[LOGO]
THE FIRST NAME IN MUTUAL FUNDS
Semiannual Report
January 31, 1996
MFS(R) GOVERNMENT MORTGAGE FUND
[graphic: picture of two men in front of a window]
<PAGE>
MFS(R) GOVERNMENT MORTGAGE FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; INVESTOR INFORMATION
Former Chairman and Director (until 1991), For MFS stock and bond market outlooks,
Massachusetts Financial Services Company call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
Peter G. Harwood - Private Investor
For information on MFS mutual funds,
J. Atwood Ives - Chairman and call your financial adviser or, for an
Chief Executive Officer, Eastern Enterprises information kit, call toll free:
1-800-637-2929 any business day from
Lawrence T. Perera - Partner, 9 a.m. to 5 p.m. Eastern time (or leave
Hemenway & Barnes a message anytime).
William J. Poorvu - Adjunct Professor, INVESTOR SERVICE
Harvard University Graduate School of MFS Service Center, Inc.
Business Administration P.O. Box 2281
Boston, MA 02107-9906
Charles W. Schmidt - Private Investor
For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from
President, Director and Secretary, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company
For service to speech- or hearing-impaired,
Jeffrey L. Shames* - President and Director, call toll free: 1-800-637-6576 any business
Massachusetts Financial Services Company day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be equipped
Elaine R. Smith - Independent Consultant with a Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American For share prices, account balances and
Management Corp. (investment advisers) exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
INVESTMENT ADVISER telephone.
Massachusetts Financial Services Company
500 Boylston Street [DALBAR SEAL] TOP-RATED SERVICE
Boston, MA 02116-3741 For the second year in a row,
MFS earned a #1 ranking in DALBAR, Inc.'s
DISTRIBUTOR Broker/Dealer Survey, Main Office Operations
MFS Fund Distributors, Inc. Service Quality category. The firm achieved a 3.49
500 Boylston Street overall score -- on a scale of 1 to 4 -- in the 1995 survey.
Boston, MA 02116-3741 A total of 71 firms responded, offering input on the quality
of service they receive from 36 mutual fund companies nationwide.
PORTFOLIO MANAGER The survey contained questions about service quality in 17 categories,
James J. Calmas* including "knowledge of phone service contacts," "accuracy of
transaction processing," and "overall ease of doing business
TREASURER with the firm."
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The U.S. financial markets, including the bond markets, experienced a very
good year in 1995 and into 1996 as interest rates declined (principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity). During the six months ended January 31, 1996, the yield on
the 30-year U.S. Treasury bond fell by more than 70 basis points (0.7%), while
the yield on the 5-year U.S. Treasury note fell by more than 90 basis points
(0.9%). During this period, Class A shares of the Fund provided a total return
of +6.21%, while Class B shares provided a total return of +5.81%. These
returns, which include the reinvestment of distributions but exclude the
effects of any sales charges, compare to a +6.11% return for the Lehman
Brothers Government National Mortgage Association (GNMA) Index, an unmanaged
index of GNMA issues. A discussion of the Fund's performance relative to the
GNMA Index may be found in the Portfolio Performance and Strategy section of
this letter. Performance information for the Fund is found on page 5 of this
report.
Economic Environment
We believe the U.S. economy will continue to grow in 1996 -- although
"subdued" may be the best way to describe this growth. One factor holding
growth in check is the continued sluggishness of the consumer sector, an area
that represents approximately two-thirds of the economy. Going into this year,
consumers have been left in a somewhat weakened position, due in part to an
increase in consumer installment debt of some 30% over the past two years. A
second reason for the economy's weakness is the "lag effect" of increases in
short-term interest rates by the Federal Reserve Board in 1994 and into 1995.
This lag effect can last up to two years, although a series of reductions in
short-term rates by the Fed, which began late last year, could provide some
support to the economy through 1996. A third reason for weakness is the
ongoing economic doldrums in Europe and Japan, important markets for U.S.
exports. Here again, we are seeing a few signs, particularly in Japan, of
modest recoveries that could lead to improved prospects for U.S. exporters.
Also, we believe lower interest rates will give a boost to the U.S. housing
market, an important segment of the economy since it also affects such
industries as major appliances, furniture, and building-supply companies.
Finally, although the first few weeks of 1996 saw some signs of inflationary
pressures, caused primarily by rising energy prices and followed by an upward
movement in gold, we believe inflation will remain under control this year,
due mainly to the subdued level of economic growth.
Interest Rates
Persistent signs of economic weakness led to decreases in short-term interest
rates by the Federal Reserve in late 1995 and early 1996 and, we believe, will
lead to some additional reductions as the year progresses. In the beginning of
the year, bond markets were trading in a narrow range as investors shifted
between concern about the lack of a budget resolution in Washington and hopes
that sluggish economic reports and low inflation might lead to lower interest
rates. Barring an unexpected shock, we believe that the still-cheap dollar,
low interest rates, and strong total employment will likely cushion the
economy from a sharp decline. Still, we believe that the subdued state of the
economy makes it unlikely that long-term interest rates will test the high end
of 5.75% to 6.75%. However, in an environment of 2% to 3% inflation, this
still leaves real (adjusted for inflation) rates of return in the fixed-income
markets at relatively attractive levels.
Portfolio Performance and Strategy
During the past six months, short-term Treasury rates fell more than long-term
rates as the bond market anticipated moves by the Federal Reserve to lower
money market rates, which it did on July 6 and December 19, 1995, and again on
January 31, 1996. On that date, the Federal Reserve lowered the federal funds'
rate to 5.25% and the discount rate to 5%. During this period, the GNMA Index
underperformed the Lehman Brothers Government Bond Index (an unmanaged,
market-value-weighted index of U.S. Treasury and government agency securities,
excluding mortgage-backed securities) which returned +7.47%, because of the
longer duration of the government market even though the yield differential
between the two markets remained relatively stable. At the same time, economic
data for the past six months, which were interrupted by the government
shutdown, continued to show no acceleration in either economic growth or
inflation.
Currently, the Fund's average duration, a measure of its sensitivity to
changes in interest rates, is slightly longer than the GNMA Index, and
approximately 80% of the Fund's assets are invested in mortgage-backed
securities. The Fund is long in an effort to take advantage of any further
moves by the Federal Reserve to lower interest rates. However, given the
relatively low level of existing rates and the excellent returns achieved in
1995, we are carefully monitoring any risks we are taking in the portfolio. In
addition, the turmoil caused by the political debate over the federal budget
and the debt ceiling will continue to resonate through the bond markets. At
this time, with current coupon mortgages yielding over 110 basis points (1.1%)
more than the 10-year Treasury, we think GNMA securities could provide
favorable returns, barring any drastic movement in rates.
If, as 1996 progresses, it appears that the economy is slowing more than
we currently expect, we may look to increase the Fund's exposure to short- and
intermediate-term interest rates, and to decrease its exposure to mortgage
prepayments by selling some of its premium mortgages.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- --------------------------- --------------------------
[Photo of A. Keith Brodkin, [Photo of James J. Calmas,
Chairman and President] Portfolio Manager]
- --------------------------- --------------------------
/s/ A. Keith Brodkin /s/ James J. Calmas
A. Keith Brodkin James J. Calmas
Chairman and President Portfolio Manager
February 14, 1996
<PAGE>
PORTFOLIO MANAGER PROFILE
James Calmas joined the Mfs Fixed Income Department in 1988. A graduate of
Dartmouth College And the Amos Tuck School of Business Administration of
Dartmouth College, he was named Assistant Vice President - Investments in
1991. in 1993, he was named Vice President - Investments and Portfolio Manager
of Mfs Government Mortgage Fund.
OBJECTIVES 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 objectives.
The Fund seeks to achieve its investment objectives by investing, under normal
circumstances, at least 65% of its total assets in obligations issued or
guaranteed by the Government National Mortgage Association (GNMA) and in
obligations fully collateralized or otherwise fully secured by obligations
issued or guaranteed by the GNMA. The Fund may also invest in other securities
that are issued or guaranteed by the U.S. government, its agencies,
authorities or instrumentalities. Depending on market conditions, the Fund may
temporarily invest a substantial portion of its assets in cash, short-term
government securities and related repurchase agreements. Government guarantees
apply to individual securities and not to prices and yields of shares in a
managed portfolio.
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 and Class B shares for the
applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- -----------------------------------------------------------------------------
Cumulative Total Return(1) +6.21% +14.80% +45.36% +103.62%
- -----------------------------------------------------------------------------
Average Annual Total Return(1) -- +14.80% + 7.77% + 7.37%
- -----------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the Securities and Exchange Commission
(the SEC), with all distributions reinvested and reflecting the maximum sales
charge of 4.75% on the initial investment for the 1- and 5-year periods ended
December 31, 1995, and for the period from January 9, 1986(2) to December 31,
1995, were 10.89%, 6.88% and 6.84%, respectively.
Class B Investment Results
(net asset value change including reinvested distributions)
9/07/93(2)-
6 Months 1 Year 1/31/96
- ---------------------------------------------------------------------------
Cumulative Total Return(3) +5.81% +14.12% +12.59%
- ---------------------------------------------------------------------------
Average Annual Total Return(3) -- +14.12% + 5.06%
- ---------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the contingent deferred sales charge (CDSC) of 4% for
the 1-year period ended December 31, 1995, and 3% for the period from September
7, 1993(2) to December 31, 1995, were 11.60% and 3.85%, respectively.
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares,
when redeemed, may be worth more or less than their original cost.
(1) These results do not include the sales charge. If the charge had been
included, the results would have been lower.
(2) Commencement of offering of this class of shares.
(3) These results do not include any CDSC. If the charge had been included, the
results would have been lower.
<PAGE>
PORTFOLIO OF INVESTMENTS (UNAUDITED) - January 31, 1996
Bonds - 98.2%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 15 Year - 2.1%
FHLMC, 9s, 2001 - 2006 $ 24,770 $ 26,117,128
- -----------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 30 Year - 0.1%
FHLMC, 8.5s, 2009 - 2017 $ 58 $ 59,932
FHLMC, 9s, 2020 - 2021 751 788,550
FHLMC, 9.5s, 2013 - 2021 382 407,942
--------------
$ 1,256,424
- -----------------------------------------------------------------------------
Federal Housing Authority - 2.2%
FHA, Centennial, "A", 8.25s, 2028(+) $ 23,826 $ 27,574,370
- -----------------------------------------------------------------------------
Federal National Mortgage Association - 15 Year - 3.3%
FNMA, 6.695s, 2005 $ 10,000 $ 10,334,375
FNMA, 7.95s, 2005 6,290 6,778,458
FNMA, 8.5s, 2004 - 2008 462 483,641
FNMA, 9s, 2002 - 2008 23,451 24,799,593
--------------
$ 42,396,067
- -----------------------------------------------------------------------------
Federal National Mortgage Association - 30 Year - 0.7%
FNMA, Stripped Mortgage Backed Security,
"240", 7s, 2023 $ 17,446 $ 4,797,723
FNMA, 7.5s, 2022 46 47,589
FNMA, 8s, 2017 - 2023 1,471 1,524,275
FNMA, 8.5s, 2022 2,173 2,270,257
FNMA, 9s, 2017 6 6,234
--------------
$ 8,646,078
- -----------------------------------------------------------------------------
Financing Corporation - 5.8%
FICO, 10.7s, 2017 $ 11,305 $ 16,878,026
FICO, 9.8s, 2018 5,285 7,360,208
FICO, 10.35s, 2018 33,965 49,599,429
--------------
$ 73,837,663
- -----------------------------------------------------------------------------
U.S. Government Guaranteed - 71.0%
Government National Mortgage Association - 15 Year - 2.7%
GNMA, 7.5s, 2008 - 2009 $ 16,685 $ 17,300,338
GNMA, 8s, 2002 - 2009 1,157 1,209,533
GNMA, 9.5s, 2010 14,372 15,211,687
--------------
$ 33,721,558
- -----------------------------------------------------------------------------
Government National Mortgage Association - 30 Year - 68.1%
GNMA, 6.5s, 2025 $ 34,191 $ 33,977,162
GNMA, 7s, 2023 - 2025 242,094 245,270,250
GNMA, 7.5s, 2017 - 2025 167,387 172,302,924
GNMA, 8s, 2007 - 2025 67,419 70,199,756
GNMA, 8.5s, 2016 25,359 26,586,654
GNMA, 9s, 2008 - 2020 136,379 145,384,153
GNMA, 9.5s, 2009 - 2020 94,970 101,943,845
GNMA, 10s, 2009 - 2018 26,614 29,333,384
GNMA, 10.5s, 2021 6,571 7,406,890
GNMA, 11s, 2021 24,261 27,658,062
GNMA, 12.5s, 2011 560 664,692
--------------
$ 860,727,772
- -----------------------------------------------------------------------------
U.S. Government Guaranteed Notes - 0.2%
Aid to Israel, 5.89s, 2005 $ 3,000 $ 3,001,500
--------------
$ 897,450,830
- -----------------------------------------------------------------------------
Small Business Administration - 5.1%
SBA, 10s, 2000 $ 3,736 $ 4,399,853
SBA, 10.1s, 2000 7,539 8,882,124
SBA, 8.8s, 2001 3,250 3,713,047
SBA, 8.85s, 2001 12,563 14,382,034
SBA, 9.3s, 2001 3,723 4,311,230
SBA, 9.45s, 2001 9,155 10,647,849
SBA, 9.55s, 2001 9,940 11,574,524
SBA, 9.7s, 2001 3,028 3,541,422
SBA, 8.75s, 2006 171 189,992
SBA, 8.05s, 2012 2,755 2,891,943
--------------
$ 64,534,018
- -----------------------------------------------------------------------------
U.S. Federal Agencies - 0.3%
Federal Agricultural Mortgage Corp.,
8.07s, 2006 $ 3,000 $ 3,496,860
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 7.6%
Stripped Principal Payments, 0s, 2017 $ 22,900 $ 6,040,333
U.S. Treasury Note, 9.125s, 1999 1,265 1,416,003
U.S. Treasury Bond, 13.125s, 2001 25,000 33,945,250
U.S. Treasury Bond, 10.75s, 2003 2,200 2,866,182
U.S. Treasury Bond, 10.75s, 2003 3,085 4,042,800
U.S. Treasury Bond, 10.75s, 2005 20,800 28,554,448
U.S. Treasury Bond, 8.75s, 2020 13,900 18,493,533
U.S. Treasury Bond, 6.875s, 2025 1,000 1,116,090
--------------
$ 96,474,639
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $1,202,544,865) $1,241,784,077
Other Assets, Less Liabilities - 1.8% 23,128,260
=============================================================================
Net Assets - 100.0% $1,264,912,337
- -----------------------------------------------------------------------------
(+)Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------
January 31, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $1,202,544,865) $1,241,784,077
Cash 171,991
Receivable for investments sold 12,215,477
Receivable for Fund shares sold 107,944
Interest receivable 13,167,011
Other assets 19,877
--------------
Total assets $1,267,466,377
--------------
Liabilities:
Payable for Fund shares reacquired $ 1,755,206
Payable to affiliates -
Management fee 15,460
Shareholder servicing agent fee 6,168
Distribution fee 309,870
Accrued expenses and other liabilities 467,336
--------------
Total liabilities $ 2,554,040
==============
Net assets $1,264,912,337
--------------
Net assets consist of:
Paid-in capital $1,353,818,019
Unrealized appreciation on investments 39,239,212
Accumulated net realized loss on investments (129,371,822)
Accumulated undistributed net investment income 1,226,928
--------------
Total $1,264,912,337
==============
Shares of beneficial interest outstanding 184,906,581
==============
Class A shares:
Net asset value and redemption price per share
(net assets of $593,341,090 / 86,718,180 shares of
beneficial interest outstanding) $6.84
=====
Offering price per share (100/95.25) $7.18
=====
Class B shares:
Net asset value and offering price per share
(net assets of $671,571,247 / 98,188,401 shares of
beneficial interest outstanding) $6.84
=====
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 (Unaudited)
- ------------------------------------------------------------------------------
Six Months Ended January 31, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $51,123,133
-----------
Expenses -
Management fee $ 4,021,633
Trustees' compensation 52,008
Shareholder servicing agent fee (Class A) 413,932
Shareholder servicing agent fee (Class B) 764,493
Distribution and service fee (Class A) 988,554
Distribution and service fee (Class B) 3,692,845
Custodian fee 271,920
Postage and printing 89,992
Auditing fees 36,550
Legal fees 2,044
Miscellaneous 455,990
-----------
Total expenses $10,789,961
Fees paid indirectly (254,834)
-----------
Net expenses $10,535,127
-----------
Net investment income $40,588,006
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(1,443,931)
Futures contracts (417,453)
-----------
Net realized loss on investments $(1,861,384)
-----------
Change in unrealized appreciation -
Investments $36,867,046
Futures contracts 257,131
-----------
Net unrealized gain on investments $37,124,177
-----------
Net realized and unrealized gain on investments and
foreign currency $35,262,793
-----------
Increase in net assets from operations $75,850,799
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
- ------------------------------------------------------------------------------
Six Months Ended
January 31, 1996 Year Ended
(Unaudited) July 31, 1995
- ------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 40,588,006 $ 94,537,796
Net realized loss on investments and
foreign currency transactions (1,861,384) (44,236,628)
Net unrealized gain on investments and
foreign currency 37,124,177 68,708,743
-------------- --------------
Increase in net assets from operations $ 75,850,799 $ 119,009,911
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (17,979,617) $ (26,574,630)
From net investment income (Class B) (21,260,240) (62,269,346)
From paid-in capital (Class A) -- (2,036,802)
-------------- --------------
Total distributions declared to
shareholders $ (39,239,857) $ (90,880,778)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 136,802,638 $ 207,482,564
Net asset value of shares issued to
shareholders in reinvestment of
distributions 17,973,027 40,173,434
Cost of shares reacquired (272,527,067) (582,715,690)
-------------- --------------
Decrease in net assets from Fund share
transactions $ (117,751,402) $ (335,059,692)
-------------- --------------
Total decrease in net assets (81,140,460) $ (306,930,559)
Net assets:
At beginning of period 1,346,052,797 1,652,983,356
-------------- --------------
At end of period (including accumulated
undistributed (distributions in excess
of) net investment income of $1,226,928
and $(121,221), respectively) $1,264,912,337 $1,346,052,797
============== ==============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------------------------------
Six Months Eight
Ended Year Months Year Ended
January 31, Ended Ended November 30,
1996 July 31, July 31, -----------------------------------
(Unaudited) 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.65 $ 6.49 $ 6.85 $ 6.82 $ 6.95
------ ------ ------ ------ ------
Income from investment operations<F4> -
Net investment income<F6> $ 0.22 $ 0.45 $ 0.29 $ 0.34 $ 0.46
Net realized and unrealized gain
(loss) on investment transactions 0.18 0.14 (0.36) 0.20 0.09
------ ------ ------ ------ ------
Total from investment operations $ 0.40 $ 0.59 $(0.07) $ 0.54 $ 0.55
------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.21) $(0.42) $(0.20) $(0.47) $(0.42)
In excess of net realized gain on
investments -- -- -- (0.04) --
From paid-in capital -- -- (0.09) -- (0.26)
Tax return of capital -- (0.01) -- -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.21) $(0.43) $(0.29) $(0.51) $(0.68)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.84 $ 6.65 $ 6.49 $ 6.85 $ 6.82
====== ====== ====== ====== ======
Total return<F3> 6.21%<F2> 9.60% (1.51)%<F1> 8.11% 8.25%
Ratios (to average net assets)
Supplemental data<F6>:
Expenses<F5> 1.22%<F1> 1.25% 1.27%<F1> 1.38% 1.42%
Net investment income 6.48%<F1> 6.99% 6.46%<F1> 6.30% 6.57%
Portfolio turnover 12% 87% 37% 167% 484%
Net assets at end of period (000,000
omitted) 593 $ 534 $ 424 $ 522 $ 715
------ ------ ------ ------ ------
<FN>
<F1> Annualized.
<F2> Not annualized.
<F3> Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
<F4> Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
<F5> For fiscal periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<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 the ratios would have been:
Net investment income -- -- $ 0.29 $ 0.34 --
Ratios (to average net assets):
Expenses -- -- 1.28% 1.46% --
Net investment income -- -- 6.45% 6.22% --
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1991 1990 1989 1988 1987 1986<F1>
- -----------------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of
period $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82 $ 9.53
------ ------ ------ ------ ------ ------
Income from investment operations<F4> -
Net investment income $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75 $ 0.72
Net realized and unrealized gain
(loss) on investment transactions 0.25 (0.40) 0.48 (0.06) (1.08) 0.43
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.73 $ 0.13 $ 1.07 $ 0.58 $(0.33) $ 1.15
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.44) $(0.49) $(0.58) $(0.64) $(0.82) $(0.65)
From net realized gain on
investments -- -- -- -- (0.01) (0.21)
From paid-in capital (0.35) (0.49) (0.45) (0.46) (0.32) --
------ ------ ------ ------ ------ ------
Total distributions declared
to shareholders $(0.79) $(0.98) $(1.03) $(1.10) $(1.15) $(0.86)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82
====== ====== ====== ====== ====== ======
Total return<F3> 11.00% 2.05% 14.72% 7.39% (3.37)% 13.75%<F2>
Ratios (to average net assets)/
Supplemental data:
Expenses 1.44% 1.40% 1.37% 1.38% 1.34% 1.00%<F2>
Net investment income 6.91% 7.29% 7.57% 7.88% 8.34% 9.54%<F2>
Portfolio turnover 731% 507% 489% 285% 212% 169%
Net assets at end of period
(000,000 omitted) $ 886 $1,068 $1,380 $1,295 $1,129 $ 593
<FN>
<F1> For the period from the commencement of investment operations, January 9, 1986 to November 30, 1986.
<F2> Annualized.
<F3> Total returns for Class A shares do not include the applicable sales charge (except for reinvestment dividends prior to
October 1, 1989). If the charge had been included, the results would have been lower.
<F4> Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
</FN>
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------
Six Months Eight
Ended Year Months
January 31, Ended Ended Period Ended
1996 July 31, July 31, November 30,
(Unaudited) 1995 1994 1993<F1>
- -----------------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.65 $ 6.49 $ 6.84 $ 6.97
------ ------ ------ ------
Income from investment operations<F4> -
Net investment income<F6> $ 0.20 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain
(loss) on investment transactions 0.18 0.14 (0.35) (0.44)
------ ------ ------ ------
Total from investment operations $ 0.38 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.19) $(0.38) $(0.18) $(0.07)
From paid-in capital -- -- (0.08) --
Tax return of capital -- (0.01) -- --
------ ------ ------ ------
Total distributions declared
to shareholders $(0.19) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------
Net asset value - end of period $ 6.84 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ======
Total return 5.81%<F3> 8.81% (1.97)%<F2> (3.91)%<F2>
Ratios (to average net assets)/
Supplemental data<F6>:
Expenses<F5> 1.92%<F2> 1.96% 1.94%<F2> 1.87%<F2>
Net investment income 5.85%<F2> 6.28% 5.80%<F2> 5.92%<F2>
Portfolio turnover 12% 87% 37% 167%
Net assets at end of period (000,000
omitted) $ 672 $ 812 $1,229 $1,628
<FN>
<F1> For the period from the commencement of offering of Class B shares, September 7, 1993 to November 30, 1993.
<F2> Annualized.
<F3> Not annualized.
<F4> Per share data for the periods subsequent to November 30, 1993 is based on average shares outstanding.
<F5> For fiscal periods ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<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 the ratios would have been:
Net investment income -- -- $ 0.26 $ 0.38
Ratios (to average net assets):
Expenses -- -- 1.94%<F2> 1.94%<F2>
Net investment income -- -- 5.80%<F2> 5.85%<F2>
</FN>
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(1) Business and Organization
MFS Government Mortgage Fund (the Fund) is a diversified series of MFS Series
Trust X (the Trust). The Trust 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 market
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 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 futures contracts is designed to hedge against
anticipated future changes in interest rates or securities prices. Investments
in interest rate futures for purposes other than hedging may be made to modify
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 futures contracts and may realize a
loss.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on
the Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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.
At July 31, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of ($95,700,480) 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), July 31, 2002 ($5,628,534), and July 31, 2003 ($4,604,728).
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class
A and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an effective annual rate
equal to 0.60% of average daily net assets for the period ended January 31,
1996.
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 and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $24,908 for the period ended January 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$13,981 as its portion of the sales charge on sales of Class A shares of the
Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
to each securities dealer that enters into a sales agreement with MFD of up to
0.25% per annum of the Fund's average daily net assets attributable to Class A
shares which are attributable to that securities dealer, a distribution fee to
MFD of up to 0.10% per annum of the Fund's average daily net assets
attributable to Class A shares, commissions to dealers and payments to MFD
wholesalers for sales at or above a certain dollar level, and other such
distribution-related expenses that are approved by the Fund. MFD retains the
service fee for accounts not attributable to a securities dealer, which
amounted to $62,447 for the period ended January 31, 1996. Fees incurred under
the distribution plan during the period ended January 31, 1996 were 0.35% of
average daily net assets attributable to Class A shares on an annualized
basis.
The Class B distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The
service fee is intended to be additional consideration for services rendered
by the dealer with respect to Class B shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $74,735
for Class B shares for the period ended January 31, 1996. Fees incurred under
the distribution plan during the period ended January 31, 1996 were 1.00% of
average daily net assets attributable to Class B shares on an annualized
basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the period ended January 31, 1996 were
$0 and $312,255 for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A
and Class B shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were $138,622,782 and $158,262,400, 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 $1,202,544,865
==============
Gross unrealized appreciation $ 48,346,268
Gross unrealized depreciation (9,107,056)
--------------
Net unrealized appreciation $ 39,239,212
==============
(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 Year Ended
January 31, 1996 July 31, 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 13,499,049 $ 90,693,699 27,491,721 $ 181,805,681
Shares issued to shareholders in reinvestment of distributions 1,178,243 7,909,279 1,875,858 12,007,470
Shares reacquired (8,235,491) (55,392,120) (14,375,598) (92,201,944)
----------- ------------- ----------- -------------
Net increase 6,441,801 $ 43,210,858 14,991,981 $ 101,611,207
=========== ============= ========== =============
<CAPTION>
Class B Shares Six Months Ended Year Ended
January 31, 1996 July 31, 1995
------------------------------ ----------------------------
Shares Amount Shares Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 6,837,644 $ 46,108,939 4,039,025 $ 25,676,883
Shares issued to shareholders in reinvestment of distributions 1,499,920 10,063,748 4,409,939 28,165,964
Shares reacquired (32,297,321) (217,134,947) (75,797,892) (490,513,746)
----------- ------------- ----------- -------------
Net decrease (23,959,757) $(160,962,260) (67,348,928) $(436,670,899)
=========== ============= =========== =============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the period ended January
31, 1996 was $7,692.
(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.
The Fund had no futures contracts outstanding at January 31, 1996.
(8) Restricted Securities
The Fund may invest not more than 10% of its total assets in securities which
are subject to legal or contractual restrictions on resale. At January 31,
1996, the Fund owned the following restricted security (constituting 2.18% of
total assets) which may not be publicly sold without registration under the
Securities Act of 1933 (the 1933 Act). 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. This
security may be offered and sold to "qualified institutional buyers" under
Rule 144A of the 1933 Act.
<TABLE>
<CAPTION>
Date of Par Amount
Description Acquisition (000 omitted) Cost Value
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHA, Centennial, "A", 8.25s, 2028 3/23/93 $23,826 $24,541,260 $27,574,370
===========
</TABLE>
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R)
GOVERNMENT [DALBAR
MORTGAGE LOGO]
FUND
500 Boylston Street
Boston, MA 02116
[logo] MFS(R)
THE FIRST NAME IN MUTUAL FUNDS
BULK RATE
U.S. POSTAGE
P A I D
PERMIT #55638
BOSTON, MA
MGM-3 4/96 91M 31/231
