senior Executive Vice President, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames<F1> - President and Chief Equity For service to speech- or hearing-impaired,
Officer, Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
Elaine R. Smith - Independent Consultant
For share prices, account balances and
David B. Stone - Chairman, North American exchanges, call toll free: 1-800-MFS-TALK
Management Corp. (Investment Advisers) (1-800-637-8255) anytime from a touch-tone
telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street TOP-RATED SERVICE
Boston, Massachusetts 02116-3741
MFS was fated first when securities
PORTFOLIO MANAGER firms evaluated the quality of
James J. Calmas<F1> service they receive from 40 mutual
fund companies. MFS got high marks
TREASURER for answering calls quickly,
W. Thomas London<F1> processing transactions accurately
and sending statements out on time.
ASSISTANT TREASURER
James O. Yost<F1> (Source: 1994 DALBAR survey)
SECRETARY
Stephen E. Cavan<F1>
ASSISTANT SECRETARY
James R. Bordewick, Jr.<F1>
<FN>
<F1>Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
During the past six months, Class A shares of the Fund provided a total return
of +1.40%, while Class B shares had a total return of +0.88%. Both of these
returns assume there investment of distributions but exclude the effects of any
sales charges. Over the same period, the Lehman Brothers Government National
Mortgage Association Index (GNMA Index), a nunmanaged index of GNMA issues with
more than $50 million outstanding, had a return of +1.61%. A discussion of the
Fund's performance during the period from August 1, 1994 through January 31,
1995, as well as our outlook over the months ahead, may be found in the
Portfolio Performance and Strategy section below.
Economic Outlook
The economic expansion, entering its fifth year, gained firmer underpinnings in
1994 as employers significantly stepped up hiring levels.Increased employment,
stronger capital spending by businesses, and strengthening overseas economies
resulted in 4% real (adjusted for inflation) gross domestic product growth last
year. Interest rates rose substantially over the past year, which should help
restrain, but not curtail, the economic expansion.Based on improving economic
fundamentals both here and abroad, we expect the business expansion to continue
well into 1995.
Interest Rates
Despite a stronger economy, inflation at the consumer level has remained
relatively benign at2.7% in 1994, the fourth straight year of 3.0% or less. Due
to a prolonged period of below-trend-line growth and continued pressure on
corporations to emphasize effective cost controls, wage growth and unit labor
costs have remained subdued. However, as the economy has exhibited continuing
strength, various industrial commodity prices have been rising substantially
faster than consumer prices. Nevertheless, businesses have had difficulty
passing these price increases on to the consumer. With the economy continuing to
expand, we expect some upward movementin inflation from below 3% to the 3 1/2%
range. The Federal Reserve Board has shown a willingness to raise short-term
rates to slow the economy to dampen inflationary pressures. Most recently, it
raised the federal funds rate 50 basis points (0.50%) after a 75 basis-point
(0.75%) increase in November. We expect the Federal Reserve to raise short-term
rates again in the coming months if it believes its current efforts have failed
to dampen inflationary expectations. Although we believe fundamentals are
favorable for lower long-term rates sometime in 1995, this may not occur until
the Federal Reserve feels that its policy toward slowing the economic expansion
has been successful. Thus, we believe that long- term yields may move moderately
higher in the near term.
Portfolio Performance and Strategy
As mentioned earlier, the Fund modestly underperformed the GNMA Index during the
past six months. Although the Fund benefited from having less interest rate
sensitivity than the GNMA Index, it was adversely affected by its approximately
25% holding of non-mortgage government securities, which underperformed GNMAs.
During the last six months the GNMA Index outperformed the Lehman Brothers
Government/Mortgage Index, an index comprised of Treasuries, agencies, and all
agency mortgages (FNMA, Freddie Mac and GNMA), by 0.81%. In the months ahead, we
believe GNMAs should continue to outperform U.S.Treasuries because the yield on
par-priced GNMAs is currently more than 1% greater than that of comparable
Treasuries, although it is important to remember that principal value and
interest on Treasury securities are guaranteed by the U.S. government if held to
maturity. In addition, over 70% of GNMAs outstanding are trading below par so
that prepayments will have less of a negative effect than they have in the past.
Even though short-term interest rates may be poised for further increases,
any move in long-term rates should be subdued as inflation statistics remain
benign. In this environment, we will continue to maintain the Fund's interest
rate sensitivity similar to that of the GNMA Index, so that the Fund should
benefit from lower rates once the Federal Reserve is through with its tightening
of monetary policy. Currently, the portfolio has the interest rate sensitivity
of a 6 1/2-year Treasury. As the year progresses, we will increase the Fund's
interest rate exposure if the economy starts to slow in response to higher
short-term rates.
Although we have the ability to invest in certain types of derivative
securities, we have used them very sparingly and currently have less than 1% of
the Fund's total net assets invested in collateralized mortgage obligations.
Under all circumstances, any securities purchased for the Fund will be
consistent with its investment objectives.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
A 1 1/2" by 1 5/8" photo of A. Keith Brodkin, Chairman and President.
A 1 1/2" by 1 5/8" photo of James J. Calmas, Portfolio Manager.
/s/A. Keith Brodkin /s/James J. Calmas
A. Keith Brodkin James J. Calmas
Chairman and President Portfolio Manager
February 28,1995
PORTFOLIO MANAGER PROFILE
James Calmas has been a member of the MFS investment staff for six years. A
graduate of Dartmouth College and the Amos Tuck School of Business
Administration of Dartmouth College, he began his career at MFS as a member of
the Fixed Income Department and was named Assistant Vice President - Investments
in 1991. In 1993, he was named Vice President - Investments and Portfolio
Manager of MFS Government Mortgage Fund.
OBJECTIVE AND POLICIES
The Fund's primary investment objective is to provide a high level of current
income. The Fund's secondary objective is to protect shareholders' capital. Any
investment involves risk and there can be no assurance that the Fund will
achieve its objective.
The Fund seeks to achieve its investment objective by investing, under normal
circumstances, at least 65% of its total assets in obligations issued or
guaranteed by the Government National Mortgage Association (GNMA). The Fund may
also invest in other securities issued by the U.S. government, its agencies,
authorities or instrumentalities. Depending on market conditions, the Fund may
invest a substantial portion of its assets in cash, short-term government
securities and related repurchase agreements.
PERFORMANCE SUMMARY
Because mutual funds like MFS Government Mortgage Fund are designed for
investors with long-term goals, we have provided cumulative results as well as
the average annual total returns for Class A shares for the past 6-month, 1- and
5-year periods ended January 31, 1995 and for the period from January 9, 1986+
to January 31, 1995.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
1/09/86+ -
6 Months 1 Year 5 Years 1/31/95 -
- ------------------------------------------------------------------------------
Cumulative Total Return* +1.40% -0.98% +36.35% +77.92%
- ------------------------------------------------------------------------------
Average Annual Total Return* -- -0.98% + 6.40% + 6.56%
- ------------------------------------------------------------------------------
The Fund's average annual total returns, calculated for the periods ended as of
the most recent calendar quarter as required by the Securities and Exchange
Commission (the SEC), with all distributions reinvested and reflecting the
maximum sales charge of 4.75% for the 1- and 5-year periods and for the period
from January 9, 1986+ to December 31, 1994 were -6.80%, +4.41% and +5.83%,
respectively.
Class B Investment Results
The average annual total returns for the 6-month and 1-year periods ended
January 31, 1995 and for the period from September 7, 1993+ to January 31, 1995,
including the reinvested distributions but not reflecting any contingent
deferred sales charge (CDSC), were +0.88%, -1.83% and -0.96%, respectively.
The average annual total returns, calculated for the periods ended as of the
most recent calendar quarter as required by the SEC, for the 1-year period ended
December 31, 1994 and for the period from September 7, 1993+ to December 31,
1994, reflecting the current maximum CDSC of 4%, were -6.42% and -5.09%,
respectively.
All results represent past performance and are not necessarily an indication of
future results. Investment return and principal value will fluctuate, and
shares, when redeemed, may be worth more or less than their original cost.
*These results do not include the sales charge. If the charge had been included,
the results would have been lower.
+Commencement of offering of this class of shares.
<PAGE>
PORTFOLIO OF INVESTMENTS - January 31, 1995
Bonds - 96.4%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 2.0%
FHLMC, 8.5s, 2007 - 2016 $ 71 $ 69,860
FHLMC, 9s, 1999 - 2021 27,730 28,409,472
FHLMC, 9.5s, 2009 - 2020 458 471,786
--------------
$ 28,951,118
- -----------------------------------------------------------------------------
Federal Housing Authority - 1.6%
FHA, Centennial, "A", 8.25s, 2028+ $ 23,961 $ 22,952,953
- -----------------------------------------------------------------------------
Federal National Mortgage Association - 3.5%
FNMA, 6.5s, 2024 $ 9,293 $ 7,318,619
FNMA, Interest-Only Strip, 7s, 2023 18,550 6,811,200
FNMA, 7.5s, 2022 50 47,340
FNMA, 8s, 2015 - 2023 1,659 1,614,965
FNMA, 8.5s, 2004 - 2022 2,955 2,949,793
FNMA, 9s, 2002 - 2016 29,638 30,369,084
--------------
$ 49,111,001
- -----------------------------------------------------------------------------
Financing Corporation - 4.3%
FICO, 10.7s, 2017 $ 11,305 $ 14,201,906
FICO, 9.8s, 2018 5,285 6,161,993
FICO, 10.35s, 2018 33,965 41,522,213
--------------
$ 61,886,112
- -----------------------------------------------------------------------------
Government National Mortgage Association - 69.2%
GNMA, 7s, 2022 - 2024 $194,300 $ 177,479,050
GNMA, 7.5s, 2008 - 2023 216,028 204,371,934
GNMA, 8s, 2002 - 2024 86,033 83,929,474
GNMA, 8.5s, 2022 - 2024 29,182 29,108,583
GNMA, 9s, 2008 - 2024 170,897 174,959,469
GNMA, 9.5s, 2009 - 2024 158,808 165,656,143
GNMA, 10s, 2009 - 2024 98,978 105,101,836
GNMA, 10.5s, 2013 - 2020 10,890 11,733,597
GNMA, 11s, 2025 30,000 32,700,000
GNMA, 12.5s, 2011 689 771,174
--------------
$ 985,811,260
- -----------------------------------------------------------------------------
Small Business Administration - 4.4%
SBA, 8.75s, 2006 $ 184 $ 187,266
SBA, 10s, 2009 4,233 4,542,609
SBA, 10.1s, 2009 8,269 8,889,311
SBA, 9.3s, 2010 4,068 4,239,287
SBA, 9.45s, 2010 9,703 10,203,876
SBA, 9.55s, 2010 10,686 11,221,561
SBA, 9.7s, 2010 3,431 3,634,282
SBA, 8.8s, 2011 3,442 3,521,691
SBA, 8.85s, 2011 13,354 13,702,192
SBA, 8.05s, 2012 2,710 2,645,294
--------------
$ 62,787,369
- -----------------------------------------------------------------------------
U.S. Federal Agencies - 0.2%
Federal Agricultural Mortgage Corp., 8s, 2006 $ 3,000 $ 2,920,320
- -----------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 11.2%
Principal Stripped Interest Payments, 0s,
2017 - 2021 $236,535 $ 36,413,507
U.S. Treasury Notes, 9.375s, 1996* 40,000 41,074,800
U.S. Treasury Bonds, 13.125s, 2001 25,000 31,871,000
U.S. Treasury Bonds, 10.75s, 2003* 4,085 4,854,777
U.S. Treasury Bonds, 10.75s, 2005 20,800 25,362,896
U.S. Treasury Bonds, 8.75s, 2020 17,900 19,751,576
--------------
$ 159,328,556
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost,
$1,443,321,467) $1,373,748,689
- -----------------------------------------------------------------------------
Repurchase Agreement - 2.5%
- -----------------------------------------------------------------------------
Lehman Brothers, dated 1/31/95, due 2/01/95,
total to be received $35,180,667
(secured by U.S. Treasury Notes, 6.25s,
due 8/31/96,market value $35,880,157),
at Cost $ 35,175 $ 35,175,000
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $1,478,496,467) $1,408,923,689
Other Assets, Less Liabilities - 1.1% 16,143,201
- -----------------------------------------------------------------------------
Net Assets - 100.0% $1,425,066,890
- -----------------------------------------------------------------------------
+Restricted security.
*Denotes all or a portion of a security segregated as collateral for open
futures contracts.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
January 31, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,478,496,467) $1,408,923,689
Cash 1,876,807
Receivable for investments sold 169,555,031
Receivable for Fund shares sold 185,908
Interest receivable 15,562,700
Other assets 27,852
--------------
Total assets $1,596,131,987
--------------
Liabilities:
Payable for investments purchased $ 164,917,580
Payable for Fund shares reacquired 4,890,724
Payable for daily variation margin on open futures
contracts 304,500
Payable to affiliates -
Management fee 76,242
Shareholder servicing agent fee 21,617
Distribution and service fee 391,441
Accrued expenses and other liabilities 462,993
--------------
Total liabilities $ 171,065,097
--------------
Net assets $1,425,066,890
--------------
Net assets consist of:
Paid-in capital $1,616,699,182
Unrealized depreciation on investments (72,018,007)
Accumulated net realized loss on investments (121,380,998)
Accumulated undistributed net investment income 1,766,713
--------------
Total $1,425,066,890
--------------
Shares of beneficial interest outstanding 224,350,804
--------------
Class A shares:
Net asset value and redemption price per share
(net assets of $374,432,906 / 58,915,901 shares of
beneficial interest outstanding) $ 6.36
-----
Offering price per share (100/95.25) $ 6.68
-----
Class B shares:
Net asset value, redemption price, and offering price
per share
(net assets of $1,050,633,984 / 165,434,903 shares of
beneficial interest outstanding) $ 6.35
-----
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A
and Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Six Months Ended
January 31, 1995
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 63,722,086
-----------
Expenses -
Management fee $ 4,964,809
Trustees' compensation 39,424
Shareholder servicing agent fee (Class A) 296,905
Shareholder servicing agent fee (Class B) 1,088,521
Distribution and service fee (Class A) 692,767
Distribution and service fee (Class B) 5,658,802
Postage 157,516
Printing 53,095
Auditing fees 40,418
Custodian fee 32,952
Miscellaneous 641,143
-----------
Total expenses $ 13,666,352
-----------
Net investment income $ 50,055,734
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (35,042,559)
Futures contracts 2,651,396
-----------
Net realized loss on investments $ (32,391,163)
-----------
Change in unrealized depreciation -
Investments $ (5,084,987)
Futures contracts (339,312)
-----------
Net unrealized loss on investments $ (5,424,299)
-----------
Net realized and unrealized loss on investments $ (37,815,462)
-----------
Increase (decrease) in net assets from operations $ 12,240,272
-----------
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------
Six Months Ended Eight Months Ended Year Ended
January 31, 1995 July 31, 1994 November 30, 1993
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 50,055,734 $ 74,548,971 $ 61,921,749
Net realized gain (loss) on
investments (32,391,163) (25,065,163) 3,896,696
Net unrealized loss on
investments (5,424,299) (75,294,158) (29,750,350)
------------ ------------ ------------
Increase (decrease)
in net assets from $
operations $ 12,240,272 (25,810,350) $ 36,068,095
------------ ------------ ------------
Distributions declared
to shareholders -
From net investment $ $ $
income (Class A) (13,514,651) (14,372,080) (41,366,228)
From net investment
income (Class B) (34,723,746) (38,804,832) (16,456,135)
In excess of net
realized gain on
investments (Class A) -- -- (4,790,820)
From paid-in capital
(Class A) -- (6,354,345) --
From paid-in capital
(Class B) -- (17,156,825) --
------------ ------------ ------------
Total distributions
declared to shareholders $ (48,238,397) $ (76,688,082) $ (62,613,183)
------------ ------------ ------------
Fund share (principal) transactions -
Net proceeds from sale
of shares $ 21,025,820 $ 55,960,166 $ 29,918,411
Net asset value of shares
issued to shareholders
in reinvestment of
distributions 21,014,080 31,831,973 24,936,586
Cost of shares reacquired (233,958,241) (482,278,453) (367,519,075)
Net asset value of shares
issued to shareholders
in connection with merger
of MFS Lifetime Government
Mortgage Fund -- -- 1,774,003,938
------------ ------------ ------------
Increase (decrease)
in net assets from
Fund share transactions $ (191,918,341) $ (394,486,314) $1,461,339,860
------------ ------------ ------------
Total increase
(decrease) in net assets $ (227,916,466) $ (496,984,746) $1,434,794,772
Net assets:
At beginning of period 1,652,983,356 2,149,968,102 715,173,330
------------ ------------ ------------
At end of period (including
undistributed (distributions in
excess of) net investment
income of $1,766,713,
$(50,624) and $(11,856,473),
respectively) $1,425,066,890 $1,652,983,356 $2,149,968,102
------------ ------------ ------------
See notes to financial statements
</TABLE>
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FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
Eight
Six Months Months
Ended Ended Year Ended November 30,
January 31, July 31, -------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------------------
Class A
- ------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period)<F2>:
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value - beginning
of period $ 6.49 $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82
----- ----- ----- ----- ----- ----- -----
Income from investment operations -
Net investment income(S) $ 0.23 $ 0.29 $ 0.34 $ 0.46 $ 0.48 $ 0.53 $ 0.59
Net realized and
unrealized gain (loss)
on investments (0.14) (0.36) 0.20 0.09 0.25 (0.40) 0.48
----- ----- ----- ----- ----- ----- -----
Total from investment
operations $ 0.09 $(0.07) $ 0.54 $ 0.55 $ 0.73 $ 0.13 $ 1.07
----- ----- ----- ----- ----- ----- -----
Less distributions declared
to shareholders -
From net investment income $(0.22) $(0.20) $(0.47) $(0.42) $(0.44) $(0.49) $(0.58)
In excess of net realized
gain on investments -- -- (0.04) -- -- -- --
From paid-in capital -- (0.09) -- (0.26) (0.35) (0.49) (0.45)
----- ----- ----- ----- ----- ----- -----
Total distributions
declared to
shareholders $(0.22) $(0.29) $(0.51) $(0.68) $(0.79) $(0.98) $(1.03)
----- ----- ----- ----- ----- ----- -----
Net asset value - end of
period $ 6.36 $ 6.49 $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86
----- ----- ----- ----- ----- ----- -----
Total return<F3> 1.40% (1.51)%<F1> 8.11% 8.25% 11.00% 2.05% 14.72%
Ratios (to average net assets)/Supplemental data<F4>:
Expenses 1.27%<F1> 1.27%<F1> 1.38% 1.42% 1.44% 1.40% 1.37%
Net investment income 7.06%<F1> 6.46%<F1> 6.30% 6.57% 6.91% 7.29% 7.57%
Portfolio turnover 64% 37% 167% 484% 731% 507% 489%
Net assets at end of period
(000,000 omitted) $ 374 $ 424 $ 522 $ 715 $ 886 $1,068 $1,380
<FN>
<F1> Annualized.
<F2> Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
<F3> Total returns for Class A shares do not include the sales charge (except
for reinvestment dividends prior to October 1, 1989). If the charge had
been included, the results would have been lower.
<F4> The investment adviser did not impose 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 ratios would have been:
Net investment income -- $ 0.29 $ 0.34 -- -- -- --
Ratios (to average net assets):
Expenses -- 1.28%<F1> 1.46% -- -- -- --
Net investment income -- 6.45%<F1> 6.22% -- -- -- --
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -continued
Financial Highlights
- -------------------------------------------------------------------------------------------------------------------------------
Eight
Six Months Months
Year Ended Ended Ended Year Ended
November 30, January 31, July 31, November 30,
- ---------------------------------------------------------------------------------------------------------------------------------
1988 1987 1986<F1> 1995 1994 1993<F2>
- -------------------------------------------------------------------------------------------------------------------------------
Class A Class B
- -------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period)<F4>:
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning
of period $ 8.34 $ 9.82 $ 9.53 $ 6.49 $ 6.84 $ 6.97
----- ----- ----- ----- ----- -----
Income from investment operations -
Net investment income(S) $ 0.64 $ 0.75 $ 0.72 $ 0.20 $ 0.26 $ 0.38
Net realized and unrealized
gain (loss) on investments (0.06) (1.08) 0.43 (0.15) (0.35) (0.44)
----- ----- ----- ----- ----- -----
Total from investment
operations $ 0.58 $(0.33) $ 1.15 $ 0.05 $(0.09) $(0.06)
----- ----- ----- ----- ----- -----
Less distributions declared to
shareholders -
From net investment income $(0.64) $(0.82) $(0.65) $(0.19) $(0.18) $(0.07)
From net realized gain on
investments -- (0.01) (0.21) -- -- --
From paid-in capital (0.46) (0.32) -- -- (0.08) --
----- ----- ----- ----- ----- -----
Total distributions
declared to
shareholders $(1.10) $(1.15) $(0.86) $(0.19) $(0.26) $ 0.07)
----- ----- ----- ----- ----- -----
Net asset value - end of
period $ 7.82 $ 8.34 $ 9.82 $ 6.35 $ 6.49 $ 6.84
----- ----- ----- ----- ----- -----
Total return<F5> 7.39% (3.37)% 13.75% 0.88% (1.97)% (3.91)%
Ratios (to average net assets)/Supplemental data<F6>:
Expenses 1.38% 1.34% 1.00%<F3> 1.97%<F3> 1.94%<F3> 1.87%<F3>
Net investment income 7.88% 8.34% 9.54%<F3> 6.36% 5.80%<F3> 5.92%<F3>
Portfolio turnover 285% 212% 169% 64% 37% 167%
Net assets at end of period
(000,000 omitted) $1,295 $1,129 $ 593 $1,051 $1,229 $1,628
<FN>
<F1> For the period from January 9, 1986 (commencement of investment operations) to November 30, 1986.
<F2> For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
<F3> Annualized.
<F4> Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
<F5> Total returns for Class A shares do not include the sales charge (except for reinvestment dividends prior to October 1,
1989). If the charge had been included, the results would have been lower.
<F6> The investment adviser did not impose 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 ratios would have been:
Net investment income -- -- -- -- $ 0.26 $ 0.38
Ratios (to average net assets):
Expenses -- -- -- -- 1.94%<F3> 1.94%<F3>
Net investment income -- -- -- -- 5.80%<F3> 5.85%<F3>
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Government Mortgage Fund (the Fund) is organized as a Massachusetts business
trust and is registered under the Investment Company Act of 1940, as amended, as
an open-end management investment company.
(2) Significant Accounting Policies
Investment Valuations - Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, are valued on the basis of
valuations furnished by dealers or by a pricing service with consideration to
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading characteristics
and other market data, without exclusive reliance upon exchange or
over-the-counter prices. Short-term obligations, which mature in 60 days or
less, are valued at amortized cost, which approximates value. Futures contracts
listed on commodities exchanges are valued at closing settlement prices.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
Futures Contracts - The Fund may enter into financial futures contracts for the
delayed delivery of securities at a fixed price on a future date. In entering
such contracts, the Fund is required to deposit either in cash or securities an
amount equal to a certain percentage of the contract amount. Subsequent payments
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security, and are recorded for financial
statement purposes as unrealized gains or losses by the Fund. The Fund's
investment in financial futures contracts is designed to hedge against
anticipated future changes in interest rates or securities prices. The Fund may
also invest in futures contracts for non-hedging purposes. For example, interest
rate futures may be used in modifying the duration of the portfolio without
incurring the additional transaction costs involved in buying and selling the
underlying securities. Should interest rates or securities prices move
unexpectedly, the Fund may not achieve the anticipated benefits of the financial
futures contracts and may realize a loss.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund may bear the risk of delay
in recovery or even loss of rights in the collateral should the borrower of the
securities fail financially. The Fund receives compensation for lending its
securities in the form of fees or from all or a portion of the income from
investment of the collateral. The Fund would also continue to earn income on the
securities loaned. At January 31, 1995, the Fund had no securities on loan.
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 both financial statement
and tax reporting purposes as required by federal income tax regulations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a financial
reporting basis and requires that only distributions in excess of tax basis
earnings and profits are reported in the financial statements as a return of
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or accumulated net realized
gains. During the eight-month period ended July 31, 1994, ($9,566,210) and
$21,386,256 was reclassified from paid-in capital to accumulated distributions
in excess of net investment income and accumulated net realized loss on
investments, respectively, due to differences between book and tax accounting
for mortgage-backed securities and tax-basis return of capital. This change had
no effect on the net assets or net asset value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. Class B shares were first offered to the public on September
7, 1993. The two classes of shares differ in their shareholder servicing agent,
distribution and service fees. Shareholders of each class also bear certain
expenses that pertain only to that particular class. 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, including distribution and shareholder servicing fees.
(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, computed daily and paid monthly at an annual rate equal to the
lesser of (i) 0.65% of the Fund's average daily net assets or (ii) 0.30% of the
Fund's average daily net assets and 6.1% of the Fund's gross income, amounted to
$4,964,809 and $8,248,819 for the six-month period ended January 31, 1995 and
the eight-month period ended July 31, 1994, respectively. The investment adviser
did not impose a portion of its fee ($93,468), which is reflected as a reduction
of expenses in the Statement of Operations, for the eight-month period ended
July 31, 1994. The Fund pays no compensation directly to its Trustees who are
officers of the investment adviser, or to officers of the Fund, all of whom
receive remuneration for their services to the Fund from MFS. Certain of the
officers and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The Fund has an
unfunded defined benefit plan for all of its independent Trustees. Included in
Trustees' compensation is a net periodic pension expense of $14,724 and $20,106
for the six months ended January 31, 1995 and the eight months ended July 31,
1994, respectively.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$10,722 and $23,519 for the six-month period ended January 31, 1995 and the
eight months ended July 31, 1994, respectively, as its portion of the sales
charge on sales of Class A shares of the Fund. The Trustees have adopted
separate distribution plans for Class A and Class B shares, pursuant to Rule
12b-1 of the Investment Company Act of 1940, as follows:
The Class A Distribution Plan provides that the Fund will pay MFD up to 0.35% of
its average daily net assets attributable to Class A shares annually in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers and payments to MFD wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. Fees incurred under the distribution plan during the
six-month period ended January 31, 1995 and the eight months ended July 31,
1994, were 0.35% of average daily net assets attributable to Class A shares on
an annualized basis and amounted to $692,767 and $1,103,659 (of which MFD
retained $53,884 and $97,724, respectively).
The Class B Distribution Plan provides that the Fund will pay MFD a monthly
distribution fee, equal to 0.75% per annum, and a quarterly service fee of up to
0.25% per annum, of the Fund's average daily net assets attributable to Class B
shares. MFD will pay to securities dealers that enter into a sales agreement
with MFD, all or a portion of the service fee attributable to Class B shares.
The service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. Fees incurred under the
distribution plan during the six-month period ended January 31, 1995 and the
eight months ended July 31, 1994 were 1.00% of average daily net assets
attributable to Class B shares on an annualized basis and amounted to $5,658,802
and $9,291,485 (of which MFD retained $91,087 and $162,592, respectively).
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a share
redemption within twelve months following the share purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a share redemption within six years of purchase. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the six-month period ended January 31, 1995 and the eight-month period
ended July 31, 1994 were $0 and $1,933, respectively, for Class A shares, and
$954,982 and $1,865,409, respectively, for Class B shares.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, for the
six-month period ended January 31, 1995 and the eight months ended July 31, 1994
earned $296,905 and $472,997 for Class A shares and $1,088,521 and $1,670,746
for Class B shares, respectively, for its services as shareholder servicing
agent. The fee is calculated as a percentage of the average daily net assets of
each class of shares at an effective annual rate of up to 0.15% and up to 0.22%
attributable to Class A and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ------------------------------------------------------------------------------
U.S. government securities $ 965,836,251 $ 968,114,747
-------------- -------------
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 $ 1,478,496,467
---------------
Gross unrealized depreciation $ 73,947,838
Gross unrealized appreciation 4,375,060
---------------
Net unrealized depreciation $ 69,572,778
---------------
At July 31, 1994, the Fund, for federal income tax purposes, had a capital loss
carryforward of $90,993,950 which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on July 31, 1996 ($3,630,686), July 31, 1998 ($81,836,532) and July
31, 2002 ($5,526,732).
<PAGE>
(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 Eight Months Ended Year Ended
January 31, 1995 July 31, 1994 November 30, 1993
-------------------------------- -------------------------------- ----------------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 697,425 $ 4,405,833 4,203,202 $ 27,515,113 2,146,686 $ 19,558,553
Shares issued to
shareholders in
reinvestment of
distributions 947,329 5,975,170 1,321,312 8,740,816 2,663,943 18,391,733
Shares reacquired (8,013,251) (50,557,606) (16,516,662) (109,058,350) (33,340,955) (235,950,665)
------------ --------------- ------------ --------------- ------------- ----------------
Net decrease (6,368,497) $ (40,176,603) (10,992,148) $ (72,802,421) (28,530,326) $(198,000,379)
------------ --------------- ------------ --------------- ------------- ----------------
<CAPTION>
Class B Shares
Six Months Ended Eight Months Ended Year Ended
January 31, 1995 July 31, 1994 November 30, 1993<F1>
-------------------------------- -------------------------------- ----------------------------------
Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Shares sold 2,646,449 $ 16,619,987 4,217,881 $ 28,445,053 1,496,862 $ 10,359,858
Shares issued to
shareholders in
reinvestment of
distributions 2,384,068 15,038,910 3,488,783 23,091,157 949,148 6,544,853
Shares reacquired (29,092,701) (183,400,635) (56,121,433) (373,220,103) (19,034,865) (131,568,410)
Shares issued in
connection with merger
with MFS Lifetime
Government Mortgage Fund -- -- -- -- 254,500,711 1,774,003,938
------------ --------------- ------------ --------------- ------------- ----------------
Net increase (decrease) (24,062,184) $(151,741,738) (48,414,769) $(321,683,893) 237,911,856 $1,659,340,239
------------ --------------- ------------ --------------- ------------- ----------------
<FN>
<F1> For the period from the commencement of offering of Class B shares,
September 7, 1993 to November 30, 1993.
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS, or an affiliate of MFS, in an unsecured line of credit
with a bank which permits borrowings up to $300 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the six
months ended January 31, 1995 and the eight-month period ended July 31, 1994 was
$11,554 and $21,356, respectively.
(7) Financial Instruments
The Fund regularly trades financial instruments with off-balance sheet risk in
the normal course of its investing activities in order to manage exposure to
market risks such as interest rates. These financial instruments include futures
contracts.
The notional or contractual amounts of these instruments represent the
investment the Fund has in particular classes of financial instruments and does
not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered. A summary of
obligations under these financial instruments at January 31, 1995 is as follows:
Unrealized
Futures Contracts Expiration Contracts Position Depreciation
- ------------------------------------------------------------------------------
U.S. Treasury Notes March 1995 1,392 Short $2,445,229
----------
At January 31, 1995, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
(8) Restricted Securities
The Fund may invest not more than 10% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At January 31, 1995, the
Fund owned the following restricted security (constituting 1.6% of net assets)
which may not be publicly sold without registration under the Securities Act of
1933. The Fund does not have the right to demand that such security be
registered. The value of this security is determined by valuations supplied by a
pricing service or brokers.
Date of Par
Description Acquisition Amount Cost Value
- ------------------------------------------------------------------------------
FHA, Centennial, "A",
8.25s, 2028 3/23/93 $23,961,242 $24,680,079 $22,952,953
-----------
(9) Acquisitions
At the close of business on September 6, 1993, the Fund acquired all of the
assets and liabilities of MFS Lifetime Government Mortgage Fund (LGM). The
acquisition was accomplished by a tax-free exchange of 254,500,711 Class B
shares of the Fund (valued at $1,774,003,938) for the 250,123,424 shares of LGM.
LGM's net assets on that date ($1,774,003,938), including $45,387,402 of
unrealized appreciation, were combined with those of the Fund. The aggregate net
assets of the Fund and LGM immediately before the acquisition were $562,603,182
and $1,774,003,938, respectively. The aggregate net assets of the Fund
immediately after the acquisition were $2,336,607,120.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders of MFS Government Mortgage Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Government Mortgage Fund as of January 31,
1995, the related statement of operations for the six months ended January 31,
1995, the statements of changes in net assets for the six months ended January
31, 1995, the eight months ended July 31, 1994, and the year ended November 30,
1993, and the financial highlights for the six months ended January 31, 1995,
the eight months ended July 31, 1994, and for each of the years in the
eight-year period ended November 30, 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
January 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers we performed other audit procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of the MFS Government
Mortgage Fund at January 31, 1995, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 3, 1995
---------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
THE MFS FAMILY OF FUNDS(R) -- AMERICA'S OLDEST MUTUAL FUND GROUP
The members of the MFS Family of Funds are grouped below according to the types
of securities in their portfolios. For free prospectuses containing more
complete information, including the exchange privilege and all charges and
expenses, please contact your financial adviser or call the MFS Service Center
at 1-800-225-2606 any business day from 8 a.m. to 8 p.m. Eastern time. This
material should be read carefully before investing or sending money.
<TABLE>
<CAPTION>
<S> <C>
STOCK LIMITED MATURITY BOND
Massachusetts Investors Trust MFS(r) Government Limited Maturity Fund
Massachusetts Investors Growth Stock Fund MFS(r) Limited Maturity Fund
MFS(r) Capital Growth Fund MFS(r) Municipal Limited Maturity Fund
MFS(r) Emerging Growth Fund WORLD
MFS(r) Gold & Natural Resources Fund MFS(r) World Asset Allocation Fund
MFS(r) Growth Opportunities Fund MFS(r) World Equity Fund
MFS(r) Managed Sectors Fund MFS(r) World Governments Fund
MFS(r) OTC Fund MFS(r) World Growth Fund
MFS(r) Research Fund MFS(r) World Total Return Fund
MFS(r) Value Fund NATIONAL TAX-FREE BOND
STOCK AND BOND MFS(r) Municipal Bond Fund
MFS(r) Total Return Fund MFS(r) Municipal High Income Fund
MFS(r) Utilities Fund (closed to new investors)
BOND MFS(r) Municipal Income Fund
MFS(r) Bond Fund STATE TAX-FREE BOND
MFS(r) Government Mortgage Fund Alabama, Arkansas, California, Florida,
MFS(r) Government Securities Fund Georgia, Louisiana, Maryland, Massachusetts,
MFS(r) High Income Fund Mississippi, New York, North Carolina,
MFS(r) Intermediate Income Fund Pennsylvania, South Carolina Tennessee, Texas,
MFS(r) Strategic Income Fund Virginia, Washington, West Virginia
(formerly MFS(r) Income & Opportunity Fund) MONEY MARKET
MFS(r) Cash Reserve Fund
MFS(r) Government Money Market Fund
MFS(r) Money Market Fund
</TABLE>
<PAGE>
MFS(R) BULK RATE
GOVERNMENT [LOGO] U.S. POSTAGE
MORTGAGE THE FIRST NAME IN MUTUAL FUNDS P A I D
FUND PERMIT #55638
BOSTON, MA
500 Boylston Street
Boston, MA 02116
[LOGO]
MGM-3 3/95 117M 31/231
