<PAGE>
[Logo] Annual Report
INVESTMENT MANAGEMENT for Year Ended
July 31, 1997
MFS(R) GOVERNMENT MORTGAGE FUND
[Graphic Omitted]
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
A Discussion with the Portfolio Manager .................................... 2
Portfolio Manager's Profile ................................................ 4
Fund Facts ................................................................. 5
Performance Summary ........................................................ 5
Tax Form Summary ........................................................... 7
Portfolio of Investments ................................................... 8
Financial Statements .......................................................10
Notes to Financial Statements ..............................................17
Independent Auditors' Report ...............................................23
The MFS Family of Funds(R) .................................................24
Trustees and Officers ......................................................25
- ------------------------------------------------------------------------------
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED JULY 31, 1997, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 9.90%, CLASS B SHARES 9.09%, AND CLASS I
SHARES 10.13%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE PAST YEAR HAS BEEN FAVORABLE FOR THE MORTGAGE MARKET, AS CONTINUED DEMAND
FROM GOVERNMENT-SPONSORED MORTGAGE CORPORATIONS AND FROM OVERSEAS HELPED
MORTGAGES OUTPERFORM U.S. TREASURIES.
o THE FUND'S CURRENT DURATION IS A RELATIVELY NEUTRAL 3.6 YEARS, REFLECTING BOTH
OUR CONCERN THAT INTEREST RATES COULD GO UP DUE TO STRONG GROWTH AND LOW
UNEMPLOYMENT AND AN ACKNOWLEDGMENT THAT RATES COULD FALL IN RESPONSE TO LOWER
INFLATION AND FALLING BUDGET DEFICITS.
o THE FUND SLIGHTLY UNDERPERFORMED THE LEHMAN BROTHERS GOVERNMENT NATIONAL
MORTGAGE ASSOCIATION INDEX DURING THE PERIOD, PRIMARILY BECAUSE IT WAS NOT AS
SENSITIVE AS THE INDEX TO CHANGES IN INTEREST RATES DURING THE BOND MARKET
RALLY LATE IN 1996.
- ------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. While some lenders are beginning to tighten standards to address this
problem, consumer debt and personal bankruptcies continue to rise. Because of
this, plus changes in other indicators, such as a slight decline in average
hourly wages and only small gains in consumer spending on some big-ticket items,
the rapid pace of growth seen in the first quarter of 1997 slowed to an annual
rate of approximately 2.2% in the second quarter, which we consider a
more-sustainable, less-inflationary pace. While growth in the second quarter
slowed dramatically, we expect it to pick up once again in the second half of
the year, with real (inflation-adjusted) growth centering around 2 1/2%.
In the fixed-income markets, we have been encouraged by the Federal Reserve
Board's decision to not raise short-term interest rates at its July meeting. But
we cannot rule out the possibility of future monetary tightening in the second
half of the year if, as we now expect, the economy strengthens during the
balance of 1997. Therefore, our risk/reward outlook for the fixed-income markets
is neutral, and we believe that fixed-income investors should think in terms of
earning the coupon income from their investments rather than seeking possible
gains from price appreciation.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
August 12, 1997
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of James J. Calmas]
JAMES J. CALMAS
For the 12 months ended July 31, 1997, Class A shares of the Fund provided a
total return of 9.90%, Class B shares 9.09%, and Class I shares 10.13%. These
returns, which assume the reinvestment of distributions but exclude the effects
of any sales charges, compare to a 10.93% return for the Lehman Brothers
Government National Mortgage Association (GNMA) Index (the Lehman Index), an
unmanaged index of GNMA issues with more than $50 million outstanding.
Q. COULD YOU TALK ABOUT SOME OF THE REASONS FOR THE FUND'S PERFORMANCE RELATIVE
TO ITS BENCHMARK INDEX?
A. Although the Fund's performance was very similar to that of the Lehman Index
during much of the past year, it did slightly underperform the index for the
entire period. One reason for this was that from September 1996 to the beginning
of December 1996 the bond market rallied and the Fund was not as sensitive to
changes in interest rates as was the Lehman Index.
Q. IN GENERAL, HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OVER THE
PAST YEAR?
A. The bond market could best be described as skittish. Although the
30-year U.S. Treasury bond ended the year yielding 67 basis points (0.67%)
less than it did at the beginning of the year, the downward move in yields was
not smooth. The bond market went through three phases: a drop in yields
between July 1996 and December 1996; a retracing of yields from December 1996
to April 1997, to over 7.15% on the 30-year Treasury; then another decline,
this time to a new low, with the 30-year Treasury yielding 6.30% by the end of
July. Although inflation was low and steady during this time, the market
vacillated over concerns about higher inflation due to steady growth and low
unemployment.
Q. MORE SPECIFICALLY, WHAT ABOUT THE MORTGAGE MARKET? HOW WOULD YOU DESCRIBE
THAT ENVIRONMENT?
A. The past year has been great for the mortgage market. Continued demand from
both the Federal National Mortgage Corporation and the Federal Home Loan
Mortgage Corporation to add mortgages to their own portfolios, as well as
overseas buying, has caused mortgages to outperform Treasuries -- even during a
period of falling interest rates. (Principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity.) The yield
differential between current-coupon GNMA securities and the 10-year Treasury
started the year at approximately 110 basis points (1.10%) and ended the year at
about 95 basis points (0.95%).
Q. WHAT ABOUT THE MORTGAGE PREPAYMENT PICTURE? IS THERE STILL SOME RISK THERE,
AND HOW IS THE FUND DEALING WITH IT?
A. There haven't been any surprises in mortgage prepayments. That's because the
30-year Treasury bond has traded within a range of 87 basis points (0.87%). This
is not enough of a change in rates to spark any major refinancing wave,
particularly since almost 70% of mortgage securities outstanding have a coupon
of 7.5% or below. The only area of the market that has experienced extremely
fast prepayment has been adjustable-rate mortgages, which the Fund does not own.
Q. WHAT IMPACT HAVE THE FEDERAL RESERVE BOARD'S (THE FED'S) ACTIONS HAD ON THE
MORTGAGE MARKET AND THE FUND THIS YEAR?
A. The Fed made one change in short-term interest rates during the past 12
months, on March 25, 1997, when it raised the targeted federal funds rate from
5.25% to 5.50%. While many economists predicted the Fed would need to be more
aggressive, in hindsight the Fed appears to have walked a fine line between a
desire to contain inflation and a desire not to stall economic growth. As a
result, the Fed helped create a relatively stable economic environment that has
helped fuel interest in fixed-income products, such as mortgages, which can
provide additional yield over U.S. Treasuries.
Q. LOOKING AHEAD, HOW IS YOUR OUTLOOK FOR THE FIXED-INCOME MARKETS REFLECTED
IN THE FUND'S CURRENT DURATION, OR INTEREST-RATE SENSITIVITY?
A. Currently, the Fund's duration is 3.6 years, which is similar to that of the
Lehman Index. This neutral positioning reflects our concern that interest rates
could go up due to strong growth, low unemployment, and a Fed policy that still
appears somewhat biased toward raising rates, as well as an acknowledgment that
rates could fall in response to lower inflation and falling budget deficits.
Q. HAVE YOU CHANGED THE FUND'S DURATION SIGNIFICANTLY THIS YEAR?
A. We have not moved the duration very much, since we felt that the
countervailing forces discussed above would prevent any long-term trends in
rates from developing, thus making any major duration moves not worth the
risk.
Q. WE'VE TALKED ABOUT SOME THINGS THAT CONTRIBUTED TO PERFORMANCE; NOW, ARE
THERE ANY PARTS OF THE MORTGAGE MARKET, AND PERHAPS POSITIONS FOR THE FUND,
THAT DID NOT PERFORM AS WELL AS YOU HOPED?
A. In general, our holdings have performed as expected. However, the Fund does
have significant holdings in mortgages issued in 1993 or before that trade at
prices above those for newer securities, and we believe these older mortgages
should command higher premiums than the market is currently paying.
/s/ James J. Calmas
James J. Calmas
Portfolio Manager
- ------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
JAMES J. 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(R) GOVERNMENT MORTGAGE FUND.
- ------------------------------------------------------------------------------
<PAGE>
FUND FACTS
OBJECTIVE: THE FUND'S PRIMARY INVESTMENT OBJECTIVE IS TO PROVIDE
A HIGH LEVEL OF CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: JANUARY 9, 1986
CLASS B: SEPTEMBER 7, 1993
CLASS I: JANUARY 2, 1997
SIZE: $939.7 MILLION NET ASSETS AS OF JULY 31, 1997
- ------------------------------------------------------------------------------
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. Class A share performance results reflect the
deduction of the 4.75% maximum sales charge; benchmark comparisons are
unmanaged and do not reflect any fees or expenses. The performance of other
share classes will be greater than or less than the line shown, based on
differences in loads and fees paid by shareholders investing in different
classes. It is not possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended July 31, 1997)
CONSUMER PRICE MFS GOVERNMENT
INDEX MORTGAGE FUND LEHMAN BROTHERS
-- U.S. (CLASS A) GNMA INDEX
--------------- -------------- ---------------
7/92 10,000.00 9,521.00 10,000.00
7/93 10,278.00 10,359.00 10,861.00
7/94 10,562.00 10,290.00 10,885.00
7/95 10,854.00 11,278.00 12,037.00
7/96 11,171.00 11,816.00 12,782.00
7/97 11,423.00 12,986.00 14,179.00
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended July 31, 1997)
CONSUMER PRICE MFS GOVERNMENT
INDEX MORTGAGE FUND LEHMAN BROTHERS
-- U.S. (CLASS A) GNMA INDEX
--------------- -------------- ---------------
7/87 10,000.00 9,522.00 10,000.00
7/89 10,932.00 11,304.00 12,529.00
7/91 11,969.00 12,596.00 15,332.00
7/93 12,689.00 15,442.00 18,812.00
7/95 13,401.00 16,812.00 20,848.00
7/97 14,104.00 19,358.00 24,559.00
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS AS OF JULY 31, 1997
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Government Mortgage Fund (Class A)
including 4.75% sales charge (SEC results) + 4.62% +6.35% +5.37% +6.83%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class A)
at net asset value + 9.90% +8.06% +6.40% +7.35%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class B)
with CDSC (SEC results) + 5.09% +6.39% +5.50% +7.05%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class B)
at net asset value + 9.09% +7.27% +5.81% +7.05%
- ------------------------------------------------------------------------------------------------------------------------------
MFS Government Mortgage Fund (Class I)
at net asset value +10.13% +8.14% +6.45% +7.37%
- ------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers GNMA Index+ +10.93% +9.21% +7.23% +9.40%
- ------------------------------------------------------------------------------------------------------------------------------
Average GNMA fund+ +10.15% +8.14% +6.36% +8.31%
- ------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index*++ + 2.26% +2.65% +2.70% +3.50%
- ------------------------------------------------------------------------------------------------------------------------------
+ Source: Lipper Analytical Services.
++ Source: CDA/Wiesenberger.
* The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures the cost of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class I
shares, which became available on January 2, 1997, have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
Class B share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class B shares. Because operating expenses
attributable to Class A shares are lower than those of Class B shares, Class B
share performance generally would have been lower than Class A share
performance. The Class A share performance 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 I share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class A shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class A shares are greater than those of Class I shares, Class I
share performance generally would have been higher than Class A share
performance. The Class A share performance included within the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
initial sales charge.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
- -------------------------------------------------------------------------------
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1997.
- -------------------------------------------------------------------------------
<PAGE>
PORTFOLIO OF INVESTMENTS - July 31, 1997
Bonds - 99.8%
- -------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -------------------------------------------------------------------------------
Federal Home Loan Mortgage Corporation - 4.7%
FHLMC, 8.5s, 2009 - 2017 $ 46 $ 48,631
FHLMC, 9s, 2001 - 2025 41,394 43,879,833
FHLMC, 9.5s, 2013 - 2021 278 299,312
------------
$ 44,227,776
- -------------------------------------------------------------------------------
Federal Housing Authority - 2.8%
FHA, Centennial, "A", 8.25s, 2028+ $ 23,602 $ 26,404,099
- -------------------------------------------------------------------------------
Federal National Mortgage Association - 3.6%
FNMA, 6.695s, 2005 $ 10,000 $ 10,490,625
FNMA, 7.95s, 2005 6,290 6,643,812
FNMA, 8s, 2017 - 2023 1,242 1,280,324
FNMA, 8.5s, 2004 - 2008 299 311,087
FNMA, 9s, 2002 - 2008 14,866 15,599,494
------------
$ 34,325,342
- -------------------------------------------------------------------------------
Financing Corporation - 3.6%
FICO, 10.35s, 2018 $ 23,965 $ 34,022,871
- -------------------------------------------------------------------------------
U.S. Federal Agencies - 0.4%
Federal Agricultural Mortgage Corp., 8.07s, 2006 $ 3,000 $ 3,353,910
- -------------------------------------------------------------------------------
U.S. Government Guaranteed - 84.7%
Government National Mortgage Association - 75.7%
GNMA, 6.5s, 2023 - 2025 $ 33,062 $ 32,538,065
GNMA, 7s, 2022 - 2025 189,477 190,299,801
GNMA, 7.5s, 2008 - 2026 168,852 172,416,634
GNMA, 8s, 2002 - 2026 171,514 177,284,792
GNMA, 8.5s, 2022 - 2023 9,991 10,434,076
GNMA, 9s, 2008 - 2022 70,054 75,716,314
GNMA, 9.5s, 2009 - 2019 11,608 12,466,271
GNMA, 10s, 2009 - 2019 18,681 20,701,102
GNMA, 11s, 2021 16,645 18,960,220
GNMA, 12.5s, 2011 409 480,887
------------
$711,298,162
- -------------------------------------------------------------------------------
Small Business Administration - 4.4%
SBA, 8.75s, 2006 $ 102 $ 108,540
SBA, 10s, 2009 3,034 3,391,661
SBA, 10.1s, 2009 3,600 4,028,714
SBA, 9.3s, 2010 3,292 3,637,739
SBA, 9.45s, 2010 8,000 8,855,366
SBA, 9.7s, 2010 2,629 2,924,477
SBA, 8.8s, 2011 2,886 3,153,214
SBA, 8.85s, 2011 11,172 12,227,030
SBA, 8.05s, 2012 2,451 2,620,863
------------
$ 40,947,604
- -------------------------------------------------------------------------------
U.S. Treasury Obligations - 4.6%
U.S. Treasury Bonds, 13.125s, 2001 $ 22,550 $ 28,057,161
U.S. Treasury Bonds, 10.375s, 2012 11,800 15,504,138
------------
$ 43,561,299
- -------------------------------------------------------------------------------
Total U.S. Government Guaranteed $795,807,065
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $923,500,554) $938,141,063
- -------------------------------------------------------------------------------
Repurchase Agreement - 2.6%
- -------------------------------------------------------------------------------
Investments in repurchase agreements with Goldman
Sachs, in a joint trading account ($134,589,000),
dated 7/31/97, due 8/01/97, total to be
received $134,610,459 collateralized by
various U.S. Treasury and Federal Agency
Obligations (with $120,767,000 par and valued
at $134,589,595), at cost $ 24,268 $ 24,268,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $947,768,554) $962,409,063
Other Assets, Less Liabilities - (2.4)% (22,717,003)
- -------------------------------------------------------------------------------
Net Assets - 100.0% $939,692,060
- -------------------------------------------------------------------------------
+Restricted security.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ---------------------------------------------------------------------------
July 31, 1997
- ---------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $947,768,554) $ 962,409,063
Cash 176,253
Receivable for Fund shares sold 27,184
Interest receivable 8,524,361
Other assets 9,102
--------------
Total assets $ 971,145,963
--------------
Liabilities:
Payable for investments purchased $ 29,756,250
Payable for Fund shares reacquired 966,251
Payable for daily variation margin on open and closed
futures contracts 69,407
Payable to affiliates -
Management fee 11,590
Shareholder servicing agent fee 3,350
Distribution and service fee 225,057
Administrative fee 386
Distribution payable 455
Accrued expenses and other liabilities 421,157
--------------
Total liabilities $ 31,453,903
--------------
Net assets $ 939,692,060
==============
Net assets consist of:
Paid-in capital $1,050,772,395
Unrealized appreciation on investments 14,021,564
Accumulated net realized loss on investments (124,937,835)
Distributions in excess of net investment income (164,064)
--------------
Total $ 939,692,060
==============
Shares of beneficial interest outstanding 139,917,960
===========
Class A shares:
Net asset value per share
(net assets of $653,144,250 / 97,254,938 shares of
beneficial interest outstanding) $6.72
=====
Offering price per share (100 / 95.25 of net asset
value per share) $7.06
=====
Class B shares:
Net asset value and offering price per share
(net assets of $286,434,350 / 42,646,140 shares of
beneficial interest outstanding) $6.72
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $113,460 / 16,882 shares of beneficial
interest outstanding) $6.72
=====
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
- -----------------------------------------------------------------------
Year Ended July 31, 1997
- -----------------------------------------------------------------------
Net investment income:
Interest income $78,784,471
-----------
Expenses -
Management fee $ 4,551,885
Trustees' compensation 78,137
Shareholder servicing agent fee (Class A) 331,398
Shareholder servicing agent fee (Class B) 486,155
Shareholder servicing agent fee 733,527
Distribution and service fee (Class A) 2,039,924
Distribution and service fee (Class B) 4,111,938
Administrative fee 60,480
Custodian fee 398,208
Postage 204,908
Printing 102,086
Auditing fee 43,154
Legal fee 8,879
Miscellaneous 682,359
-----------
Total expenses $13,833,038
Fees paid indirectly (357,961)
-----------
Net expenses $13,475,077
-----------
Net investment income $65,309,394
-----------
Realized and unrealized gain (loss) on investments:
Realized loss (identified cost basis) -
Investment transactions $(1,578,852)
Futures contracts (5,183,443)
-----------
Net realized loss on investments $(6,762,295)
-----------
Change in unrealized appreciation -
Investments $32,107,282
Futures contracts 689,688
-----------
Net unrealized gain on investments $32,796,970
-----------
Net realized and unrealized gain on investments $26,034,675
-----------
Increase in net assets from operations $91,344,069
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Year Ended July 31, 1997 1996
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
<S> <C> <C>
Net investment income $ 65,309,394 $ 78,380,863
Net realized loss on investments (6,762,295) (2,426,844)
Net unrealized gain (loss) on investments 32,796,970 (20,890,441)
-------------- --------------
Increase in net assets from operations $ 91,344,069 $ 55,063,578
-------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (38,530,720) $ (35,352,327)
From net investment income (Class B) (23,909,098) (37,804,675)
From net investment income (Class I) (5,224) --
Tax return of capital (1,201,681) (2,132,709)
-------------- --------------
Total distributions declared to shareholders $ (63,646,723) $ (75,289,711)
-------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 335,526,636 $ 225,940,176
Net asset value of shares issued to shareholders in
reinvestment of distributions 30,190,696 34,824,383
Cost of shares reacquired (547,691,540) (492,622,301)
-------------- --------------
Decrease in net assets from Fund share transactions $ (181,974,208) $ (231,857,742)
-------------- --------------
Total decrease in net assets $ (154,276,862) $ (252,083,875)
Net assets:
At beginning of period 1,093,968,922 1,346,052,797
-------------- --------------
At end of period (including distributions in excess of
net investment income of $164,064 and $142,549,
respectively) $ 939,692,060 $1,093,968,922
============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
- ------------------------------------------------------------------------------------------------------------------------------
Eight Months
Ended Year Ended
Year Ended July 31, July 31, November 30,
--------------------------------------- ------------ -----------------------
1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82 $ 6.95
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.44 $ 0.45 $ 0.45 $ 0.29 $ 0.34 $ 0.46
Net realized and unrealized gain
(loss) on investments 0.18 (0.14) 0.14 (0.36) 0.20 0.09
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.62 $ 0.31 $ 0.59 $(0.07) $ 0.54 $ 0.55
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.42) $(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) (0.01) -- -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.43) $(0.43) $(0.43) $(0.29) $(0.51) $(0.68)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82
====== ====== ====== ====== ====== ======
Total return(+) 9.90% 4.76% 9.60% (1.51)%++ 8.11% 8.25%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.09% 1.16% 1.25% 1.27%+ 1.38% 1.42%
Net investment income 6.75% 6.75% 6.99% 6.46%+ 6.30% 6.57%
Portfolio turnover 33% 25% 87% 37% 167% 484%
Net assets at end of period (000,000
omitted) $653 $541 $534 $424 $522 $715
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
(+) Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of the periods indicated. If this fee
had been incurred by the Fund, the net investment income per share and 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
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75
Net realized and unrealized gain (loss) on
investments 0.25 (0.40) 0.48 (0.06) (1.08)
------ ------ ------ ------ ------
Total from investment operations $ 0.73 $ 0.13 $ 1.07 $ 0.58 $(0.33)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.44) $(0.49) $(0.58) $(0.64) $(0.82)
In excess of net realized gain on investments -- -- -- -- (0.01)
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)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34
====== ====== ====== ====== ======
Total return(+) 11.00% 2.05% 14.72% 7.39% (3.37)%
Ratios (to average net assets)/Supplemental data:
Expenses 1.44% 1.40% 1.37% 1.38% 1.34%
Net investment income 6.91% 7.29% 7.57% 7.88% 8.34%
Portfolio turnover 731% 507% 489% 285% 212%
Net assets at end of period (000,000 omitted) $886 $1,068 $1,380 $1,295 $1,129
(+) 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.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
Eight Months
Ended Period Ended
Year Ended July 31, July 31, November 30,
--------------------------------------- ----------------- -----------------
1997 1996 1995 1994 1993**
- -----------------------------------------------------------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.53 $ 6.65 $ 6.49 $ 6.84 $ 6.97
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.40 $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain (loss) on
investments 0.17 (0.13) 0.14 (0.35) (0.44)
------ ------ ------ ------ ------
Total from investment operations $ 0.57 $ 0.27 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.37) $(0.38) $(0.38) $(0.18) $(0.07)
From paid-in capital -- -- -- (0.08) --
Tax return of capital (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.38) $(0.39) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ====== ======
Total return 9.09% 3.98% 8.81% (1.97)%++ (3.91)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.78% 1.87% 1.96% 1.94%+ 1.87%+
Net investment income 6.02% 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover 33% 25% 87% 37% 167%
Net assets at end of period (000,000 omitted) $286 $553 $812 $1,229 $1,628
** For the period from the commencement of the Fund's offering of Class B shares, September 7, 1993, through November 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For the fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees
paid indirectly.
(S) The investment adviser voluntarily waived a portion of its management fee for certain of 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%+ 1.94%+
Net investment income -- -- -- 5.80%+ 5.85%+
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -------------------------------------------------------------------------------------------
Year Ended
July 31, 1997***
- -------------------------------------------------------------------------------------------
Class I
- -------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
<S> <C>
Net asset value - beginning of period $ 6.59
------
Income from investment operations# -
Net investment income $ 0.31
Net realized and unrealized gain on investments 0.09
------
Total from investment operations $ 0.40
------
Less distributions paid to shareholders -
From net investment income $(0.26)
From tax return of capital (.01)
------
Total distributions paid to shareholders (0.27)
------
Net asset value - end of period $ 6.72
======
Total return 6.19%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.73%+
Net investment income 7.06%+
Portfolio turnover 33%
Net assets at end of period (000 omitted) $113
*** For the period from the commencement of the Fund's offering of Class I shares, January 2,
1997, through July 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid indirectly.
</TABLE>
See notes to financial statements
<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.
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
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 or exchange 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. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. 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 premiums and
original issue discounts are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Interest
payments received in additional securities are recorded on the ex- interest date
in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percent of the
Fund's average daily net assets. The fee is reduced according to an arrangement
which measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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 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, 1997, $1,684,186 and $1,201,681 were
reclassified from distributions in excess of net investment income and paid in
capital, respectively, and $2,885,867 was reclassified from accumulated net
realized loss on investments, due to differences between book and tax accounting
for mortgage-backed securities.
At July 31, 1997, the Fund, for federal income tax purposes, had a capital loss
carryforward of ($124,022,705) 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), July 31, 2004, ($30,095,607), and July 31, 2005,
($1,857,304).
Multiple Classes of Shares of Beneficial Interest - The Fund offers Class A,
Class B, and Class I shares. The three classes of shares differ in their
respective distribution and service fees. All shareholders bear the common
expenses of the Fund pro rata based on the average daily net assets of each
class, without distinction between share classes. Dividends are declared
separately for each class. No class has preferential dividend rights;
differences in per share dividend rates are generally due to differences in
separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services and general
office facilities. The management fee is computed daily and paid monthly at an
annual rate of 0.45% of average daily net assets.
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 renumeration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $30,627 for the year ended
July 31, 1997.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
compliance, shareholder communications, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee up to 0.015% per annum of the Fund's average daily net
assets, provided that the administrative fee is not assessed on Fund assets that
exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$22,649 for the year ended July, 31 1997, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A and Class B shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% 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 $200,615 for the year ended July 31,
1997. Fees incurred under the distribution plan during the year ended July 31,
1997, were 0.35% of average daily net assets attributable to Class A shares on
an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B 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 $267,073 for Class B shares, for the year
ended July 31, 1997. Fees incurred under the distribution plan during the year
ended July 31, 1997, were 1.00% 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 by 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, 1997, were $127 and $301,436 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 fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- ---------------------------------------------------------------------------
U.S. government securities $327,226,917 $485,019,548
============ ============
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 $947,771,892
============
Gross unrealized appreciation $ 23,910,874
Gross unrealized depreciation (9,273,703)
------------
Net unrealized appreciation $ 14,637,171
============
(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 July 31, 1997 Year Ended July 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 33,238,157 $ 218,654,931 17,258,809 $ 115,389,414
Shares issued to shareholders
in reinvestment of distributions 2,705,877 17,720,451 2,410,533 16,042,351
Shares transferred to Class I (24,043) (157,482)
Shares reacquired (21,505,030) (141,474,917) (17,105,744) (113,835,287)
---------- ------------- --------- -------------
Net increase 14,414,961 $ 94,742,983 2,563,598 $ 17,596,478
========== ============= =========== =============
<CAPTION>
Class B Shares
Year Ended July 31, 1997 Year Ended July 31, 1996
---------------------------------- ----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 17,769,251 $ 116,849,711 16,626,636 $ 110,550,762
Shares issued to shareholders
in reinvestment of distributions 1,901,265 12,464,920 2,820,005 18,782,032
Shares reacquired (61,776,157) (406,143,501) (56,843,019) (378,787,014)
---------- ------------- --------- -------------
Net decrease (42,105,641) $(276,828,870) (37,396,378) $(249,454,220)
========== ============= =========== =============
</TABLE>
Class I Shares
Year Ended July 31, 1997*
-------------------------------
Shares Amount
- -------------------------------------------------------------------
Shares sold 3,187 $ 21,994
Shares issued to shareholders
in reinvestment of distributions 812 5,325
Shares transferred from Class A 24,043 157,482
Shares reacquired (11,160) (73,122)
------ --------
Net increase 16,882 $111,679
====== ========
* For the period from the commencement of the Fund's offering of Class I
shares, January 2, 1997, through July 31, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended July 31, 1997, was $10,667.
(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.
<PAGE>
<TABLE>
<CAPTION>
Futures Contracts
UNREALIZED
EXPIRATION CONTRACTS POSITION DEPRECIATION
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Treasury Bonds September 1997 100 Short $618,945
========
</TABLE>
At July 31, 1997, 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, 1997,
the Fund owned the following restricted securities (constituting 2.8% of net
assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees.
<TABLE>
<CAPTION>
Date of Principal Amount
Description Acquisition (000 Omitted) Cost Value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FHA, Centennial, "A", 8.25s, 2028 3/23/93 $23,602 $24,309,690 $26,404,099
===========
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees and Shareholders 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 (one of the series
constituting MFS Series Trust X) as of July 31, 1997, the related statement of
operations for the year then ended, the statement of changes in net assets for
the years ended July 31, 1997 and 1996 and the financial highlights for each of
the years in the three-year period ended July 31, 1997, the eight months ended
July 31, 1994, and for each of the years in the seven-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, 1997 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Government
Mortgage Fund at July 31, 1997, the results of its operations, the changes in
its net assets, and its financial highlights for the respective stated periods
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 5, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
<TABLE>
MFS(R) GOVERNMENT MORTGAGE FUND
<S> <C>
Trustees Custodian
A. Keith Brodkin* - Chairman and President State Street Bank and Trust Company
Richard B. Bailey* - Private Investor; Former Auditors
Chairman and Director (until 1991), Deloitte & Touche LLP
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director, Investor Information
Cambridge Trust Company For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime from a
Peter G. Harwood -Private Investor touch-tone telephone.
J. Atwood Ives - Chairman and Chief Executive For information on MFS mutual funds, call your
Officer, Eastern Enterprises financial adviser or, for an information kit,
call toll free: 1-800-637-2929 any business day
Lawrence T. Perera - Partner, Hemenway & Barnes from 9 a.m. to 5 p.m. Eastern time (or leave a
message anytime).
William J. Poorvu - Adjunct Professor, Harvard
University Graduate School of Business Investor Service
Administration MFS Service Center, Inc.
P.O. Box 2281
Charles W. Schmidt - Private Investor Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive Vice For general information, call toll free:
President, Director and Secretary, 1-800-225-2606 any business day from
Massachusetts Financial Services Company 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - President and Director, For service to speech- or hearing-impaired,
Massachusetts Financial Services Company call toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. (To use
Elaine R. Smith - Independent Consultant this service, your phone must be equipped with
a Telecommunications Device for the Deaf.)
David B. Stone - Chairman, North American
Management Corp. (investment advisers) For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
Investment Adviser (1-800-637-8255) anytime from a touch-tone
Massachusetts Financial Services Company telephone.
500 Boylston Street
Boston, MA 02116-3741 World Wide Web
www.mfs.com
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street -------------------------------------------------
Boston, MA 02116-3741 [DALBAR Logo] For the fourth year in a row, MFS
earned a #1 ranking in the DALBAR,
Portfolio Manager Inc. Broker/Dealer Survey, Main
James J. Calmas* Office Operations Service Quality Category. The
firm achieved a 3.42 overall score on a scale
Treasurer of 1 to 4 in the 1997 survey. A total of 111
W. Thomas London* firms responded, offering input on the quality
of service they received from 29 mutual fund
Assistant Treasurers companies nationwide. The survey contained
Mark E. Bradley* questions about service quality in 11
Ellen Moynihan* categories, including "knowledge of operations
James O. Yost* contact, " "keeping you informed," and "ease of
doing business" with the firm.
Secretary -------------------------------------------------
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
------------
MFS(R) GOVERNMENT [DALBAR Logo] BULK RATE
MORTGAGE FUND U.S. POSTAGE
P A I D
500 Boylston Street MFS
Boston, MA 02116-3741 ------------
[MFS Logo]
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MGM-2 9/97 88M 31/231/831
