COVER
[MFS LOGO]
INVESTMENT MANAGEMENT
Annual Report
for Year Ended
July 31, 1996
MFS(R) Government Mortgage Fund
[PHOTO OF CAPITOL BUILDING WITH AMERICAN FLAG]
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
<S> <C>
Letter from the Chairman 1
A Discussion with the Fund Manager 3
Performance Summary 5
Portfolio of Investments 7
Financial Statements 9
Notes to Financial Statements 15
It's Easy to Contact Us 22
MFS Investment Opportunities 23
The MFS Family of Funds(R) 24
Trustees and Officers 25
</TABLE>
Highlights
[BULLET] The Fund's Class A shares had a total return of 4.76% for the past
year, while Class B shares returned 3.98%.
[BULLET] The Fund has reduced its duration to make it less sensitive to interest
rate changes, a modification that grew out of our outlook for more
rapid economic growth and, possibly, higher interest rates.
[BULLET] Major questions facing the fixed-income markets are whether robust
economic growth will continue and whether low levels of unemployment
will push up wages and prices.
[BULLET] We think there is a greater chance that interest rates will rise rather
than decline over the next few months, which means that mortgages will
be less susceptible to prepayment risk.
<PAGE>
Letter from the Chairman
[PHOTO OF A. KEITH BRODKIN]
Dear Shareholders:
With over half of 1996 behind us, the U.S. economy appears to have settled
into a pattern of fairly reasonable growth and moderate inflation - two
factors that we think can be important contributors to a favorable long-term
investment climate. During the first quarter of 1996, real
(inflation-adjusted) economic growth was 2.3% on an annualized basis,
followed by a rate of 4.2% in the second quarter. Thus, while real growth in
gross domestic product has exceeded our expectations so far this year, we
continue to believe that growth from quarter to quarter will be uneven, but
may accelerate slightly to exceed 2.5% by the end of 1996. Although
individual consumers appear to be carrying an excessive debt load, the
consumer sector itself, which represents two-thirds of the economy, continues
to be impressive as the automobile and housing markets remain resilient.
Consumer spending has also been positively impacted by widespread job growth.
At the same time, however, the economies of Europe and Japan continue to be
in the doldrums, weakening U.S. export markets while subduing the capital
spending plans of American corporations.
In the bond markets, persistent signs of economic weakness led to decreases
in short-term interest rates by the Federal Reserve Board in late 1995 and
early 1996. However, should signs of economic growth and, particularly, of
higher inflation continue, we would expect the Fed to maintain its
anti-inflationary stance. In the beginning of the year, bond 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. Later, fixed-income
markets began reacting to conflicting signals regarding the strength of the
economy with more volatile trading patterns marked by an upward bias in
interest rates. Interest rates may move even higher over the coming months,
but we believe the current rise in bond yields is reaching a point where
fixed-income markets are fairly valued.
Finally, as you may have noticed, this report to shareholders incorporates
a number of changes which we believe will make it more informative and useful
to you. Following the discussion with the Fund Manager, you will find new
information on the Fund's holdings, including charts illustrating
1
<PAGE>
Letter from the Chairman - continued
the portfolio's concentration in the different types of investments that meet
its criteria. Near the back of the report, you will find a list of telephone
numbers and addresses in case you need to contact MFS. We hope to hear from
you.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[SIG] A. KEITH BRODKIN
A. Keith Brodkin
Chairman and President
August 14, 1996
2
<PAGE>
A Discussion with the Fund Manager
[PHOTO] JAMES J. CALMAS
Q. How has the Fund performed over the past year, Jim?
A. With a total return of 4.76% for Class A shares and 3.98% for Class B
shares, the Fund's returns for the year ended July 31, 1996 were not as great
as we would have hoped. These returns, which include the reinvestment of
distributions but exclude the effects of any sales charges, compare to a
6.19% return for the Lehman Brothers Government National Mortgage Association
(GNMA) Index, an unmanaged index of GNMA issues. The Fund also underperformed
the average GNMA fund tracked by Lipper Analytical Services, which had a
total return of 4.94%.
Q. What do you see as some of the major factors that affected performance?
A. The major factor was the Fund's interest rate sensitivity (often referred
to as duration) during the first six months of 1996. The pace of economic
growth and the resulting increase in interest rates were greater than we had
anticipated - especially since inflation has remained subdued, at around 3%.
After interest rates fell throughout the second half of 1995, the Fund's
interest rate sensitivity was greater than that of the GNMA market. This
adversely affected the Fund as rates rose during 1996. In addition, the
Fund's U.S. Treasury holdings underperformed mortgage-backed securities. For
instance, the return of the five-year Treasury bond was up only 3.89% and
that of the 10-year bond only 3.14% during the past 12 months. Keep in mind
that principal value and interest on Treasury securities are guaranteed by
the U.S. government if held to maturity.
Q. Has the Fund's duration changed over the past year, and is it
positioned any differently than the average Lipper fund in terms of duration?
A. The Fund has reduced its duration so that it is now less than those of the
GNMA market and the average Lipper GNMA fund. This change grew out of our
outlook for more rapid economic growth and the greater possibility that the
Federal Reserve might raise short-term interest rates.
Q. What is the Fund's current interest rate sensitivity and why are you at
that level now?
A. The Fund's duration is currently 3.85 years, which means that if interest
rates were to rise by one percentage point, the price of the Fund would
decline by approximately 3.85%. Of course, over time we believe that the
income provided by the securities in the portfolio will improve the Fund's
3
<PAGE>
A Discussion with the Fund Manager - continued
total return. At this level of duration, it is our opinion that the Fund's
returns would not be drastically impaired if rates did rise. Moreover, if
rates were to fall unexpectedly, the Fund would still receive some benefits.
Q. What changes have you seen in the interest rate environment in general
and the mortgage market in particular?
A. The major questions which now confront the fixed-income markets are
whether economic growth will continue to be robust and whether the current
low level of unemployment (5.4%) will cause wages and, hence, prices to
increase. While some market participants think that the rise in yields during
1996 will slow the economy, others feel that growth will continue to be
strong and that the Federal Reserve may be forced to act. We believe that in
an environment of rising or steady interest rates, the additional yield of
mortgages will most likely allow them to outperform Treasuries. This is the
reason the Fund has reduced its duration while continuing to hold
approximately 80% of its assets in mortgage-backed securities.
Q. What kind of environment do you see for the fixed-income and mortgage
markets over the next few months and how are you positioning the Fund for it?
A. We think there is probably a greater chance that interest rates will rise
rather than decline over the next few months, and that the 30-year U.S.
Treasury bond will continue to trade in a range between 6.5% and 7.5%. With
interest rates trading within this range, and with much of the mortgage
market now trading below par, we feel that mortgages are now less susceptible
to prepayment risk. So we believe that the additional 1.15% of yield provided
by GNMA current coupon mortgages is attractive.
[SIG] JAMES J. CALMAS
James J. Calmas
Fund Manager
Fund 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 Fund Manager of MFS
Government Mortgage Fund.
4
<PAGE>
Performance Summary
The information below and on the following page illustrates the historical
performance of MFS Government Mortgage Fund Class A shares in comparison to
various market indicators. Fund results in the graph reflect the deduction of
the 4.75% maximum sales charge; benchmark comparisons are unmanaged and do
not reflect any fees or expenses. You cannot invest in an index. All results
reflect the reinvestment of all dividends and capital gains. Class B shares
were offered effective September 7, 1993. Information on Class B share
performance appears on the next page.
Please note that the performance of other classes will be greater than or
less than the line shown, based on the differences in loads and fees paid by
shareholders investing in the different classes.
Growth of a Hypothetical $10,000 Investment
(For the Period from January 9, 1986 to July 31, 1996)
[LINE CHART}
Consumer Lehman Brothers MFS Government
Price Index GNMA Index Mortgage Fund (Class A)
86 10018 10651 10756
87 10409 11389 10481
88 10824 12405 11267
89 11382 14269 12767
90 11931 15613 13218
91 12462 17462 14973
92 12855 19762 15873
93 13212 21425 16994
94 13578 21472 16628
95 13953 23744 19354
96 14365 25214 19191
We have included the average annual total returns of all GNMA funds
(including the Fund) tracked by Lipper Analytical Services, Inc. for the
applicable time periods (52, 34, 29 and 16 funds for the 1-, 3- and 5-year
periods ended July 31, 1995, and for the period from January 1, 1986 through
July 31, 1996, respectively). Because these returns do not reflect any
applicable sales charges, we have also included the Fund's results at net
asset value (no sales charge) for comparison. All results are historical and,
therefore, are not an indication of future results. The principal value and
income return of an investment in a mutual fund will vary with changes in
market conditions, and shares, when redeemed, may be worth more or less than
their original cost.
5
<PAGE>
Performance Summary-continued
<TABLE>
<CAPTION>
Average Annual Total Returns 1 Year 3 Years 5 Years 10 Years
- ------------------------------------- ----- ------ ------ ---------
<S> <C> <C> <C> <C>
MFS Government Mortgage Fund
(Class A) including 4.75% sales
charge -0.19% +2.79% +5.90% +5.95%
- ------------------------------------- --- ---- ---- -------
MFS Government Mortgage Fund
(Class A) at net asset value +4.76% +4.48% +6.93% +6.47%
- ------------------------------------- --- ---- ---- -------
MFS Government Mortgage Fund
(Class B) with CDSC +0.05% +2.90% +6.20% +6.25%
- ------------------------------------- --- ---- ---- -------
MFS Government Mortgage Fund
(Class B) without CDSC +3.98% +3.78% +6.50% +6.25%
- ------------------------------------- --- ---- ---- -------
Lehman Brothers GNMA Index** +6.19% +2.83% +2.88% +3.48%
- ------------------------------------- --- ---- ---- -------
Average GNMA Fund +4.94% +4.45% +6.88% +7.96%
- ------------------------------------- --- ---- ---- -------
Consumer Price IndexS.** +2.95% +5.58% +7.62% +9.13%
- ------------------------------------- --- ---- ---- -------
</TABLE>
Class B share performance includes the performance of the Fund's Class A shares
for periods prior to the commencement of offering of Class B shares on September
7, 1993. Sales charges and operating expenses for Class A and Class B shares
differ. The Class A share performance, which is included within the Class B
share SEC performance, has been adjusted to reflect the CDSC generally
applicable to Class B shares rather than the initial sales charge generally
applicable to Class A shares. Class B share performance has not been adjusted,
however, to reflect differences in operating expenses (e.g., Rule 12b-1 fees).
**Source: Lipper Analytical Services, Inc. Benchmark comparisons begin on
January 1, 1986.
S.The Consumer Price Index is a popular measure of change in prices.
Fund Facts
Strategy: The Fund's primary investment objective is to provide a high
level of current income.
Commencement
of investment
operations: January 9, 1986
Size: $1.1 Billion as of July 31, 1996
6
<PAGE>
Portfolio of Investments - July 31, 1996
Bonds - 97.4%
<TABLE>
<CAPTION>
Principal
Amount
(000
Issuer Omitted) Value
- ------------------------------------------------ ------------ -------------
<S> <C> <C>
Federal Home Loan Mortgage Corporation - 5.0%
FHLMC, 8.5s, 2009 - 2017 $ 51 $ 52,520
FHLMC, 9s, 2001 - 2025 52,250 54,344,823
FHLMC, 9.5s, 2013 - 2021 327 348,018
----------
$ 54,745,361
- ------------------------------------------------ --------- ----------
Federal Housing Authority - 2.2%
FHA, Centennial, "A", 8.25s, 2028+ $ 23,755 $ 24,467,078
- ------------------------------------------------ --------- ----------
Federal National Mortgage Association - 4.3%
FNMA, 6.695s, 2005 $ 10,000 $ 9,512,500
FNMA, 7.5s, 2022 44 43,327
FNMA, 7.95s, 2005 6,290 6,504,253
FNMA, 8s, 2017 - 2023 1,368 1,375,321
FNMA, 8.5s, 2006 - 2022 2,322 2,380,627
FNMA, 9s, 2002 - 2017 19,893 20,676,288
FNMA, Stripped Mortgage Backed Security, "240",
7s, 2023 16,732 5,819,647
----------
$ 46,311,963
- ------------------------------------------------ --------- ----------
Financing Corporation - 6.1%
FICO, 10.7s, 2017 $ 11,305 $ 15,261,750
FICO, 9.8s, 2018 5,285 6,636,797
FICO, 10.35s, 2018 33,965 44,722,395
----------
$ 66,620,942
- ------------------------------------------------ --------- ----------
Small Business Administration - 5.2%
SBA, 10s, 2000 $ 3,463 $ 3,825,716
SBA, 10.1s, 2000 6,974 7,708,729
SBA, 8.8s, 2001 3,198 3,415,250
SBA, 8.85s, 2001 12,085 12,930,142
SBA, 9.3s, 2001 3,585 3,882,267
SBA, 9.45s, 2001 8,771 9,551,646
SBA, 9.55s, 2001 9,062 9,873,472
SBA, 9.7s, 2001 2,799 3,066,503
SBA, 8.75s, 2006 158 166,077
SBA, 8.05s, 2012 2,686 2,677,015
----------
$ 57,096,817
- ------------------------------------------------ --------- ----------
U.S. Federal Agencies - 0.3%
Federal Agricultural Mortgage Corp., 8.07s, 2006 $ 3,000 $ 3,205,770
- ------------------------------------------------ --------- ----------
U.S. Government Guaranteed - 68.2%
Government National Mortgage Association - 67.9%
GNMA, 6.5s, 2023 - 2026 $ 39,325 $ 36,486,456
GNMA, 7s, 2022 - 2025 205,496 196,507,176
GNMA, 7.5s, 2008 - 2026 188,741 185,834,552
GNMA, 8s, 2002 - 2026 73,307 73,758,771
GNMA, 8.5s, 2022 - 2023 11,850 12,157,297
GNMA, 9s, 2013 - 2022 83,321 87,497,902
GNMA, 9.5s, 2009 - 2021 94,617 100,980,381
GNMA, 10s, 2011 - 2019 23,699 25,772,823
GNMA, 11s, 2021 21,292 23,826,600
GNMA, 12.5s, 2011 513 596,735
----------
$743,418,693
- --------------------------------------------------------------------------------
7
<PAGE>
Portfolio of Investments - continued
Bonds - continued
- --------------------------------------------------------------------------------
Principal
Amount
(000
Issuer Omitted) Value
- ------------------------------------------------ ------------ -------------
U.S. Government Guaranteed - continued
U.S. Government Guaranteed Notes - 0.3%
AID-Israel, 5.89s, 2005 $ 3,000 $ 2,769,090
- ------------------------------------------------ --------- ----------
Total U.S. Government Guaranteed $ 746,187,783
- ---------------------------------------------------------------- ----------
U.S. Treasury Obligations - 6.1%
Stripped Principal Payments, 0s, 2017 $22,900 $ 5,200,132
U.S. Treasury Bonds, 13.125s, 2001 25,000 31,679,750
U.S. Treasury Bonds, 10.75s, 2003 3,085 3,759,844
U.S. Treasury Bonds, 10.75s, 2005 20,800 26,269,776
----------
$ 66,909,502
- ------------------------------------------------ --------- ----------
Total Bonds (Identified Cost, $1,083,011,989) $1,065,545,216
- ---------------------------------------------------------------- ----------
Repurchase Agreement - 1.8%
------------------------------------------------------------------------------
Goldman Sachs, dated 7/31/96, due 8/01/96, total
to be received $19,410,019 (secured by
various U.S. Treasury and Federal Agency
obligations in a jointly traded account), at Cost $19,407 $ 19,407,000
- ------------------------------------------------ --------- ----------
Total Investments (Identified Cost, $1,102,418,989) $1,084,952,216
Other Assets, Less Liabilities - 0.8% 9,016,706
------------------------------------------------------------- ----------
Net Assets - 100.0% $1,093,968,922
- ---------------------------------------------------------------- ----------
</TABLE>
+ Restricted security.
See notes to financial statements
8
<PAGE>
Financial Statements
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
July 31, 1996
- ------------------------------------------------------------------------------ -------------
<S> <C>
Assets:
Investments, at value (identified cost, $1,102,418,989) $1,084,952,216
Cash 232
Receivable for Fund shares sold 112,281
Interest receivable 11,905,827
Other assets 13,899
-----------
Total assets $1,096,984,455
-----------
Liabilities:
Distributions payable $ 1,975
Payable for Fund shares reacquired 1,830,715
Payable for daily variation margin on open futures contracts 441,500
Payable to affiliates -
Management fee 13,496
Shareholder servicing agent fee 5,471
Distribution fee 267,494
Accrued expenses and other liabilities 454,882
-----------
Total liabilities $ 3,015,533
-----------
Net assets $1,093,968,922
-----------
Net assets consist of:
Paid-in capital $1,233,948,284
Unrealized depreciation on investments (18,775,406)
Accumulated net realized loss on investments (121,061,407)
Accumulated distributions in excess of net investment income (142,549)
-----------
Total $1,093,968,922
-----------
Shares of beneficial interest outstanding 167,591,758
-----------
Class A shares:
Net asset value per share (net assets of $540,818,176 / 82,839,977 shares
of beneficial interest outstanding) $6.53
-----------
Offering price per share (100/95.25) $6.86
-----------
Class B shares:
Net asset value and offering price per share (net assets of $553,150,746 /
84,751,781 shares of beneficial interest outstanding) $6.53
-----------
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.
</TABLE>
See notes to financial statements
9
<PAGE>
Financial Statements - continued
Statement of Operations
<TABLE>
<CAPTION>
Year Ended July 31, 1996
- ------------------------------------------------- --------------
<S> <C>
Net investment income:
Interest income $ 97,123,348
------------
Expenses -
Management fee $ 6,612,086
Trustees' compensation 81,805
Shareholder servicing agent fee (Class A) 819,496
Shareholder servicing agent fee (Class B) 1,402,750
Distribution and service fee (Class A) 1,955,061
Distribution and service fee (Class B) 6,687,956
Custodian fee 434,756
Postage 308,270
Printing 62,850
Auditing fees 42,200
Legal fees 8,023
Miscellaneous 702,992
------------
Total expenses $ 19,118,245
Fees paid indirectly (375,760)
------------
Net expenses $ 18,742,485
------------
Net investment income $ 78,380,863
------------
Realized and unrealized gain (loss) on
investments:
Realized loss (identified cost basis) -
Investment transactions $ (1,605,979)
Futures contracts (820,865)
------------
Net realized loss on investments $ (2,426,844)
------------
Change in unrealized depreciation -
Investments $(19,838,939)
Futures contracts (1,051,502)
------------
Net unrealized loss on investments $(20,890,441)
------------
Net realized and unrealized loss on investments $(23,317,285)
------------
Increase in net assets from operations $ 55,063,578
------------
</TABLE>
See notes to financial statements
10
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended July 31, 1996 1995
- -------------------------------------------- ----------- -------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 78,380,863 $ 94,537,796
Net realized loss on investments (2,426,844) (44,236,628)
Net unrealized gain (loss) on investments (20,890,441) 68,708,743
--------- -----------
Increase in net assets from operations $ 55,063,578 $ 119,009,911
--------- -----------
Distributions declared to shareholders -
From net investment income (Class A) $ (35,352,327) $ (26,574,630)
From net investment income (Class B) (37,804,675) (62,269,346)
Tax return of capital (2,132,709) (2,036,802)
--------- -----------
Total distributions declared to
shareholders $ (75,289,711) $ (90,880,778)
--------- -----------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 225,940,176 $ 207,482,564
Net asset value of shares issued to
shareholders in reinvestment of
distributions 34,824,383 40,173,434
Cost of shares reacquired (492,622,301) (582,715,690)
--------- -----------
Decrease in net assets from Fund share
transactions $ (231,857,742) $ (335,059,692)
--------- -----------
Total decrease in net assets $ (252,083,875) $ (306,930,559)
Net assets:
At beginning of period 1,346,052,797 1,652,983,356
--------- -----------
At end of period (including accumulated
distributions in excess of net investment
income of $142,549 and $121,221,
respectively) $1,093,968,922 $1,346,052,797
--------- -----------
</TABLE>
See notes to financial statements
11
<PAGE>
Financial Statements - continued
Financial Highlights
<TABLE>
<CAPTION>
Eight
Months
Ended
Year Ended July July Year Ended
31, 31, November 30,
---------------- ------- ------------------
1996 1995 1994 1993 1992
- ------------------------------------------------ ------ ------ ------- ------ --------
Class
A
- ------------------------------------------------ ------ ---------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.65 $ 6.49 $ 6.85 $ 6.82 $ 6.95
---- ---- ----- ---- ------
Income from investment operations# -
Net investment incomeS. $ 0.45 $ 0.45 $ 0.29 $ 0.34 $ 0.46
Net realized and unrealized gain (loss) on
investments (0.14) 0.14 (0.36) 0.20 0.09
---- ---- ----- ---- ------
Total from investment operations $ 0.31 $ 0.59 $ (0.07) $ 0.54 $ 0.55
---- ---- ----- ---- ------
Less distributions declared to shareholders -
From net investment income $ (0.42) $ (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) (0.01) -- -- --
---- ---- ----- ---- ------
Total distributions declared to
shareholders $ (0.43) $ (0.43) $ (0.29) $ (0.51) $ (0.68)
---- ---- ----- ---- ------
Net asset value - end of period $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82
---- ---- ----- ---- ------
Total return++ 4.76% 9.60% (1.51)%+ 8.11% 8.25%
Ratios (to average net assets)/Supplemental
data:S.
Expenses## 1.16% 1.25% 1.27%+ 1.38% 1.42%
Net investment income 6.75% 6.99% 6.46%+ 6.30% 6.57%
Portfolio turnover 25% 87% 37% 167% 484%
Net assets at end of period (000,000 omitted) $ 541 $ 534 $ 424 $ 522 $ 715
+ Annualized.
# Per share data for the periods subsequent to November 30, 1993 is based on average shares
outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without
reduction for fees paid indirectly.
++ Total returns for Class A shares do not include the applicable sales charge (except for
reinvested dividends prior to October 1, 1989). If the charge had been included, the results
would have been lower.
S. The investment adviser voluntarily waived a portion of its management fee for the periods
indicated. If these fees had been incurred by the Fund, the net investment income per share and
the ratios would have been:
Net investment income -- -- $ 0.29 $ 0.34 --
Ratios (to average net assets):
Expenses -- -- 1.28%+ 1.46% --
Net investment income -- -- 6.45%+ 6.22% --
</TABLE>
See notes to financial statements
12
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Year Ended November 30, 1991 1990 1989 1988 1987 1986*
- -------------------------------------------- ------ ------ ------ ------ ------ --------
Class A
- -------------------------------------------- ------ ------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82 $ 9.53
---- ---- ---- ---- ---- ------
Income from investment operations -
Net investment income $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75 $ 0.72
Net realized and unrealized gain (loss) on
investments 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++ 11.00% 2.05% 14.72% 7.39% (3.37)% 13.75%+
Ratios (to average net assets)/
Supplemental data:
Expenses 1.44% 1.40% 1.37% 1.38% 1.34% 1.00%+
Net investment income 6.91% 7.29% 7.57% 7.88% 8.34% 9.54%+
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
</TABLE>
* For the period from the commencement of investment operations,
January 9, 1986 to November 30, 1986.
+ Annualized.
++ Total returns for Class A shares do not include the applicable sales charge
(except for reinvested dividends prior to October 1, 1989). If the charge
had been included, the results would have been lower.
See notes to financial statements
13
<PAGE>
Financial Statements - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
Eight
Months
Ended Period Ended
Year Ended July 31, July 31, November 30,
---------------- ------- -------------
1996 1995 1994 1993**
- ------------------------------------------------ ------ ------ ------- -------------
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# -
Net investment incomeS. $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain (loss) on
investments (0.13) 0.14 (0.35) (0.44)
---- ---- ----- ------
Total from investment operations $ 0.27 $ 0.55 $(0.09) $(0.06)
---- ---- ----- ------
Less distributions declared to shareholders -
From net investment income $(0.38) $(0.38) $(0.18) $(0.07)
From paid-in capital -- -- (0.08) --
Tax return of capital (0.01) (0.01) -- --
---- ---- ----- ------
Total distributions declared to shareholders $(0.39) $(0.39) $(0.26) $(0.07)
---- ---- ----- ------
Net asset value - end of period $ 6.53 $ 6.65 $ 6.49 $ 6.84
---- ---- ----- ------
Total return 3.98% 8.81% (1.97)%+ (3.91)%+
Ratios (to average net assets)/Supplemental
data[SECTION].:
Expenses## 1.87% 1.96% 1.94%+ 1.87%+
Net investment income 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover 25% 87% 37% 167%
Net assets at end of period (000,000 omitted) $ 553 $ 812 $1,229 $1,628
** For the period from the commencement of offering of Class B shares, September
7, 1993, to November 30, 1993.
+ Annualized.
# Per share data for the periods subsequent to November 30, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
[SECTION] The investment adviser voluntarily waived a portion of its management
fee for certain of the periods indicated. If these fees had been incurred by
the Fund, the net investment income per share and the ratios would have been:
Net investment income -- -- $ 0.26 $ 0.38
Ratios (to average net assets):
Expenses -- -- 1.94%+ 1.94%+
Net investment income -- -- 5.80%+ 5.85%+
</TABLE>
See notes to financial statements
14
<PAGE>
Notes to Financial Statements
(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
General - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues, are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Fund to
obtain those securities in the event of a default under the repurchase
agreement. The Fund monitors, on a daily basis, the value of the securities
transferred to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is greater than amounts owed to
the Fund under each such repurchase agreement. The Fund along with other
affiliated entities of Massachusetts Financial Services Company (MFS), may
utilize a joint trading account for the purpose of entering into one or more
repurchase agreements.
Futures Contracts - The Fund may enter into futures contracts for the
delayed delivery of securities, currency or contracts based on financial
indices 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
15
<PAGE>
Notes to Financial Statements - continued
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 income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided. The Fund files a tax return
annually using tax accounting methods required under provisions of the Code
which may differ from generally accepted accounting principles, the basis on
which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial
statements may differ from that reported on the Fund's tax return and,
consequently, the character of distributions to shareholders reported in the
financial highlights may differ from that reported to shareholders on Form
1099-DIV. Distributions to shareholders are recorded on the ex-dividend date.
The Fund distinguishes between distributions on a tax basis and a
financial reporting basis and requires that only distributions in excess of
tax basis earnings and profits are reported in the financial statements as a
tax return of capital. Differences in the recognition or classification of
income between the financial statements and tax earnings and profits which
result in temporary over-distributions for financial statement purposes, are
classified as distributions in excess of net investment income or accumulated
net realized gains. During the year ended July 31, 1996, $3,112,480 and
$5,763,395 were reclassified from accumulated distributions in excess of net
investment income and paid-in capital, respectively, and $8,875,875 was
reclassified to accumulated net realized loss on investments due to
differences between book
16
<PAGE>
Notes to Financial Statements - continued
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.
At July 31, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of ($122,165,401) 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, 1998 ($81,836,532), July 31, 2002
($5,628,534), July 31, 2003 ($4,604,728), and July 31, 2004 ($30,095,607).
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 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 MFS
to provide overall investment advisory and administrative services, and
general office facilities. The management fee was computed daily and paid
monthly at an annual rate equal to the lesser of (i) 0.65% of average daily
net assets or (ii) 0.30% of average daily net assets and 6.1% of the Fund's
gross income prior to January 1, 1996. Effective January 1, 1996, the
management fee is computed daily and paid monthly at an annual rate equal to
0.45% of the Fund's average daily net asset value.
The Fund pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Fund, all of whom receive
remuneration for their services to the Fund from MFS. Certain of the officers
and Trustees of the Fund are officers or directors of MFS, MFS Fund
Distributors, Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has
an unfunded defined benefit plan for all its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $30,440 for the year ended July 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor,
received $32,084 for the year ended July 31, 1996, as its portion of the
sales charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A 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
17
<PAGE>
Notes to Financial Statements - continued
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 $158,742 for the year ended July 31, 1996. Fees incurred
under the distribution plan during the year ended July 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 $176,901
for Class B shares for the year ended July 31, 1996. Fees incurred under the
distribution plan during the year ended July 31, 1996 were 0.99% of average
daily net assets attributable to Class B shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended July 31, 1996 were $27
and $487,099 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.
18
<PAGE>
Notes to Financial Statements - continued
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
- ------------------------- ----------- ------------
<S> <C> <C>
U.S. government
securities $308,239,561 $530,738,338
--------- ----------
</TABLE>
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Fund, as computed on a federal income tax basis, are
as follows:
<TABLE>
<CAPTION>
<S> <C>
Aggregate cost $1,102,422,327
-----------
Gross unrealized depreciation $ (29,820,870)
Gross unrealized appreciation 12,350,759
-----------
Net unrealized
depreciation $ (17,470,111)
-----------
</TABLE>
(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 Year Ended Year Ended
July 31, 1996 July 31, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
- ------------------------------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Shares sold 17,258,809 $ 115,389,414 27,491,721 $181,805,681
Shares issued to shareholders
in reinvestment of
distributions 2,410,533 16,042,351 1,875,858 12,007,470
Shares reacquired (17,105,744) (113,835,287) (14,375,598) (92,201,944)
--------- ---------- --------- -----------
Net increase 2,563,598 $ 17,596,478 14,991,981 $101,611,207
--------- ---------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
Class B Shares Year Ended Year Ended
July 31, 1996 July 31, 1995
-------------------------- -----------------------------
Shares Amount Shares Amount
- ------------------------------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C>
Shares sold 16,626,636 $ 110,550,762 4,039,025 $ 25,676,883
Shares issued to shareholders
in reinvestment of
distributions 2,820,005 18,782,032 4,409,939 28,165,964
Shares reacquired (56,843,019) (378,787,014) (75,797,892) (490,513,746)
--------- --------- --------- ------------
Net decrease (37,396,378) $(249,454,220) (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 year ended
July 31, 1996 was $1,000.
19
<PAGE>
Notes to Financial Statements - continued
(7) Financial Instruments
The Fund 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.
<TABLE>
<CAPTION>
Futures Contracts
Unrealized
Expiration Contracts Position Depreciation
- ------------------------------------- -------- ------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds September 1996 90 Short $ (141,418)
U.S. Treasury Notes September 1996 100 Short (91,510)
U.S. Treasury Bonds September 1996 110 Short (241,594)
U.S. Treasury Bonds September 1996 224 Short (799,971)
U.S. Treasury Bonds September 1996 150 Short (34,140)
-----------
$(1,308,633)
-----------
</TABLE>
At July 31, 1996, 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 total assets in securities which
are subject to legal or contractual restrictions on resale. At July 31, 1996,
the Fund owned the following restricted security (constituting 2.23% of total
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.
<TABLE>
<CAPTION>
Par Amount
Date of (000
Description Acquisition Omitted) Cost Value
- -------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
FHA, Centennial, "A", 8.25s,
2028 3/23/93 $23,755 $24,467,315 $24,467,078
---------
</TABLE>
20
<PAGE>
Independent Auditors' Report
To the Trustees of MFS Series Trust X 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
July 31, 1996, the related statement of operations for the year then ended,
the statement of changes in net assets for the years ended July 31, 1996 and
1995, and the financial highlights for the years ended July 31, 1996 and
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 July 31, 1996, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Mortgage Fund at July 31, 1996, 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
September 4, 1996
21
<PAGE>
It's Easy to Contact Us
[PHONE RECEIVER] MFS Automated Information
Account Information:
Call 1-800-MFS-TALK (1-800-637-8255)
anytime.
Market Outlook:
Call 1-800-637-4458 anytime for the MFS outlook
on the bond and stock markets.
? MFS Personal Service
Account Service:
Call 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
Product Information:
Call 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time.
Service for the Hearing-Impaired:
Call 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time (TDD required).
[ENVELOPE] MFS Mailing Addresses
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
Web Site
http://www.mfs.com
22
<PAGE>
MFS Investment Opportunities
The MFS Family of Funds(R) falls into the eight general categories below. All
offer full-time professional management, a diversified portfolio, and a wide
array of shareholder services.
Stock funds seek growth of capital rather than income through investments
in stocks.
Stock and bond funds seek current income and growth of capital through
investments in both stocks and bonds.
Bond funds seek current income through investments in debt securities.
World funds seek stock, balanced, and bond fund objectives through
investments in U.S. and foreign stocks and bonds.
Limited-maturity bond funds seek current income and preservation of
capital through investments in debt securities with remaining maturities of
five years or less.
National tax-free bond funds seek current income exempt from federal
income tax through investments in debt securities issued by states and
municipalities.(1)
State tax-free bond funds seek current income exempt from federal and
state income taxes through investments in debt securities issued by a single
state and its municipalities.(1)
Money market funds seek preservation of capital and current income through
investments in short-term debt securities.(2)
To determine which MFS fund may be appropriate for you, please contact
your financial adviser, who can help you relate these investment
opportunities to your financial goals. If you prefer, you may call MFS
Investor Information for literature(3) on MFS products and services:
1-800-637-2929, from 9 a.m. to 5 p.m. Eastern time any business day (leave a
message anytime).
(1) A small portion of the income may be subject to federal, state and/or
alternative minimum tax.
(2) Investments in money market funds are not issued or guaranteed by the U.S.
government and there is no assurance that the fund will be able to maintain
a stable net asset value.
(3) Including a prospectus containing more complete information including
charges and expenses. Read the prospectus carefully before investing.
23
<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 MFS at 1-800-637-2929
any business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime). This material should be read carefully before investing or
sending money.
<TABLE>
<S> <C>
Stock World
- -------------------- --------------------
Massachusetts Investors Trust MFS(R)/Foreign & Colonial Emerging Markets
Massachusetts Investors Growth Stock Fund Equity Fund
MFS(R) Capital Growth Fund MFS(R)/Foreign & Colonial International
MFS(R) Emerging Growth Fund Growth Fund
MFS(R) Gold & Natural Resources Fund MFS(R)/Foreign & Colonial International
MFS(R) Growth Opportunities Fund Growth and Income Fund
MFS(R) Managed Sectors Fund MFS(R) World Asset Allocation Fund(SM)
MFS(R) OTC Fund MFS(R) World Equity Fund
MFS(R) Research Fund MFS(R) World Government Fund
MFS(R) Value Fund MFS(R) World Growth Fund
MFS(R) World Total Return Fund
Stock and Bond National Tax-Free Bond
- -------------------- --------------------
MFS(R) Total Return Fund MFS(R) Municipal Bond Fund
MFS(R) Utilities Fund MFS(R) Municipal High Income Fund
MFS(R) Municipal Income Fund
Bond State Tax-Free Bond
- -------------------- --------------------
MFS(R) Bond Fund Alabama, Arkansas, California, Florida,
MFS(R) Government Mortgage Fund Georgia, Maryland, Massachusetts,
MFS(R) Government Securities Fund Mississippi, New York, North Carolina,
MFS(R) High Income Fund Pennsylvania, South Carolina, Tennessee,
MFS(R) Intermediate Income Fund Virginia, West Virginia
MFS(R) Strategic Income Fund
Limited Maturity Bond Money Market
- -------------------- --------------------
MFS(R) Government Limited Maturity Fund MFS(R) Cash Reserve Fund
MFS(R) Limited Maturity Fund MFS(R) Government Money Market Fund
MFS(R) Municipal Limited Maturity Fund MFS(R) Money Market Fund
</TABLE>
24
<PAGE>
MFS(R) Government Mortgage Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Peter G. Harwood - Private Investor
J. Atwood Ives - Chairman and Chief Executive
Officer, Eastern Enterprises
Lawrence T. Perera - Partner,
Hemenway & Barnes
William J. Poorvu - Adjunct Professor,
Harvard University Graduate School of
Business Administration
Charles W. Schmidt - Private Investor
Arnold D. Scott* - Senior Executive
Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
Elaine R. Smith - Independent Consultant
David B. Stone - Chairman, North American
Management Corp. (investment advisers)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Manager
James J. Calmas*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds,
call your financial adviser or, for an
information kit, call toll free:
1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For current account service, call toll free:
1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired,
call toll free: 1-800-637-6576 any business
day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be
equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
Web Site
http://www.mfs.com
[DALBAR LOGO]
TOP RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category.
The firm achieved a 3.49 overall score - on a scale of 1 to 4 - in the
1995 survey. A total of 71 firms responded, offering input on the
quality of service they receive from 36 mutual fund companies nationwide.
The survey contained questions about service quality in 17 categories,
including "knowledge of phone service contracts," "accuracy
of transaction processing," and "overall ease of doing business
with the firm."
25
<PAGE>
[BACK COVER]
MFS(R)
Government
Mortgage
Fund
500 Boylston Street
Boston, MA 02116
[MFS LOGO](SM)
INVESTMENT MANAGEMENT
[DALBAR LOGO]
TOP-RATED SERVICE
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
[C] 1996 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MGM-2-9/96 89.5M 31/231
