<PAGE>
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
"We invented the mutual fund"(SM)
MFS(R) GOVERNMENT MORTGAGE FUND
SEMIANNUAL REPORT o JANUARY 31, 1998
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
A Discussion with the Portfolio Manager ................................... 4
Fund Facts ................................................................ 8
Performance Summary ....................................................... 8
Portfolio Concentration ................................................... 9
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 12
Notes to Financial Statements ............................................. 19
Trustees and Officers ..................................................... 25
HIGHLIGHTS
o FOR THE SIX MONTHS ENDED JANUARY 31, 1998, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 3.75%, CLASS B SHARES 3.45%,
AND CLASS I SHARES 3.75%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o THE FUND PERFORMED ABOUT AS WE EXPECTED AS WE SOUGHT TO PROVIDE A FAIRLY
STABLE INVESTMENT VERSUS CASH, AS WELL AS AN ENHANCED YIELD.
o WHILE REFINANCINGS HAVE HELPED CREATE SOME PREPAYMENT RISK IN THE MORTGAGE
MARKET, THE FUND HAS TENDED TO AVOID NEW-ISSUE, 7 1/2% TO 8% COUPONS THAT
ARE MORE LIKELY TO BE REFINANCED IN THE NEAR TERM.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
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<PAGE>
[Photo of A. Keith Brodkin] MFS Mourns Chairman's Passing
A. Keith Brodkin It is with deep regret that we inform you
of the death on February 2, 1998, of A. Keith
Brodkin, Chairman and Chief Executive Officer
of MFS Investment Management(SM). Mr. Brodkin
joined MFS in 1970 and made enormous
contributions to the organization, including
helping to build the firm's investment staff,
which will continue to manage all of the MFS
investment portfolios. His leadership,
friendship, and wise counsel will be sorely
missed.
more on Mr. Brodkin on page 3
LETTER FROM THE CHAIRMAN
Dear Shareholders:
Thanks to a sustained period of relative stability and moderate growth, the
U.S. economy has produced thousands of new jobs, inflation has remained under
control, and the investment climate has -- for the most part -- been
favorable. 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. Based on
preliminary data, the U.S. economy grew at a 4.3% annual rate in the fourth
quarter of 1997, up from 3.1% in the third quarter. For all of 1997, the
economy grew by 3.8% (adjusted for inflation), the fastest pace since 1988.
While U.S. economic growth continues to be impressive, events in the Pacific
Rim will somewhat offset that and, therefore, markets are likely to continue
to focus on Federal Reserve Board (Fed) activity.
The U.S. government bond market has benefited from the deflationary events in
Asia, while the high-yield and emerging-debt markets have come under some
pressure. Inflation remains under control, and the Fed will most likely
continue to take a wait-and-see attitude toward raising interest rates. As a
result, our near-term outlook for high-grade markets is neutral to moderately
positive. At the same time, high-yield markets, having gone through a
correction, could offer reasonable value but require careful selection.
Overall, fixed-income markets appear to be reasonably valued.
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
February 17, 1998
JEFFREY L. SHAMES, A GRADUATE OF WESLEYAN UNIVERSITY AND THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY SLOAN SCHOOL OF MANAGEMENT, JOINED
MFS IN 1983. AFTER FOUR YEARS AS AN INDUSTRY ANALYST AND PORTFOLIO
MANAGER, HE WAS NAMED CHIEF EQUITY OFFICER IN 1987 AND PRESIDENT AND A
MEMBER OF THE BOARD IN 1993. MR. SHAMES WAS APPOINTED CHAIRMAN AND CHIEF
EXECUTIVE OFFICER IN FEBRUARY 1998.
<PAGE>
IN MEMORIAM
A. KEITH BRODKIN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
MFS INVESTMENT MANAGEMENT
On February 2, 1998, Keith Brodkin, a friend and leader to everyone at
MFS, died unexpectedly at age 62. His thoughtful letters to shareholders
on the markets and economy have been an integral part of MFS shareholder
reports like this one for many years.
Keith joined MFS in 1970 as the firm's first fixed-income manager,
managing the bond portion of MFS(R) Total Return Fund. He went on to
manage our first pure bond fund, MFS(R) Bond Fund, when it was
introduced in 1974, and he was considered a pioneer in the art of active
bond management.
Keith was named President and Chief Investment Officer of MFS
in 1987 and four years later became Chairman and Chief Executive
Officer. During his stewardship, MFS has achieved significant growth in
total assets under management, rising from some $25 billion in 1991 to
the over $70 billion today entrusted to us by three million individual
and institutional investors worldwide. Under Keith's leadership, MFS has
carefully but steadily built its domestic and international investment
capabilities through the introduction of a range of new products and a
still-growing staff that now numbers over 100 equity and fixed-income
professionals.
Throughout his career, Keith was very active in a wide range of
charitable endeavors. He is survived by his wife and three children.
His leadership, friendship, and wise counsel will be sorely missed.
<PAGE>
A DISCUSSION WITH THE PORTFOLIO MANAGER
[Photo of D. Richard Smith]
D. Richard Smith
For the six months ended January 31, 1998, Class A shares of the Fund provided
a total return of 3.75%, Class B shares 3.45%, and Class I shares 3.75%. These
returns, which assume the reinvestment of distributions but exclude the
effects of any sales charges, compare to a 4.40% return for
the Lehman Brothers Government National Mortgage Association (GNMA) Index, an
unmanaged index of GNMA issues with more than $50 million outstanding.
Q. COULD YOU DISCUSS SOME OF THE REASONS FOR THE FUND'S PERFORMANCE RELATIVE
TO ITS BENCHMARK OVER THE PAST SIX MONTHS?
A. The Fund performed about as we expected. We think many of the investors in
this Fund are looking for a fairly stable investment versus cash, as well
as an enhanced yield. That's what mortgage assets tend to bring. They tend
to have a sensitivity in the marketplace comparable to that of a three- to
five-year U.S. Treasury security, and we add about 1.0% of yield to that.
Q. HOW ARE YOU MANAGING THE FUND SINCE TAKING OVER AS PORTFOLIO MANAGER ON
JANUARY 2, 1998?
A. We follow a fairly structured, risk-management approach to managing the
Fund. We start by breaking risk factors into three categories. The first is
based on our fundamental outlook for the overall economy. The second is
value orientation, by which we focus on how the asset class is trading
compared to how it has traded in the past. The third is the technical
environment. Technicals focus on market trends as well as on the impact of
special situations and issuance.
Right now, we feel pretty good about the economy. We think growth is okay,
and we expect inflation to remain low, which should be a positive influence
on portfolio returns. We're also seeing some pretty good values in the
mortgage market. Current-coupon bonds, which are GNMA 6 1/2% coupons, yield
approximately 6.65%, or 110 basis points (1.10%) more than
comparable-maturity Treasuries. We think that's one of the best values we've
seen in these securities over the past three to five years. (Principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity.) From a technical perspective, the market is a little soft
now because of heavy new supply, but we think the demand for mortgages will
strengthen over the course of the year.
Q. HOW WOULD YOU DESCRIBE THE FIXED-INCOME ENVIRONMENT IN RECENT MONTHS?
A. It's been much better than expected over the past six months, even the past
year. Yields have continued to come down, and returns of bond portfolios
have exceeded the coupon yield of the underlying securities. Bond mutual
funds showed substantial price returns last year, as did mortgages, which
returned one to two percentage points more than the Fund's coupon interest
income.
Growth should remain moderate, and we think inflation will remain muted. The
big thing to watch for will be labor costs in an environment of lower-priced
imported goods. The dollar seems to be more stable now, and -- one of the
great stories for the fixed-income markets -- the federal budget deficit is
low and will probably lead to a surplus. That means the government will issue
fewer bonds, which means a smaller overall supply, and that's also a positive
for the fixed-income markets.
Q. MORE SPECIFICALLY, WHAT ABOUT THE MORTGAGE MARKET?
A. We still think the mortgage market is a good value. In 1997, mortgages were
the best-performing asset class among high-grade bonds. On a duration-
adjusted basis, they outperformed Treasuries by 110 basis points (1.10%).
They also outperformed both corporate and asset-backed bonds. We think we
will continue to have good risk-adjusted returns versus both shorter-
maturity Treasuries and cash.
Q. HAS THE TURMOIL IN ASIAN MARKETS AFFECTED THE U.S. MORTGAGE MARKET IN ANY
WAY, PERHAPS BY ATTRACTING FOREIGN MONEY HERE?
A. At the peak of the crisis, we saw a lot of foreign money coming into the
U.S. market, not for its value, but more for its reputation as a safe
haven. The United States was seen as a much more stable place to be, so
people were willing to accept a lower yield on their securities just to get
the comfort that the U.S market created versus other foreign investments.
We think the Asian problem is now past its worst point, and we would not
look for the substantial flows coming in that we saw over the past year. So
we wouldn't look for Asia to be as much of a factor as we move further into
1998.
Q. WHAT ABOUT THE MORTGAGE PREPAYMENT SITUATION? IS THERE STILL SOME RISK
THERE, AND HOW IS THE FUND DEALING WITH IT?
A. We think there will be some prepayment risk during the first few months of
the year. We've tended to avoid those new-issue 7 1/2% to 8% coupons that
are more likely to be refinanced in the near term. (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.) The
market adjusted pretty quickly to these fears and may have even
overestimated the amount of prepayments. There were big refinancing waves
in both 1993 and 1996, so most people who could have refinanced have
probably already done it. Today's refinancings are coming from people who
were in adjustable-rate mortgages that floated at two percentage points
over three-month Treasury bills and who are converting to fixed-rate
mortgages at lower rates. On the fixed-rate side, which is what we manage,
we expect more refinancings for a few months, but we don't expect to get
into a situation in which we can't deliver a greater yield than the
Treasury market.
Q. ARE THERE ANY POSITIONS IN THE FUND THAT PERFORMED BETTER THAN YOU
EXPECTED IN THE PAST SEVERAL MONTHS?
A. The mortgage market in general has performed quite well. Over the
past year, mortgages performed better than expected as interest rates
declined. Toward the end of 1997, we lowered the percentage of mortgages in
the Fund because they had been doing so well, and we might have missed some
of the last bit of tightening and price increases that occurred in the
mortgage market at that time. But by January of this year the mortgage
market began to weaken, and we started to add back mortgages to get to a
more neutral position, which for the Fund is about 80% to 85% mortgages.
Q. WERE THERE ANY POSITIONS THAT DID NOT PERFORM AS WELL AS YOU HOPED?
A. The Fund probably held more cash than it should have. When the market
rallied in the fourth quarter, 2% to 4% of the Fund was in cash. Over the
last six months of 1997, three-month Treasury bills returned about 2.60%,
and two-year Treasuries returned 3.71%. So being invested in securities
paid off in the fourth quarter, and by holding cash, we were penalized.
Going forward, we think the Fund needs to hold more in lower-coupon
securities. As more of these adjustable-rate mortgages refinance into
fixed-rate mortgages, we're going to see a lot more
6 1/2% coupons in the benchmark universe. We'll buy those. We think they're
a good value right now, and that's how we're building up our mortgage
position.
Q. AS YOU LOOK AHEAD, WHAT CHANGES DO YOU SEE IN THE GENERAL ECONOMIC
ENVIRONMENT OR YOUR MARKET, AND HOW ARE YOU POSITIONING THE FUND FOR THOSE
CHANGES?
A. We think the economy will demonstrate a more moderate pace through the
spring. As Fed Chairman Alan Greenspan said, we've felt the financial
impact of Asia, but we haven't felt the economic impact yet. When that
happens, we'll probably see lower economic growth numbers, which will
create lower yields, and also higher prices. We would like to participate
in that. As we get further into the year, and as long as the U.S.
employment and income situation remains strong, interest rates, which
should bottom out in the spring, will tend to rise.
/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.
Note to Shareholders: On January 2, 1998, D. Richard Smith succeeded
James J. Calmas as portfolio manager of the Fund. Mr. Smith joined MFS
in 1993 as a portfolio manager and was promoted to Vice President --
Investments in 1995. A graduate of Vassar College, he holds an M.B.A. from
Vanderbilt University.
<PAGE>
FUND FACTS
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: $879.7 MILLION NET ASSETS AS OF JANUARY 31, 1998
PERFORMANCE SUMMARY
Because mutual funds like MFS(R) Government Mortgage Fund are designed for
investors with long-term goals, we have provided cumulative results as well as
the average annual total returns for Class A, Class B, and Class I shares for
the applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN AS OF JANUARY 31, 1998
<TABLE>
<CAPTION>
CLASS A INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +3.75% +9.01% +35.66% +102.49%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +9.01% + 6.29% + 7.31%
- ------------------------------------------------------------------------------------------------------------
SEC Results -- +3.82% + 5.25% + 6.79%
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<CAPTION>
CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +3.45% +8.30% +31.50% +96.35%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +8.30% + 5.63% + 6.98%
- ------------------------------------------------------------------------------------------------------------
SEC Results -- +4.30% + 5.32% + 6.98%
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<CAPTION>
CLASS I INVESTMENT RESULTS
(net asset value change including reinvested distributions)
6 Months 1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +3.75% +9.18% +35.92% +102.87%
- ------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +9.18% + 6.33% + 7.33%
- ------------------------------------------------------------------------------------------------------------
</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 ("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"), which became available on January 2, 1997, 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
attributable to 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.
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 attributable to A are greater than those of I, I performance
generally would have been higher than A performance. The A performance
included within the I performance has been adjusted to reflect the fact that I
have no initial sales charge.
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.
PORTFOLIO CONCENTRATION AS OF JANUARY 31, 1998
LARGEST SECTORS
Mortgage Backed 79.2%
U.S. Treasuries 9.0%
Other Agencies 7.4%
Cash 4.4%
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) -- January 31, 1998
Bonds - 94.7%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Government Guaranteed - 86.1%
Government National Mortgage Association - 74.5%
GNMA, 6s, 2009 - 2013 $ 19,898 $ 19,791,921
GNMA, 6.5s, 2011 - 2099 79,012 79,089,070
GNMA, 7s, 2022 - 2027 161,205 163,986,195
GNMA, 7.5s, 2008 - 2026 157,693 162,646,057
GNMA, 8s, 2002 - 2026 111,127 115,562,111
GNMA, 9s, 2008 - 2022 62,620 68,158,807
GNMA, 9.5s, 2009 - 2019 9,945 10,720,998
GNMA, 10s, 2009 - 2019 16,257 18,177,250
GNMA, 11s, 2021 14,561 16,659,165
GNMA, 12.5s, 2011 359 426,784
------------
$655,218,358
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Small Business Administration - 2.8%
SBA, 8.05s, 2012 $ 129 $ 140,209
SBA, 8.75s, 2006 99 105,032
SBA, 8.8s, 2011 2,788 3,082,316
SBA, 8.85s, 2011 10,501 11,623,019
SBA, 9.3s, 2010 3,140 3,504,294
SBA, 9.7s, 2010 2,484 2,784,388
SBA, 10s, 2009 2,827 3,177,557
------------
$ 24,416,815
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U.S. Treasury Obligations - 8.8%
U.S. Treasury Notes, 6.375s, 2000 $ 15,000 $ 15,325,800
U.S. Treasury Bonds, 13.125s, 2001 22,550 27,750,481
U.S. Treasury Notes, 6.125s, 2007 18,000 18,795,960
U.S. Treasury Bonds, 10.375s, 2012 11,800 15,872,888
------------
$ 77,745,129
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Total U.S. Government Guaranteed $757,380,302
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U.S. Federal Agencies - 8.6%
Federal Home Loan Mortgage Corporation - 0.1%
FHLMC, 8.5s, 2009 - 2017 $ 39 $ 40,868
FHLMC, 9s, 2020 - 2099 513 547,611
FHLMC, 9.5s, 2013 - 2021 260 278,039
------------
$ 866,518
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Federal National Mortgage Association - 4.2%
FNMA, 6.6s, 2007 $ 4,813 $ 4,955,403
FNMA, 6.695s, 2005 10,000 10,115,625
FNMA, 7.95s, 2005 6,290 6,698,850
FNMA, 8s, 2017 - 2023 1,101 1,141,497
FNMA, 8.5s, 2004 - 2008 262 274,499
FNMA, 9s, 2002 - 2008 12,984 13,694,006
------------
$ 36,879,880
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Financing Corporation - 4.0%
FICO, 10.35s, 2018 $ 23,965 $ 35,576,770
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Other - 0.3%
U.S. Department of Veteran Affairs,
7.5s, 2013 $ 2,601 $ 2,644,949
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Total U.S. Federal Agencies $ 75,968,117
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Total Bonds (Identified Cost, $816,658,560) $833,348,419
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Repurchase Agreement - 4.6%
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Goldman Sachs, dated 1/30/98, due 2/02/98,
total to be received $39,903,580 (secured
by various U.S. Treasury and Federal
Agency obligations in a jointly
traded account), at cost $ 39,885 $ 39,885,000
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Total Investments (Identified Cost, $856,543,560) $873,233,419
Other Assets, Less Liabilities - 0.7% 6,450,440
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Net Assets - 100.0% $879,683,859
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See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities (Unaudited)
- --------------------------------------------------------------------------------
JANUARY 31, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $856,543,560) $873,233,419
Cash 872,637
Receivable for Fund shares sold 62,452
Interest receivable 8,016,861
Receivable for investments sold 32,371,069
Other assets 9,102
------------
Total assets $914,565,540
------------
Liabilities:
Payable for investments purchased $ 33,313,471
Payable for Fund shares reacquired 943,888
Payable to affiliates -
Management fee 21,677
Shareholder servicing agent fee 5,419
Distribution and service fees 200,886
Administrative fee 723
Accrued expenses and other liabilities 395,617
------------
Total liabilities $ 34,881,681
------------
Net assets $879,683,859
------------
Net assets consist of:
Paid-in capital $986,069,136
Unrealized appreciation on investments 16,689,859
Accumulated net realized loss on investments (123,412,312)
Accumulated undistributed net investment income 337,176
------------
Total $879,683,859
============
Shares of beneficial interest outstanding 130,258,517
============
Class A shares:
Net asset value per share
(net assets of $705,003,592 / 104,411,122 shares of
beneficial interest outstanding) $6.75
=====
Offering price per share (100 / 95.25 of net asset value
per share) $7.09
=====
Class B shares:
Net asset value and offering price per share
(net assets of $174,614,245 / 25,837,606 shares of
beneficial interest outstanding) $6.76
=====
Class I shares:
Net asset value, offering price per share, and
redemption price per share (net assets of
$66,022 / 9,789 shares of beneficial interest
outstanding) $6.74
=====
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------
SIX MONTHS ENDED JANUARY 31, 1998
- ------------------------------------------------------------------------------
Net investment income:
Interest income $33,902,684
-----------
Expenses -
Management fee $ 2,048,049
Trustees' compensation 37,445
Shareholder servicing agent fee 578,098
Distribution and service fee (Class A) 803,470
Distribution and service fee (Class B) 1,336,897
Administrative fee 60,611
Custodian fee 150,019
Postage 90,886
Printing 19,213
Auditing fees 16,265
Legal fees 2,501
Miscellaneous 289,331
-----------
Total expenses $ 5,432,785
Fees paid indirectly (134,380)
-----------
Net expenses $ 5,298,405
-----------
Net investment income $28,604,279
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 1,913,421
Futures contracts (387,898)
-----------
Net realized gain on investments $ 1,525,523
-----------
Change in unrealized appreciation -
Investments $ 2,049,350
Futures contracts 618,945
-----------
Net unrealized gain on investments $ 2,668,295
-----------
Net realized and unrealized gain on investments $ 4,193,818
-----------
Increase in net assets from operations $32,798,097
===========
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED
ANUARY 31, 1998 JULY 31, 1997
(UNAUDITED)
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 28,604,279 $ 65,309,394
Net realized gain (loss) on investments 1,525,523 (6,762,295)
Net unrealized gain on investments 2,668,295 32,796,970
------------ --------------
Increase in net assets from operations $ 32,798,097 $ 91,344,069
------------ --------------
Distributions declared to shareholders -
From net investment income (Class A) $(20,496,403) $ (38,530,720)
From net investment income (Class B) (7,603,215) (23,909,098)
From net investment income (Class I) (3,421) (5,224)
Tax return of capital -- (1,201,681)
------------ --------------
Total distributions declared to
shareholders $(28,103,039) $ (63,646,723)
------------ --------------
Net decrease in net assets from Fund
share transactions $(64,703,259) $ (181,974,208)
------------ --------------
Total decrease in net assets $(60,008,201) $ (154,276,862)
Net assets:
At beginning of period 939,692,060 1,093,968,922
------------ --------------
At end of period (including accumulated
undistributed (distributions in excess
of) net investment income of $337,176
and ($164,064), respectively) $879,683,859 $ 939,692,060
============ ==============
See notes to financial statements
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS EIGHT MONTHS
ENDED YEAR ENDED JULY 31, ENDED
JANUARY 31, -------------------------------------------- JULY 31,
1998 1997 1996 1995 1994
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.85
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.22 $ 0.44 $ 0.45 $ 0.45 $ 0.29
Net realized and unrealized gain (loss)
on investments 0.03 0.18 (0.14) 0.14 (0.36)
------ ------ ------ ------ ------
Total from investment operations $ 0.25 $ 0.62 $ 0.31 $ 0.59 $(0.07)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.22) $(0.42) $(0.42) $(0.42) $(0.20)
From paid in capital -- -- -- -- (0.09)
From tax return capital -- (0.01) (0.01) (0.01) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.22) $(0.43) $(0.43) $(0.43) $(0.29)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.75 $ 6.72 $ 6.53 $ 6.65 $ 6.49
====== ====== ====== ====== ======
Total return(+) 3.75%++ 9.90% 4.76% 9.60% (1.51)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.98%+ 1.09% 1.16% 1.25% 1.27%+
Net investment income 6.52%+ 6.75% 6.75% 6.99% 6.46%+
Portfolio turnover 22% 33% 25% 87% 37%
Net assets at end of period (000,000
omitted) $705 $653 $541 $534 $424
+ 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 and/or distribution fee, respectively, 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
Ratios (to average net assets):
Expenses -- -- -- -- 1.28%+
Net investment income -- -- -- -- 6.45%+
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
- -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1993 1992 1991 1990 1989 1988 1987
- -------------------------------------------------------------------------------------------------------------------------------
CLASS A
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of
period $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34 $ 9.82
------ ------ ------ ------ ------ ------ ------
Income from investment operations -
Net investment income(S) $ 0.34 $ 0.46 $ 0.48 $ 0.53 $ 0.59 $ 0.64 $ 0.75
Net realized and unrealized
gain (loss) on investments 0.20 0.09 0.25 (0.40) 0.48 (0.06) (1.08)
------ ------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.54 $ 0.55 $ 0.73 $ 0.13 $ 1.07 $ 0.58 $(0.33)
------ ------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.47) $(0.42) $(0.44) $(0.49) $(0.58) $(0.64) $(0.82)
In excess of net realized
gain on investments (0.04) -- -- -- -- -- (0.01)
From paid in capital -- (0.26) (0.35) (0.49) (0.45) (0.46) (0.32)
------ ------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.51) $(0.68) $(0.79) $(0.98) $(1.03) $(1.10) $(1.15)
------ ------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.85 $ 6.82 $ 6.95 $ 7.01 $ 7.86 $ 7.82 $ 8.34
====== ====== ====== ====== ====== ====== ======
Total return(+) 8.11% 8.25% 11.00% 2.05% 14.72% 7.39% (3.37)%
Ratios (to average net assets)/
Supplemental data(S):
Expenses 1.38% 1.42% 1.44% 1.40% 1.37% 1.38% 1.34%
Net investment income 6.30% 6.57% 6.91% 7.29% 7.57% 7.88% 8.34%
Portfolio turnover 167% 484% 731% 507% 489% 285% 212%
Net assets at end of period
(000,000 omitted) $522 $715 $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.
(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 $ 0.34 -- -- -- -- -- --
Ratios (to average net assets):
Expenses 1.46% -- -- -- -- -- --
Net investment income 6.22% -- -- -- -- -- --
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights -- continued
- -----------------------------------------------------------------------------------------------------------------------------------
EIGHT
SIX MONTHS YEAR ENDED JULY 31, MONTHS PERIOD
ENDED ENDED ENDED
JANUARY 31, ----------------------------------------- JULY 31, NOVEMBER 30,
1998 1997 1996 1995 1994 1993**
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------------------------------------
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) $ 0.20 $ 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 $ 0.23 $ 0.57 $ 0.27 $ 0.55 $(0.09) $(0.06)
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income $(0.19) $(0.37) $(0.38) $(0.38) $(0.18) $(0.07)
From paid in capital -- -- -- -- (0.08) --
From tax return of capital -- (0.01) (0.01) (0.01) -- --
------ ------ ------ ------ ------ ------
Total distributions
declared to shareholders $(0.19) $(0.38) $(0.39) $(0.39) $(0.26) $(0.07)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 6.76 $ 6.72 $ 6.53 $ 6.65 $ 6.49 $ 6.84
====== ====== ====== ====== ====== ======
Total return 3.45%++ 9.09% 3.98% 8.81% (1.97)%++ (3.91)%++
Ratios (to average net assets)/
Supplemental data(S):
Expenses## 1.73%+ 1.78% 1.87% 1.96% 1.94%+ 1.87%+
Net investment income 5.72%+ 6.02% 6.01% 6.28% 5.80%+ 5.92%+
Portfolio turnover 22% 33% 25% 87% 37% 167%
Net assets at end of period
(000,000 omitted) $175 $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 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%+
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS -- continued
Financial Highlights -- continued
- -----------------------------------------------------------------------------------------------------
SIX MONTHS
ENDED PERIOD ENDED
JANUARY 31, JULY 31,
1998 1997***
(UNAUDITED)
- -----------------------------------------------------------------------------------------------------
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 $ 0.22 $ 0.31
Net realized and unrealized gain (loss) on investments 0.03 0.09
------ ------
Total from investment operations $ 0.25 $ 0.40
------ ------
Less distributions declared to shareholders -
From net investment income $(0.23) $(0.26)
From tax return of capital -- (0.01)
------ ------
Total distributions declared to shareholders $(0.23) $(0.27)
------ ------
Net asset value - end of period $ 6.74 $ 6.72
====== ======
Total return 3.75%++ 6.19%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.73%+ 0.73%+
Net investment income 6.72%+ 7.06%+
Portfolio turnover 22% 33%
Net assets at end of period (000 omitted) $66 $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.
See notes to financial statements
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Government Mortgage Fund (the Fund) is a diversified series of MFS Series
Trust X (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
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.
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 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. 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 average daily 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 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.
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 multiple
classes of shares. The classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of
the Fund 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
effective annual rate of 0.45% of average daily net assets.
Administrator - Effective March 1, 1997, 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, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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
$16,185 for the period ended January 31, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
approximately $8,800 for the period ended January 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
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. Payment of the
0.10% per annum Class A distribution fee has been suspended indefinitely, and
will only be implemented 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 $140,742 for the period ended January 31,
1998. Fees incurred under the distribution plan during the period ended
January 31, 1998, 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 $65,578
for Class B shares, for the period ended January 31, 1998. Fees incurred under
the distribution plan during the period ended January 31, 1998, 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
period ended January 31, 1998, were $10 and $63,476 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 Fund's average daily net assets at an effective 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 $187,062,129 $295,817,543
------------ ------------
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 $856,543,560
-----------
Gross unrealized appreciation $ 23,676,712
Gross unrealized depreciation (6,986,853)
-----------
Net unrealized appreciation $ 16,689,859
============
(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
PERIOD ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 13,992,276 $ 94,106,397 33,238,157 $ 218,654,931
Shares issued to shareholders
in reinvestment of
distributions 1,429,419 9,521,054 2,705,877 17,720,451
Shares transferred to class I -- -- (24,043) (157,482)
Shares reacquired (8,265,511) (55,227,661) (21,505,030) (141,474,917)
---------- ------------- ----------- -------------
Net increase 7,156,184 $ 48,399,790 14,414,961 $ 94,742,983
========== ============= =========== =============
<CAPTION>
Class B Shares
PERIOD ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 701,495 $ 4,702,072 17,769,251 $ 115,849,711
Shares issued to shareholders
in reinvestment of
distributions 605,605 4,037,936 1,901,265 12,464,920
Shares reacquired (18,115,634) (121,795,797) (61,776,157) (406,143,501)
---------- ------------- ----------- -------------
Net decrease (16,808,534) $(113,055,789) (42,105,641) $(276,828,870)
========== ============= =========== =============
<CAPTION>
Class I Shares
PERIOD ENDED JANUARY 31, 1998 YEAR ENDED JANUARY 31, 1997*
----------------------------------- -----------------------------------
SHARES AMOUNT SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 693 $ 4,649 3,157 $ 21,994
Shares issued to shareholders
in reinvestment of
distributions 482 3,208 812 5,325
Shares transferred to class I -- -- 24,043 157,482
Shares reacquired (8,268) (55,117) (11,160) (73,122)
---------- ------------- ----------- -------------
Net increase (decrease) (7,093) $ (47,260) 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 $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 period ended January 31, 1998, was $1,418.
(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.
At January 31, 1998, the Fund had no open futures contracts.
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) GOVERNMENT MORTGAGE FUND
<TABLE>
<S> <C>
TRUSTEES CUSTODIAN
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until 1991), INVESTOR INFORMATION
MFS Investment Management
For MFS stock and bond market outlooks, call
Peter G. Harwood - Private Investor toll free: 1-800-637-4458 anytime from a
touch-tone telephone.
J. Atwood Ives - Chairman and Chief
Executive Officer, Eastern Enterprises For information on MFS mutual funds, call
your financial adviser or, for an
Lawrence T. Perera - Partner, Hemenway information kit, call toll free:
& Barnes 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message
William J. Poorvu - Adjunct Professor, anytime).
Harvard 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 For general information, call toll free:
President, Director, and Secretary, MFS 1-800-225-2606 any business day from
Investment Management 8 a.m. to 8 p.m. Eastern time.
Jeffrey L. Shames* - Chairman, Chief For service to speech- or hearing-impaired,
Executive Officer, and Director, MFS call toll free: 1-800-637-6576 any business
Investment Management day from 9 a.m. to 5 p.m. Eastern time. (To
use this service, your phone must be
Elaine R. Smith - Independent Consultant 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. [Dalbar logo] For the fourth year in a row,
500 Boylston Street MFS earned a #1 ranking in the DALBAR, Inc.
Boston, MA 02116-3741 Broker/Dealer Survey, Main Office Operations
Service Quality Category. The firm achieved a
PORTFOLIO MANAGER 3.42 overall score on a scale of 1 to 4 in
D. Richard Smith* the 1997 survey. A total of 111 firms
responded, offering input on the quality of
TREASURER service they received from 29 mutual fund
W. Thomas London* companies nationwide. The survey contained
questions about service quality in 11
ASSISTANT TREASURERS categories, including "knowledge of
Mark E. Bradley* operations contact," "keeping you informed,"
Ellen Moynihan* and "ease of doing business" with the firm.
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
MFS(R) GOVERNMENT MORTGAGE FUND ----------------
Bulk Rate
U.S. Postage
Paid
MFS
----------------
[LOGO] MFS(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
500 Boylston Street
Boston, MA 02116-3741
[DALBAR
LOGO]
TOP-RATED SERVICE
(C)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MGM-3 3/98 89M 31/231/831
