<PAGE>
[Logo]M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
MFS(R) GOVERNMENT
MORTGAGE FUND
ANNUAL REPORT o JULY 31, 1998
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 21
Independent Auditors' Report .............................................. 27
Trustees and Officers ..................................................... 29
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HIGHLIGHTS
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o FOR THE YEAR ENDED JULY 31, 1998, CLASS A SHARES OF THE FUND PROVIDED A
TOTAL RETURN OF 6.17%, CLASS B SHARES 5.40%, AND CLASS I SHARES 6.47%.
(SEE PERFORMANCE SUMMARY FOR MORE INFORMATION. PAST PERFORMANCE IS NO
GUARANTEE OF FUTURE RESULTS.)
o BECAUSE WE ARE FAIRLY OPTIMISTIC ABOUT INTEREST RATES, THE FUND IS
POSITIONED FOR A FLATTER YIELD CURVE RESULTING FROM LONG-TERM RATES COMING
DOWN TOWARD SHORT-TERM RATES.
o WE HAVE FOUND INCREASING VALUE IN 15- YEAR MORTGAGES, WHICH WE BELIEVE MAY
CARRY LESS PREPAYMENT RISK, EVEN IF INTEREST RATES COME DOWN A LITTLE.
WHEN HOMEOWNERS ADD UP THE EXTRA INTEREST COSTS OF EXTENDING THEIR
MORTGAGES, THEY WILL PROBABLY PREFER TO GET THEIR CURRENT MORTGAGES PAID
OFF.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of Jeffrey L. Shames]
- ----------------------------
Jeffrey L. Shames
Dear Shareholders:
Although the U.S. stock market has enjoyed several years of double-digit
advances, this summer's volatility shows the necessity of taking a cautious
outlook. By most commonly accepted measures, equity valuations appear to have
risen to a point at which stock prices have become more vulnerable to changes
in the investment environment such as rising inflation and interest rates, a
slowing economy, or -- as we have seen recently -- earnings disappointments.
As a result, while we continue to hold a favorable long-term outlook for the
equity markets, we also believe that a significant market correction would be
a healthy near-term event.
Currently, equity investors seem to be primarily focused on the slowdown in
corporate earnings. In the second quarter, average earnings growth for
companies in the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance, was about
3%, well below what people were expecting a year ago. As a result, the stock
market has begun to retreat from the record-high levels set in mid-July. This
retreat may help correct some of the overvaluations that have been building in
the market for some time. Prior to July, equity prices had continued to rise
without a corresponding increase in corporate earnings. As a result, price-to-
earnings (P/E) ratios, or the amount investors paid for stocks in relation to
companies' earnings per share, also went up. A year ago this July, the average
P/E ratio for stocks in the S&P 500 stood at approximately 23; this July, the
average P/E ratio was some 20% higher, at about 28. If this summer's downturn
helps create more reasonable valuations, we believe the correction could
provide a sounder long-term foundation for the equity markets. On another
positive note, interest rates have been relatively stable for several months
as inflation has remained low. In an environment of low interest rates, stocks
become more attractive than most fixed-income investments, while low inflation
helps control companies' costs.
As long as interest rates remain low and the economy continues to grow, we
expect stock prices to advance over the next 12 months in line with corporate
earnings, that is, about 8% to 10%. However, just as no one can predict market
cycles, so too no one can predict economic cycles -- except to say that these
cycles do exist and that an economic slowdown at some point is inevitable.
Internationally, the economic turmoil in Asia continues to be a concern to us,
and we believe the United States has yet to see the full impact of this
crisis. There have been brief periods of improvement in a few countries but,
for the most part, the region's economies are still very weak and the
situation could turn worse before getting better. While the crisis has
affected all countries in Asia, Japan was the major factor behind the turmoil
as excesses in its banking and real estate sectors led to severe currency
problems. Although Japan now has a new government, questions remain about the
nation's commitment to ending the loan crisis and reforming its banking
system. At the same time, the Asian turmoil has had the beneficial effect of
moderating U.S. growth and keeping inflation in check, which has helped
establish a favorable interest-rate environment.
Countering the situation in Asia has been the growing strength of European
economies, although European equity markets have also seen some volatility
this summer. But as these countries move toward economic union, they have
benefited from a convergence of interest rates to lower levels, a rapid
expansion of manufacturing and service businesses, and an increasingly strong
consumer sector. This has helped American exporters offset some of their Asian
losses, while providing investment opportunities in developed and emerging
European markets.
Given the uncertainty arising from these conflicting developments, we believe
it is prudent to remind investors of the need to take a long-term view and to
diversify their investments across a range of asset classes. This includes
portfolios that focus on bond and international investments as well as on the
U.S. stock market. At MFS, we also believe our commitment to original,
company-by-company research gives us an advantage, by helping us find
companies that we think can keep growing or gain market share during periods
of market turmoil. To help fulfill this commitment, and to provide the
broadest possible coverage of industry sectors and individual companies, MFS
continues to increase its number of full-time research analysts. These
analysts thoroughly investigate each company's earnings potential and position
in its industry as well as the overall prospects for that industry.
MFS also uses active portfolio management on the fixed-income side, taking
advantage of our extensive research and credit analysis to help reduce the
potential for price declines and enhance the opportunity for appreciation. Every
year, both fixed-income and equity managers meet with thousands of credit
issuers and companies. They also attend many presentations, closely follow
sources of industry research, and keep track of competitors.
We believe that applying this discipline of thorough, bottom-up research to
both the equity and fixed-income markets is the best way to provide favorable
long-term performance for our shareholders -- regardless of changes in the
overall market environment.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
August 14, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
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[Photo of D. Richard Smith]
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D. Richard Smith
For the year ended July 31, 1998, Class A shares of the Fund provided a total
return of 6.17%, Class B shares 5.40%, and Class I shares 6.47%. These returns,
which assume the reinvestment of distributions but exclude the effects of any
sales charges, compare to a 7.45% return for the Lehman Brothers Government
National Mortgage Association (GNMA) Index, an unmanaged index of GNMA issues
with more than $50 million outstanding.
Q. HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT OF THE PAST YEAR?
A. The overriding theme has been a weakening global economy and a continued
strong domestic economy. The dollar has continued to be strong and, while
it appeared we would see an economic slowdown because of Asia in the first
quarter, it didn't happen until the second quarter, when imports and
manufacturing were affected. While we think the Asian turmoil is serious,
we also believe that the domestic economy ultimately will determine the
direction of the U.S. bond market.
Q. GIVEN THIS ENVIRONMENT, HOW HAVE YOU BEEN POSITIONING THE FUND?
A. Our primary concern is our exposure to changes in interest rates. We also
consider exposure to the mortgage market and differences in coupons and
maturities. Currently, we're fairly optimistic about interest rates. We
think that global growth is slowing, that inflation is dormant, and that
interest rates will continue to come down. The turmoil in Asia has helped
create a strong demand for U.S.-based assets, which has also contributed to
lower rates. Now, because the Federal Reserve Board (the Fed) has kept
interest rates on hold for over a year, the short end of the market has
stabilized while the long end keeps rallying on lower-inflation
expectations, so we've ended up with a flatter yield curve, with long-term
rates coming down toward short-term rates. We believe we are well
positioned for this flatter yield curve.
Q. WHAT SHOULD INVESTORS BE LOOKING FOR FROM THIS FUND?
A. People who invest in this Fund are looking for moderate sensitivity to
changes in interest rates and good yield characteristics. Yields on GNMA
(Ginnie Mae) securities tend to be about 100 basis points (1.00%) over
those of five-year U.S. Treasury securities. (Principal value and interest
on Treasury securities are guaranteed by the U.S. government if held to
maturity.) We tend to like the shorter-term, higher-yielding securities
that haven't started to prepay yet (7% and 7 1/2% coupons) because these
higher coupons can add stability to the Fund's net asset value (NAV). The
lower 6% and 6 1/2% coupons tend to lack enough yield for the added price
risk. Under current conditions, with the supply of lower-yielding coupons
high, expected performance of lower coupons tends to be marginal.
Q. BECAUSE THIS IS A MORTGAGE FUND, DOES THAT MEAN ALL OF ITS ASSETS ARE IN
MORTGAGE-BACKED SECURITIES?
A. No. We always have at least 65% of portfolio securities in Ginnie Maes. The
other 35% can be in other types of agency mortgages or in Treasuries. We
use both types of securities when we think they have value. At the end of
1997, we felt mortgages were overvalued because of significant upside price
potential in the bond market and downward pressure on yields. So we lowered
our exposure to mortgages to roughly that 65% level. While that didn't help
us in the last few months of 1997, it did help in the first quarter of this
year, when mortgages underperformed Treasuries. Since then, we've seen most
of this year's bond market rally, so we've raised our mortgage exposure back
up to about 95%.
Q. WHAT ABOUT THE FUND'S DURATION, OR EXPOSURE TO CHANGES IN INTEREST RATES?
A. The duration can be anywhere from 1.5% to 3.5%. As of the end of July, as
we've become a little more optimistic about interest rates, we've moved
toward the long end of that range, at about 2.5% or 2.6% versus 2.3% for
the benchmark. If inflation and growth continue to be low, we'll continue
to extend the duration.
Q. WHAT CAN YOU TELL US ABOUT THE FUND'S CURRENT STRATEGY?
A. In developing a strategy, we look at three factors. The first is a
macroeconomic view of growth and inflation, both of which commonly drive
interest rates in the long run. We also consider security valuations; that
is, how much yield can we add to the portfolio, and how much value can we
add by selecting different types of securities? The third component is the
technical factors, or the supply of securities in the marketplace. Right
now, macroeconomic factors favor strong growth and low inflation,
valuations in the mortgage market are much better than they were earlier in
the year, and the technical factors are pretty strong as well. Money
continues to come into the mortgage market, making it an attractive sector
in which to invest.
Q. HAVE THERE BEEN ANY PARTICULARLY INTERESTING DEVELOPMENTS IN THE MORTGAGE
MARKET IN THE PAST SIX MONTHS?
A. We have learned that prepayment rates can go up pretty fast in this
environment. However, we've also learned the value of investing in Ginnie
Maes versus other types of mortgage securities. Ginnie Maes have smaller
loan balances and are a lot less sensitive to prepayments than mortgage
securities such as Fannie Maes (Federal National Mortgage Association) and
Freddie Macs (Federal Home Loan Mortgage Corporation). We've also learned
that old mortgages can prepay as fast as new mortgages. These are mortgages
that have been in existence for more than five years but haven't been
refinanced before. Many of them are being refinanced now. Finally, we've
found value in 15-year securities. Even if interest rates come down a
little, people with 15-year mortgages probably won't refinance into new 15-
year loans because when they add up the extra interest costs of extending
their mortgages, they will probably prefer to get their current mortgages
paid off. So we're selectively buying these mortgages.
Q. LOOKING AHEAD, WHAT CHANGES DO YOU SEE IN THE GENERAL ECONOMIC ENVIRONMENT OR
IN YOUR MARKET, AND HOW MIGHT THEY BE REFLECTED IN THE FUND?
A. We think the critical things to watch are employment, the stock market,
corporate earnings, wage pressures, and the growth of the service sector
versus the manufacturing sector. If the economy remains strong, interest
rates could move back up and the market will begin to anticipate Fed
tightening. We think the Fed would rather raise rates a bit now, when the
economy is strong, rather than wait until the economy is weakening and
inflation is already building. Overall, though, we think we've gone through
the majority of the rally for this quarter in our market and that we're in
a period of stability. Also, the government is probably going to run a $50
billion to $60 billion budget surplus this year, so the supply of Treasury
securities will be less than it's been in quite a while, which should help
the demand side of this market, resulting in stable to lower rates. Given
this scenario, we expect to maintain the Fund's conservative stance but
would look to increase its interest-rate sensitivity if the yield curve
steepens and we can put some money to work at higher yields.
/s/ D. Richard Smith
D. Richard Smith
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
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PORTFOLIO MANAGER'S PROFILE
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D. RICHARD SMITH IS VICE PRESIDENT -- INVESTMENTS AT MFS INVESTMENT
MANAGEMENT(R) AND PORTFOLIO MANAGER OF MFS(R) GOVERNMENT MORTGAGE FUND,
MFS(R) GOVERNMENT LIMITED MATURITY FUND, AND MFS(R) MERIDIAN(SM) U.S.
GOVERNMENT BOND FUND.
MR. SMITH JOINED MFS IN 1993. FROM 1986 TO 1993 HE WORKED IN RESEARCH
AND INSTITUTIONAL SALES ON WALL STREET. HE IS A GRADUATE OF VASSAR
COLLEGE AND HAS AN M.B.A. FROM VANDERBILT UNIVERSITY.
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
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FUND FACTS
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OBJECTIVE: SEEKS PRIMARILY HIGH CURRENT INCOME AND,
SECONDARILY, PRESERVATION OF CAPITAL.
COMMENCEMENT OF
INVESTMENT OPERATIONS: JANUARY 9, 1986
CLASS INCEPTION: CLASS A JANUARY 9, 1986
CLASS B SEPTEMBER 7, 1993
CLASS I JANUARY 2, 1997
SIZE: $812.1 MILLION NET ASSETS AS OF JULY 31, 1998
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include the deduction of the maximum applicable sales charge and
reflect the percentage change in net asset value, including reinvestment of
dividends. 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. (See Notes to Performance Summary for more information.)
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, 1998)
MFS Government Lehman Consumer
Mortgage Fund Brothers Price Index
-- Class A GNMA Index -- U.S.
- -------------------------------------------------------
7/93 $ 9,523 $10,000 $10,000
7/94 9,405 10,052 10,251
7/95 10,308 11,073 10,543
7/96 10,799 11,745 10,830
7/97 11,869 13,006 11,142
7/98 12,601 13,975 11,302
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended July 31, 1998)
MFS Government Lehman Consumer
Mortgage Fund Brothers Price Index
-- Class A GNMA Index -- U.S.
- -------------------------------------------------------
7/88 $ 9,520 $10,000 $10,000
7/89 10,889 11,480 10,498
7/90 11,279 12,549 11,004
7/91 12,134 14,036 11,494
7/92 13,672 15,819 11,857
7/93 14,875 17,125 12,186
7/94 14,776 17,214 12,523
7/95 16,195 18,962 12,869
7/96 16,967 20,113 13,245
7/97 18,647 22,272 13,544
7/98 19,797 23,933 13,772
AVERAGE ANNUAL TOTAL RETURNS THROUGH JULY 31, 1998
<TABLE>
CLASS A
<CAPTION>
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return +6.17% +6.92% +5.88% +7.64%
- ------------------------------------------------------------------------------------------------
SEC Results +1.12% +5.20% +4.86% +7.11%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
CLASS B
<CAPTION>
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return +5.40% +6.13% +5.17% +7.28%
- ------------------------------------------------------------------------------------------------
SEC Results +1.41% +5.24% +4.84% +7.28%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
CLASS I
<CAPTION>
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average Annual Total Return +6.47% +7.10% +5.99% +7.69%
- ------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
COMPARATIVE INDICES
<CAPTION>
1 Year 3 Years 5 Years 10 Years/Life
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average GNMA fund* +6.81% +7.32% +6.11% +8.27%
- ------------------------------------------------------------------------------------------------
Lehman Brothers GNMA Index+ +7.45% +8.07% +6.92% +9.12%
- ------------------------------------------------------------------------------------------------
Consumer Price Index+# +1.69% +2.29% +2.48% +3.25%
- ------------------------------------------------------------------------------------------------
</TABLE>
*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).
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class I shares
("I") have no sales charge or Rule 12b-1 fees and are only available to
certain institutional investors.
B results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of A for periods prior to the inception of B. Because operating expenses
of A are lower than those of B, B performance generally would have been lower
than A performance. The A performance included within the B SEC performance
has been adjusted to reflect the CDSC generally applicable to B rather than
the initial sales charge generally applicable to A. Performance results
reflect any applicable expense subsidies and waivers, without which the
results would have been less favorable. Subsidies and waivers may be rescinded
at any time. See the prospectus for details. All results are historical and
assume the reinvestment of dividends and capital gains.
I results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of A for periods prior to the inception of I. Because operating
expenses of A are greater than those of I, I performance generally would have
been higher than A performance. The A performance included in the
I performance has been adjusted to reflect the fact that I have no initial
sales charge.
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.
Mortgage-backed securities are subject to prepayment risk as homeowners pay
their mortgages early by refinancing them at lower rates. Prepayment results
in a loss of anticipated interest. These risks may increase share
price volatility.
Government guarantees apply to individual securities only and not to prices
and yields of shares in a managed portfolio.
<PAGE>
PORTFOLIO CONCENTRATION AS OF JULY 31, 1998
Quality Ratings
Mortgage Backed 93.2%
Other Government Agencies 0.3%
Cash 6.2%
U.S. Treasuries 0.3%
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- July 31, 1998
Bonds - 99.0%
<CAPTION>
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Guaranteed - 93.3%
Government National Mortgage Association - 87.0%
GNMA, 6s, 2024 - 2028 $ 22,931 $ 22,429,417
GNMA, 6.5s, 2012 - 2027 99,552 99,641,971
GNMA, 7s, 2022 - 2027 185,608 188,719,599
GNMA, 7.5s, 2008 - 2028 230,018 236,969,665
GNMA, 8s, 2012 - 2025 108,748 112,930,366
GNMA, 9s, 2008 - 2019 21,349 22,960,583
GNMA, 9.5s, 2009 - 2010 8,225 8,839,943
GNMA, 11s, 2021 12,350 13,856,988
GNMA, 12.5s, 2011 311 362,964
------------
$706,711,496
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U.S Treasury Obligations - 6.3%
U.S. Treasury Notes, 5.625s, 2008 $ 15,000 $ 15,140,550
U.S. Treasury Bonds, 6.125s, 2027 5,000 5,285,150
U.S. Treasury Bonds, 10.375s, 2012 2,600 3,458,806
U.S. Treasury Bonds, 13.125s, 2001### 22,550 26,908,464
------------
$ 50,792,970
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Total U.S. Government Guaranteed $757,504,466
- ------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 5.7%
Federal Home Loan Mortgage Corporation - 0.1%
FHLMC, 8.5s, 2009 $ 26 $ 27,770
FHLMC, 9s, 2020 418 443,464
FHLMC, 9.5s, 2020 245 261,506
------------
$ 732,740
- ------------------------------------------------------------------------------------------------------
Federal National Mortgage Association - 5.3%
FNMA, 6.6s, 2007 $ 4,790 $ 4,918,295
FNMA, 7.95s, 2005 6,290 6,647,744
FNMA, 8.5s, 2007 - 2028 19,853 20,709,954
FNMA, 9s, 2004 - 2008 10,659 11,221,860
------------
$ 43,497,853
- ------------------------------------------------------------------------------------------------------
Other - 0.3%
U.S. Department of Veteran Affairs, 7.5s, 2013 $ 2,370 $ 2,417,706
- ------------------------------------------------------------------------------------------------------
Total U.S. Federal Agencies $ 46,648,299
- ------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $802,844,166) $804,152,765
- ------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- continued
Short-Term Obligations - 0.2%
<CAPTION>
- ------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Goldman Sachs dated 7/31/98, due 8/03/98, total to be
received $1,814,856 (secured by various U.S.
Treasury Obligations in a jointly traded account),
at Amortized Cost $ 1,814 $ 1,814,000
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $804,658,166) $805,966,765
Other Assets, Less Liabilities - 0.8% 6,142,722
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $812,109,487
- ------------------------------------------------------------------------------------------------------
###Security segregated as collateral for open future contracts.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
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JULY 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $804,658,166) $ 805,966,765
Cash 37,198
Receivable for Fund shares sold 2,146,343
Interest receivable 5,563,767
Other assets 7,074
-------------
Total assets $ 813,721,147
-------------
Liabilities:
Payable for Fund shares reacquired $ 990,616
Payable for daily variation margin on open futures
contracts 12,500
Payable to affiliates -
Management fee 10,020
Shareholder servicing agent fee 2,505
Distribution and service fee 193,591
Administrative fee 334
Accrued expenses and other liabilities 402,094
-------------
Total liabilities $ 1,611,660
-------------
Net assets $ 812,109,487
=============
Net assets consist of:
Paid-in capital $ 853,171,339
Unrealized appreciation on investments 1,315,334
Accumulated net realized loss on investments (42,192,909)
Accumulated distributions in excess of net investment
income (184,277)
-------------
Total $ 812,109,487
=============
Shares of beneficial interest outstanding 121,295,790
===========
Class A shares:
Net asset value per share
(net assets of $656,602,121 / 98,097,509 shares of
beneficial interest outstanding) $6.69
=====
Offering price per share (100 / 95.25 of net asset value
per share) $7.02
=====
Class B shares:
Net asset value and offering price per share
(net assets of $155,456,232 / 23,190,632 shares of
beneficial interest outstanding) $6.70
=====
Class I shares:
Net asset value, offering price, and redemption price per share
(net assets of $51,134 / 7,649 shares of beneficial
interest outstanding) $6.69
=====
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, 1998
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 64,403,388
------------
Expenses -
Management fee $ 3,929,806
Trustees' compensation 69,358
Shareholder servicing agent fee 1,048,537
Distribution and service fee (Class A) 1,645,486
Distribution and service fee (Class B) 2,150,242
Administrative fee 123,099
Custodian fee 278,085
Postage 198,402
Printing 60,405
Auditing fees 39,890
Legal fees 5,565
Miscellaneous 543,825
------------
Total expenses $ 10,092,700
Fees paid indirectly (239,575)
------------
Net expenses $ 9,853,125
------------
Net investment income $ 54,550,263
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 11,657,147
Futures contracts (1,884,741)
------------
Net realized gain on investments $ 9,772,406
------------
Change in unrealized appreciation (depreciation) -
Investments $(13,331,910)
Futures contracts 625,680
------------
Net unrealized loss on investments $(12,706,230)
------------
Net realized and unrealized loss on investments $ (2,933,824)
------------
Increase in net assets from operations $ 51,616,439
============
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
- -----------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1998 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 54,550,263 $ 65,309,394
Net realized gain (loss) on investments 9,772,406 (6,762,295)
Net unrealized gain (loss) on investments (12,706,230) 32,796,970
------------- --------------
Increase in net assets from operations $ 51,616,439 $ 91,344,069
------------- --------------
Distributions declared to shareholders -
From net investment income (Class A) $ (40,398,677) $ (38,530,720)
From net investment income (Class B) (11,609,634) (23,909,098)
From net investment income (Class I) (5,097) (5,224)
From net realized gain on investments (Class A) (1,910,443) --
From net realized gain on investments (Class B) (549,017) --
From net realized gain on investments (Class I) (241) --
Tax return of capital --
(1,201,681)
------------- --------------
Total distributions declared to shareholders $ (54,473,109) $ (63,646,723)
------------- --------------
Net decrease in net assets from Fund share transactions $(124,725,903) $ (181,974,208)
------------- --------------
Total decrease in net assets $(127,582,573) $ (154,276,862)
Net assets:
At beginning of period 939,692,060 1,093,968,922
------------- --------------
At end of period (including accumulated distributions
in excess of net investment income of $184,277 and
$164,064, respectively) $ 812,109,487 $ 939,692,060
============= ==============
</TABLE>
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
EIGHT MONTHS
YEAR ENDED JULY 31, ENDED YEAR ENDED
--------------------------------------------------- JULY 31, NOVEMBER 30,
1998 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.85 $ 6.82
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.43 $ 0.44 $ 0.45 $ 0.45 $ 0.29 $ 0.34
Net realized and unrealized gain
(loss) on investments (0.03) 0.18 (0.14) 0.14 (0.36) 0.20
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.40 $ 0.62 $ 0.31 $ 0.59 $(0.07) $ 0.54
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.41) $(0.42) $(0.42) $(0.42) $(0.20) $(0.47)
From net realized gains on
investments (0.02) -- -- -- -- --
In excess of net realized gain on
investments -- -- -- -- -- (0.04)
From paid-in capital -- -- -- -- (0.09) --
From tax return of capital -- (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.43) $(0.43) $(0.43) $(0.43) $(0.29) $(0.51)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.69 $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.85
====== ====== ====== ====== ====== ======
Total return(+) 6.17% 9.90% 4.76% 9.60% (1.51)%++ 8.11%
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 0.97% 1.09% 1.16% 1.25% 1.27%+ 1.38%
Net investment income 6.43% 6.75% 6.75% 6.99% 6.46%+ 6.30%
Portfolio turnover 72% 33% 25% 87% 37% 167%
Net assets at end of period (000,000
omitted) $657 $653 $541 $534 $424 $522
+ 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 the
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>
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34
------ ------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.46 $ 0.48 $ 0.53 $ 0.59 $ 0.64
Net realized and unrealized gain (loss) on
investments 0.09 0.25 (0.40) 0.48 (0.06)
------ ------ ------ ------ ------
Total from investment operations $ 0.55 $ 0.73 $ 0.13 $ 1.07 $ 0.58
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.42) $(0.44) $(0.49) $(0.58) $(0.64)
From paid-in capital (0.26) (0.35) (0.49) (0.45) (0.46)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.68) $(0.79) $(0.98) $(1.03) $(1.10)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82
====== ====== ====== ====== ======
Total return(+) 8.25% 11.00% 2.05% 14.72% 7.39%
Ratios (to average net assets)/Supplemental data:
Expenses 1.42% 1.44% 1.40% 1.37% 1.38%
Net investment income 6.57% 6.91% 7.29% 7.57% 7.88%
Portfolio turnover 484% 731% 507% 489% 285%
Net assets at end of period (000,000
omitted) $715 $886 $1,068 $1,380 $1,295
(+) 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>
Financial Highlights - continued
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
EIGHT MONTHS
YEAR ENDED JULY 31, ENDED PERIOD ENDED
------------------------------------------------ JULY 31, NOVEMBER 30,
1998 1997 1996 1995 1994 1993*
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84 $ 6.97
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.38 $ 0.40 $ 0.40 $ 0.41 $ 0.26 $ 0.38
Net realized and unrealized gain
(loss) on investments (0.03) 0.17 (0.13) 0.14 (0.35) (0.44)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.35 $ 0.57 $ 0.27 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.35) $(0.37) $(0.38) $(0.38) $(0.18) $(0.07)
From net realized gains on
investments (0.02) -- -- -- -- --
From paid-in capital -- -- -- -- (0.08) --
From tax return of capital -- (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.37) $(0.38) $(0.39) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.70 $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ====== ====== ======
Total return 5.40% 9.09% 3.98% 8.81% (1.97)%++ (3.91)%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.72% 1.78% 1.87% 1.96% 1.94%+ 1.87%+
Net investment income 5.67% 6.02% 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover 72% 33% 25% 87% 37% 167%
Net assets at end of period (000,000
omitted) $155 $286 $553 $812 $1,229 $1,628
* For the period from the inception of Class B, 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 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 the
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>
Financial Highlights - continued
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1998 1997**
- ----------------------------------------------------------------------------------------------------------
CLASS I
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 6.72 $ 6.59
------ ------
Income from investment operations# -
Net investment income $ 0.44 $ 0.31
Net realized and unrealized gain (loss) on investments (0.02) 0.09
------ ------
Total from investment operations $ 0.42 $ 0.40
------ ------
Less distributions declared to shareholders -
From net investment income $(0.43) $(0.26)
From net realized gains on investments $(0.02) --
From tax return of capital -- (0.01)
------ ------
Total distributions declared to shareholders $(0.45) $(0.27)
------ ------
Net asset value - end of period $ 6.69 $ 6.72
====== ======
Total return 6.47% 6.19%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.73% 0.73%+
Net investment income 6.67% 7.06%+
Portfolio turnover 72% 33%
Net assets at end of period (000 omitted) $51 $113
** For the period from the inception of Class I, 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 reported at market value using closing settlement
prices. Over-the-counter options on securities are valued by brokers.
Securities for which there are no such quotations or valuations are valued at
fair value as determined in good faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities collateral in a repurchase transaction be transferred to
the custodian in a manner sufficient to enable the Fund to obtain those
securities in the event of a default under the repurchase agreement. The Fund
monitors, on a daily basis, the value of the collateral to ensure that its
value, including accrued interest, is greater than amounts owed to the Fund
under each such repurchase agreement. The Fund, along with other affiliated
entities of Massachusetts Financial Services Company (MFS), may utilize a
joint trading account for the purpose of entering into one or more repurchase
agreements.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities or contracts based on financial indices at a fixed
price on a future date. In entering such contracts, the Fund is required to
deposit with the broker 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 contract, 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 discount 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. Some
securities may be purchased on a "when-issued" or "forward delivery" basis,
which means that the securities will be delivered to the Fund at a future
date, usually beyond customary settlement time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
the Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
The Fund files a tax return annually using tax accounting methods required
under provisions of the Code, which may differ from generally accepted
accounting principles, the basis on which these financial statements are
prepared. Accordingly, the amount of net investment income and net realized
gain reported on these financial statements may differ from that reported on
the Fund's tax return and, consequently, the character of distributions to
shareholders reported in the financial highlights may differ from that
reported to shareholders on Form 1099-DIV.
Distributions to shareholders are recorded on the ex-dividend date. The Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as a tax return of capital.
Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes are classified as
distributions in excess of net investment income or net realized gains. During
the year ended July 31, 1998, $2,557,068 and $72,875,153 were reclassified
from accumulated distributions in excess of net investment income and paid-in
capital, respectively to accumulated net realized loss on investments due to
differences between book and tax accounting for mortgage-backed securities and
the expiration of capital loss carryforwards. This change had no effect on the
net assets or net asset value per share.
At July 31, 1998, the Fund, for federal income tax purposes, had a capital loss
carryforward of ($42,186,173) 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, 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 three
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. No class has preferential
dividend rights; differences in per share dividend rates are generally due to
differences in separate class expenses. Class B shares will convert to Class A
shares approximately eight years after purchase.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an 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
remuneration 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
$29,325 for the year ended July 31, 1998.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$35,510 for the year ended July 31, 1998, as its portion of the sales charge
on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A 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
paid to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer and a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares. Payment of the up to 0.10% per
annum distribution fee will commence on such date as the Trustees of the Trust
may determine. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $144,624 for the year ended July 31,
1998. Fees incurred under the distribution plan during the year ended July 31,
1998, were 0.25% 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. 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. The service fee is
intended to be consideration for services rendered by the dealer with respect
to Class B. MFD retains the service fee for accounts not attributable to a
securities dealer, which amounted to $63,529 for Class B shares for the year
ended July 31, 1998. Fees incurred under the distribution plan during the year
ended July 31, 1998, were 1.00% of average daily net assets attributable to
Class B shares on an annualized basis.
Certain Class A shares are subject to a contingent deferred sales charge in
the event of a shareholder redemption within 12 months following purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of
Class B shares in the event of a shareholder redemption within six years of
purchase. MFD receives all contingent deferred sales charges. Contingent
deferred sales charges imposed during the year ended July 31, 1998, were $283
and $116,843, 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 0.1125% Prior to January 1, 1998, the fee was calculated as a
percentage of the average daily net assets at an effective annual rate of
0.13%.
(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 $611,206,024 $743,433,971
------------ ------------
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 $804,658,166
------------
Gross unrealized appreciation $ 9,225,554
Gross unrealized depreciation (7,916,955)
------------
Net unrealized appreciation $ 1,308,599
============
(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, 1998 YEAR ENDED JULY 31, 1997
------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 18,176,669 $ 122,097,242 33,238,157 $ 218,654,931
Shares issued to shareholders in
reinvestment of distributions 3,001,790 20,014,229 2,705,877 17,720,451
Transferred to Class I -- -- (24,043) (157,482)
Shares reacquired (20,335,888) (135,963,645) (21,505,030) (141,474,917)
----------- ------------- ----------- -------------
Net increase 842,571 $ 6,147,826 14,414,961 $ 94,742,983
=========== ============= =========== =============
<CAPTION>
Class B Shares
YEAR ENDED JULY 31, 1998 YEAR ENDED JULY 31, 1997
------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,436,007 $ 9,624,515 17,769,251 $ 116,849,711
Shares issued to shareholders in
reinvestment of distributions 981,420 6,552,039 1,901,265 12,464,920
Shares reacquired (21,872,935) (146,988,676) (61,776,157) (406,143,501)
----------- ------------- ----------- -------------
Net decrease (19,455,508) $(130,812,122) (42,105,641) $(276,828,870)
=========== ============= =========== =============
<CAPTION>
Class I Shares
YEAR ENDED JULY 31, 1998 PERIOD ENDED JULY 31, 1997*
---------------------------------- ----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,275 $ 8,547 3,187 $ 21,994
Shares issued to shareholders in
reinvestment of distributions 770 5,123 812 5,325
Shares transferred from Class A -- -- 24,043 157,482
Shares reacquired (11,278) (75,277) (11,160) (73,122)
------- -------- ------- --------
Net increase (decrease) (9,233) $(61,607) 16,882 $111,679
======= ======== ======= ========
* For the period from the inception of Class I, January 2, 1997, through July 31, 1997.
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of
Fund shares. Interest is charged to each fund, based on its borrowings, at a
rate equal to the bank's base rate. In addition, a commitment fee, based on
the average daily unused portion of the line of credit, is allocated among the
participating funds at the end of each quarter. The commitment fee allocated
to the Fund for the year ended July 31, 1998, was $5,034.
(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.
Futures Contracts
<TABLE>
<CAPTION>
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION APPRECIATION
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds September 1998 400 Short $6,735
------
</TABLE>
At July 31, 1998, the Fund had sufficient cash and/or securities to cover
margin requirements on open futures contracts.
<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 consitituting MFS Series Trust X) as of July 31, 1998, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended July 31, 1998 and 1997, and the
financial highlights for each of the years in the four-year period ended July
31, 1998, the eight months ended July 31, 1994, and for each of the years in
the six year period ended November 30, 1994. 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, 1998, 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, 1998, 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 11, 1998
<PAGE>
FEDERAL INCOME TAX INFORMATION ON DISTRIBUTIONS
In January 1999, shareholders will be mailed Form 1099 reporting the federal
tax status of all distributions paid during the calendar year 1998.
The Fund has designated $2,459,701 as a long-term capital gain dividend.
<PAGE>
<TABLE>
MFS(R) GOVERNMENT MORTGAGE FUND
<S> <C>
TRUSTEES CUSTODIAN
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until 1991),
MFS Investment Management AUDITORS
Deloitte & Touche LLP
Peter G. Harwood - Private Investor
Investor Information For MFS stock and bond
J. Atwood Ives - Chairman and Chief Executive market outlooks, call toll free: 1-800-637-4458
Officer, Eastern Enterprises (diversified anytime from a touch-tone telephone.
services company)
For information on MFS mutual funds, call your
Lawrence T. Perera - Partner, Hemenway financial adviser or, for an information kit,
& Barnes (attorneys) call toll free: 1-800-637-2929 any business day
from 9 a.m. to 5 p.m. Eastern time (or leave a
William J. Poorvu - Adjunct Professor, Harvard message anytime).
University Graduate School of Business
Administration INVESTOR SERVICE
MFS Service Center, Inc.
Charles W. Schmidt - Private Investor P.O. Box 2281
Boston, MA 02107-9906
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, For general information, call toll free:
MFS Investment Management 1-800-225-2606 any business day from 8 a.m. to 8
p.m. Eastern time.
Jeffrey L. Shames* - Chairman, Chief Executive
Officer, and Director, MFS Investment Management For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day from
Elaine R. Smith - Independent Consultant 9 a.m. to 5 p.m. Eastern time. (To use this
service, your phone must be equipped with a
David B. Stone - Chairman and Director, Telecommunications Device for the Deaf.)
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
PORTFOLIO MANAGER
D. Richard Smith*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
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INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MGM-2 9/98 78M 31/231/831
