<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) GOVERNMENT
MORTGAGE FUND
ANNUAL REPORT o JULY 31, 2000
-----------------------------------
MUTUAL FUND GIFT KITS (see page 26)
-----------------------------------
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 4
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 11
Financial Statements ...................................................... 12
Notes to Financial Statements ............................................. 18
Independent Auditors' Report .............................................. 24
Trustees and Officers ..................................................... 29
MFS ORIGINAL RESEARCH(R)
RESEARCH HAS BEEN CENTRAL TO INVESTMENT MANAGEMENT AT MFS
SINCE 1932, WHEN WE CREATED ONE OF THE FIRST IN-HOUSE
RESEARCH DEPARTMENTS IN THE MUTUAL FUND (SM)
INDUSTRY. ORIGINAL RESEARCH(SM) AT MFS IS MORE ORIGINAL RESEARCH
THAN JUST CRUNCHING NUMBERS AND CREATING
ECONOMIC MODELS: IT'S GETTING TO KNOW MFS
EACH SECURITY AND EACH COMPANY PERSONALLY.
MAKES A DIFFERENCE
--------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
--------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
I'm sure you've noticed that whenever financial markets suffer a large decline,
as they did very dramatically this past spring, there's a flurry of information
on "how to deal with market volatility" -- both in the popular press and from
those of us in the investment business. Our own thinking on this is that, first,
for long-term investors volatility is not necessarily something to be feared;
occasional volatility may in fact be healthy for the markets.
Second, our experience has been that when markets begin to fall, it's often too
late to act. The best response may be to do nothing -- if you're properly
prepared with a long-term plan, created with the help of your investment
professional. To help you create or update that plan and take market volatility
in stride, here are some points you may want to consider the next time you talk
with your investment professional.
1. VOLATILITY CAN BE A GOOD THING
We would argue that the markets today are much healthier than they were before
the period of volatility this past spring, in the sense that stock prices have
returned to more reasonable levels and we have a stronger base for future
growth. Perhaps the worst of the market's wrath descended on companies with very
high prices, relative to their earnings, or with business concepts that looked
great in the euphoria of a booming market but in the end appeared to have no
fundamental backing. It has always been our view that one of the best
protections against market volatility is to invest in stocks and bonds of
fundamentally good companies selling at reasonable prices. When discussing
potential investments with your investment professional, you may want to ask how
they fared in previous periods of volatility, as well as in the good times.
2. INVEST FOR THE LONG TERM
You've heard that before, but we think it's still probably the most important
concept in investing. Time is one of an investor's greatest allies. Over nearly
all long-term periods -- 5, 10, 20 years, and more -- stock and bond returns, as
represented by most common indices, have been positive and have considerably
outpaced inflation. Investing is the best way we know of to make your money work
for you while you're doing something else.
Where investors can get into trouble is by confusing investing with trading. In
our view, traders who buy securities with the intention of selling them at a
profit in a matter of hours, days, or weeks are gambling. We believe this seldom
turns out to be a good strategy for increasing your wealth.
3. INVEST REGULARLY
Waiting for the "right time" to invest is almost always a poor strategy, because
only in retrospect do we know when that right time really was. Periods of
volatility are probably the worst times to make an investment decision. Faced
with turmoil in the markets, many investors have opted to simply stay on the
sidelines.
On the other hand, we think one of the best techniques for investing is through
automatic monthly or quarterly deductions from a checking or savings account.
This approach has at least three major benefits. First, you can formulate a
long-term plan -- how much to invest, how often, and into what portfolios -- in
a calm, rational manner, working with your investment professional. Second, with
this approach you invest regularly without agonizing over the decision each time
you buy shares.
And, third, if you invest equal amounts of money at regular intervals, you'll be
taking advantage of a strategy called dollar-cost averaging: by investing a
fixed amount while the share cost fluctuates, you end up with an average share
cost to you that is lower than the average share price over your investment
period.(1) If all this sounds familiar, it's probably because you're already
taking advantage of dollar-cost averaging by investing regularly for retirement
through a 401(k) or similar account at work.
4. DIVERSIFY
One of the dangers of not having an investment plan is that you may be tempted
to simply chase performance, i.e., move money into whatever asset class appears
to be outperforming at the moment -- small, mid, or large cap; growth or value;
United States or international; stocks or bonds. The problem with this approach
is that by the time a particular area is generally recognized as "hot," you may
have already missed some of the best performance.
International investing offers a case in point. In the 1980s, international
investments, as represented by the Morgan Stanley Capital International (MSCI)
Europe, Australia, Far East (EAFE) Index, outperformed U.S. investments, as
represented by the Standard & Poor's 500 Composite Index (S&P 500), in 7 out of
10 years.(2) For the decade, the MSCI EAFE's average annual performance was 23%,
compared to 18% for the S&P 500. Going into the 1990s, then, an investor looking
only at recent performance might have favored international investments over
U.S. investments.
But the 1990s turned out to be virtually a mirror image of the '80s. Domestic
investments outperformed international investments in 7 out of 10 years, with
the S&P 500 returning an average of 18% annually for the decade and the MSCI
EAFE returning a 7% annual average. Looking ahead, however, we are optimistic
about international markets because we feel that many of the same forces that
propelled the current U.S. economic boom -- deregulation, restructuring, and
increased adoption of technology -- have taken root overseas.
The lesson to be learned is that nobody really knows what asset class will be
the next to outperform or how long that performance will be sustained. We would
suggest that one way to potentially profit from swings in the market -- to
potentially be invested in various asset classes before the market shifts in
their favor -- is with a diversified portfolio covering several asset classes.
If you haven't already done so, we encourage you to discuss these thoughts with
your investment professional and factor them into your long-range financial
planning. Hopefully, the next time the markets appear to be going wild, you'll
feel confident enough in your plan to view periods of volatility as a time of
potential opportunity -- or perhaps just a time to sit back and do nothing.
As always, we appreciate your confidence in MFS 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 15, 2000
------------
(1)The use of a systematic investing program does not guarantee a profit or
protect against a loss in declining markets. You should consider your
financial ability to continue to invest through periods of low prices.
(2)Sources: Lipper Inc. Decade performance: '80s -- 12/31/79-12/31/89, '90s --
12/31/89-12/31/99. The MSCI EAFE Index is an unmanaged, market-
capitalization-weighted total return index that measures the performance of
the same developed-country global stock markets included in the MSCI World
Index but excludes the United States, Canada, and the South African mining
component. The S&P 500 is a popular, unmanaged index of common stock total
return performance. It is not possible to invest directly in an index. PAST
PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
A prospectus containing more complete information on any MFS product, including
all charges and expenses, can be obtained from your investment professional.
Please read it carefully before you invest or send money. Investments in mutual
funds will fluctuate and may be worth more or less upon redemption.
The opinions expressed in this letter are those of Jeffrey L. Shames, and no
forecasts can be guaranteed.
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of D. Richard Smith]
D. Richard Smith
For the 12 months ended July 31, 2000, Class A shares of the fund provided a
total return of 6.09%, Class B shares 5.24%, and Class I shares 6.53%. These
returns assume the reinvestment of any distributions but exclude the effects of
any sales charges. These returns compare over the period to a 6.78% return for
the fund's benchmark, the Lehman Brothers Government National Mortgage
Association Index, an unmanaged index of Government National Mortgage
Association (GNMA) issues with more than $50 million outstanding. During the
same period, the average GNMA fund tracked by Lipper Inc., an independent firm
that reports mutual fund performance, returned 5.53%.
Q. LET'S START BY REVIEWING THE OVERALL GOAL OF THE FUND.
A. The goal of the fund -- which is a U.S. government-quality, intermediate bond
offering -- is to produce higher yields than a Treasury-only portfolio, while
maintaining higher credit quality than a corporate bond portfolio. In
managing the fund, we typically keep its interest-rate sensitivity (which is
measured by duration) slightly less than that of a five-year Treasury bond.
(Principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) Generally speaking, the longer the
duration of a bond or a portfolio, the more its value will fluctuate in
response to interest-rate changes. Five- year Treasury bonds, for example,
are usually less sensitive to interest-rate changes than 30-year Treasury
bonds.
Q. WHAT FACTORS HELPED FUND PERFORMANCE DURING THE PAST YEAR?
A. A main driver of our strong performance was that the fund's duration was
neutral, meaning it was in line with the GNMA market as a whole. The U.S.
economy was exceptionally strong throughout the past year, prompting the
Federal Reserve Board (the Fed) to raise interest rates on several occasions
to slow growth and keep inflation from accelerating. Having a neutral
duration meant that the fund wasn't overly sensitive to rising interest rates
and didn't unduly suffer as a result. We generally maintain a neutral
duration because we prefer not to take a lot of interest-rate risk. If we
did, the fund's interest-rate exposure could easily overwhelm other
strategies we pursue, such as security selection.
Q. WAS SECURITY SELECTION ANOTHER FACTOR THAT HELPED PERFORMANCE DURING
THE PERIOD?
A. Yes, our position in long-term U.S. Treasury securities helped the
portfolio's returns. With the federal budget posting surpluses rather than
deficits, the U.S. Treasury scaled back the size and frequency of new long-
maturity bond offerings. In addition, the government used some of the surplus
to reduce its debt by buying back outstanding longer-maturity Treasury bonds.
We found that in anticipation of a scarcity of long-term bonds, investors
pushed long-term bond yields lower and their prices higher even as short-term
interest rates rose.
We use Treasury bonds because they help manage the average duration of the
portfolio and because they are somewhat more liquid -- or easily traded --
than mortgage securities. We also maintain a small cash position, which helps
provide stability when interest rates are changing and also helps facilitate
share movement in and out of the fund.
Q. HOW DID YOUR CHOICES IN THE MORTGAGE MARKET HELP PERFORMANCE?
A. GNMA securities performed well relative to other mortgage securities. Toward
the beginning of the period, GNMA securities were attractively priced
relative to other mortgage choices. When legislators and other government
officials questioned the implicit backing that other mortgage issuers --
namely the Federal National Mortgage Association (Fannie Mae) and the Federal
Home Loan Mortgage Corporation (Freddie Mac) -- enjoy from the U.S.
government, it only served to highlight the value GNMA securities offered. We
found that as investors increasingly embraced this value, GNMA securities
performed well.
Q. WHAT CHANGES HAVE YOU MADE TO THE FUND'S MORTGAGE HOLDINGS DURING THE PAST
SEVERAL MONTHS?
A. Against the backdrop I just described, some GNMA securities became fully or
richly valued by our analysis. So we sold some of our GNMA holdings to lock
in their relatively strong performance and replaced them with more
attractively priced Fannie Mae and Freddie Mac securities.
Q. WHAT IS YOUR OUTLOOK ON THE HOUSING MARKET?
A. Despite rising interest rates, the housing market continued to remain much
stronger throughout the past year than many industry analysts expected.
Looking ahead, we think housing turnover will slow a bit. That's because we
believe economic growth will moderate somewhat and seasonal factors will make
mortgages less likely to be prepaid before their maturity. That's why we are
currently focused on mortgages that carry rates in the 7% range, rather than
older 6% mortgages that are priced at a discount to their face value. Let's
say a 6% mortgage security trades at $92. Historically, when there has been
rapid prepayment in response to increased housing turnover, many 6% mortgages
have been prepaid at par, or $100. But if prepayment has been slower, you
have had to wait a long time to get money back at par. That's why we've
focused more on 7% mortgage securities, which may provide more income for the
fund and, we believe, may perform better in a slower housing market. In
addition, we've mostly avoided 15-year securities, which became very richly
priced during the year. Instead, we have focused almost exclusively on more
attractively priced 30-year securities.
Q. WHAT'S YOUR OUTLOOK FOR THE ECONOMY, INTEREST RATES, AND THE MORTGAGE MARKET?
A. We believe that economic growth in the final two quarters of this year will
be around 4%. Furthermore, we think that the Fed will be comfortable with the
notion that growth can hover around that level without any inflationary
pressures. We think that inflation appears to be contained, although it has
ticked up from its depressed level two years ago. Given that, we think that
interest rates may stabilize. As for the mortgage market, we think it offers
good value relative to other fixed-income alternatives, specifically Treasury
and agency securities. If rates do remain stable, we think there will be
increased demand for mortgage securities and their performance will benefit
as a result.
/s/ D. Richard Smith
D. Richard Smith
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and are
current 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.
<PAGE>
--------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
--------------------------------------------------------------------------------
D. RICHARD SMITH IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R) AND PORTFOLIO
MANAGER OF MFS(R) GOVERNMENT MORTGAGE FUND AND MFS(R) GOVERNMENT LIMITED
MATURITY FUND.
MR. SMITH JOINED MFS IN 1993. HE BECAME A PORTFOLIO MANAGER IN 1997. 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. DEGREE FROM VANDERBILT UNIVERSITY.
HE IS A CHARTERED FINANCIAL ANALYST (CFA).
ALL PORTFOLIO MANAGERS AT MFS INVESTMENT MANAGEMENT(R) ARE SUPPORTED BY AN
INVESTMENT STAFF OF OVER 100 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A
GLOBAL, ISSUER-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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 investment professional or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<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: $603.3 MILLION NET ASSETS AS OF JULY 31, 2000
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 the 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.) It is not possible to
invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended July 31, 2000)
MFS Government
Mortgage Fund Lehman Brothers
-- Class A GNMA Index
------------------------------------------------------
7/90 $ 9,525 $10,000
7/92 11,545 12,634
7/94 12,478 13,752
7/96 14,328 16,149
7/98 16,718 19,251
7/00 17,968 21,131
TOTAL RATES OF RETURN THROUGH JULY 31, 2000
<TABLE>
<CAPTION>
CLASS A
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +6.09% +14.10% +31.38% +88.64%
-----------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +6.09% + 4.50% + 5.61% + 6.55%
-----------------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge +1.05% + 2.81% + 4.59% + 6.04%
-----------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +5.24% +11.47% +26.44% +79.48%
-----------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +5.24% + 3.69% + 4.80% + 6.02%
-----------------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge +1.26% + 2.80% + 4.48% + 6.02%
-----------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return Excluding Sales Charge +6.53% +15.03% +32.72% +90.57%
-----------------------------------------------------------------------------------------------------------
Average Annual Total Return Excluding Sales Charge +6.53% + 4.78% + 5.83% + 6.66%
-----------------------------------------------------------------------------------------------------------
Average Annual Total Return Including Sales Charge +6.53% + 4.78% + 5.83% + 6.66%
-----------------------------------------------------------------------------------------------------------
<CAPTION>
COMPARATIVE INDICES(+)
1 Year 3 Years 5 Years 10 Years
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Average GNMA fund+ +5.53% + 4.59% + 5.76% + 6.96%
-----------------------------------------------------------------------------------------------------------
Lehman Brothers GNMA Index# +6.78% + 5.66% + 6.80% + 7.77%
-----------------------------------------------------------------------------------------------------------
(+) Average annual rates of return.
+ Source: Lipper Inc.
# Source: Standard & Poor's Micropal, Inc.
</TABLE>
NOTES TO PERFORMANCE SUMMARY
Class A Share Performance Including Sales Charge takes into account the
deduction of the maximum 4.75% sales charge. Class B Share Performance Including
Sales Charge takes into account the deduction of the applicable contingent
deferred sales charge (CDSC), which declines over six years from 4% to 0%. Class
I shares have no sales charge and are only available to certain institutional
investors.
Class B and I share performance includes the performance of the fund's Class A
shares for periods prior to its inception (blended performance). Class B
performance has been adjusted to take into account the CDSC applicable to Class
B shares rather than the initial sales charge (load) applicable to Class A
shares. Class I share blended performance has been adjusted to account for the
fact that Class I shares have no sales charge. These blended performance figures
have not been adjusted to take into account the differences in class- specific
operating expenses. Because operating expenses of Class B shares are higher than
those of Class A, the blended Class B share performance is higher than it would
have been had Class B shares been offered for the entire period. Conversely,
because operating expenses of Class I shares are lower than those of Class A,
the blended Class I share performance is lower than it would have been had Class
I shares been offered for the entire period.
All 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 capital gains.
INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. MORE RECENT
RETURNS MAY BE MORE OR LESS THAN THOSE SHOWN. PAST PERFORMANCE IS NO GUARANTEE
OF FUTURE RESULTS.
Government guarantees apply to individual securities only and not to prices and
yields of shares in a managed portfolio. See the prospectus for details.
The Fund may invest in mortgage-backed securities, which are subject to
prepayments as homeowners pay their mortgages early by refinancing them at lower
rates. Therefore, the value of securities may not increase as much as that of
other fixed-income securities during periods of falling interest rates. See the
prospectus for details.
PORTFOLIO CONCENTRATION AS OF JULY 31, 2000
PORTFOLIO STRUCTURE
Mortgage Backed 94.9%
U.S. Treasuries 5.0%
Government Agency 0.1%
The portfolio is actively managed, and current holdings may be different.
<PAGE>
PORTFOLIO OF INVESTMENTS -- July 31, 2000
<TABLE>
<CAPTION>
Bonds - 98.0%
--------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
--------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Government Guaranteed - 89.8%
Government National Mortgage Association - 86.5%
GNMA, 6.5s, 2023 - 2029 $166,352 $157,796,819
GNMA, 7s, 2023 - 2029 149,685 145,617,925
GNMA, 7.5s, 2017 - 2029 94,689 93,974,989
GNMA, 8s, 2017 - 2029 81,072 81,818,249
GNMA, 8.5s, 2017 - 2030 22,473 22,993,068
GNMA, 9s, 2008 - 2025 14,445 14,911,596
GNMA, 9.5s, 2009 - 2010 3,910 4,102,906
GNMA, 12.5s, 2011 213 238,888
------------
$521,454,440
--------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 3.3%
U.S. Treasury Notes, 6.5s, 2010 $ 19,250 $ 19,884,672
--------------------------------------------------------------------------------------------------
Total U.S. Government Guaranteed $541,339,112
--------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 8.2%
Federal Home Loan Mortgage Corp., 6.5s, 2029 $ 177 $ 167,560
Federal Home Loan Mortgage Corp., 8.5s, 2009 - 2017 14 14,033
Federal Home Loan Mortgage Corp., 9s, 2020 - 2021 266 271,736
Federal Home Loan Mortgage Corp., 9.5s, 2013 - 2021 133 138,620
Federal National Mortgage Assn., 7.5s, 2029 - 2030 44,437 43,796,550
Federal National Mortgage Assn., 8.5s, 2004 - 2008 97 99,127
Federal National Mortgage Assn., 9s, 2002 - 2007# 4,683 4,812,053
U.S. Department of Veteran Affairs, 7.5s, 2013 363 362,555
--------------------------------------------------------------------------------------------------
Total U.S. Federal Agencies $ 49,662,234
--------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $607,939,608) $591,001,346
--------------------------------------------------------------------------------------------------
Repurchase Agreement - 1.8%
--------------------------------------------------------------------------------------------------
Goldman Sachs, dated 7/31/00, due 8/1/00, total to be
received $11,048,010 (secured by various U.S.
Treasury and Federal Agency obligations in a
jointly traded account), at cost $ 11,046 $ 11,046,000
--------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $618,985,608) $602,047,346
Other Assets, Less Liabilities - 0.2% 1,211,073
--------------------------------------------------------------------------------------------------
Net Assets - 100.0% $603,258,419
--------------------------------------------------------------------------------------------------
# Security segregated as collateral for open futures contracts.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
---------------------------------------------------------------------------
JULY 31, 2000
---------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $618,985,608) $602,047,346
Cash 268
Receivable for fund shares sold 16,555
Interest receivable 4,112,429
Other assets 11,082
------------
Total assets $606,187,680
------------
Liabilities:
Payable for daily variation margin on open futures
contracts $ 12,500
Payable for fund shares reacquired 2,469,083
Payable to affiliates -
Management fee 19,786
Shareholder servicing agent fee 4,947
Distribution and service fee 16,086
Administrative fee 866
Accrued expenses and other liabilities 405,993
------------
Total liabilities $ 2,929,261
------------
Net assets $603,258,419
============
Net assets consist of:
Paid-in capital $679,766,074
Unrealized depreciation on investments (16,755,054)
Accumulated net realized loss on investments (60,162,972)
Accumulated undistributed net investment income 410,371
------------
Total $603,258,419
============
Shares of beneficial interest outstanding 94,728,002
==========
Class A shares:
Net asset value per share
(net assets of $542,579,577 / 85,222,402 shares of
beneficial interest outstanding) $6.37
=====
Offering price per share (100 / 95.25 of net asset value
per share) $6.68
=====
Class B shares:
Net asset value and offering price per share
(net assets of $60,678,733 / 9,505,583 shares of
beneficial interest outstanding) $6.38
=====
Class I shares:
Net asset value, offering price, and redemption price
per share (net assets of $109.10 / 17.131 shares
of beneficial interest outstanding) $6.37
=====
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, 2000
----------------------------------------------------------------------------
Net investment income:
Interest income $46,192,528
-----------
Expenses -
Management fee $ 2,886,813
Trustees' compensation 57,180
Shareholder servicing agent fee 639,933
Distribution and service fee (Class A) 1,414,779
Distribution and service fee (Class B) 757,082
Administrative fee 87,609
Custodian fee 204,025
Printing 14,370
Postage 123,851
Auditing fees 37,094
Legal fees 3,051
Miscellaneous 413,907
-----------
Total expenses $ 6,639,694
Fees paid indirectly (185,362)
Reduction of expenses by investment adviser (320,246)
-----------
Net expenses $ 6,134,086
-----------
Net investment income $40,058,442
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(9,031,243)
Futures contracts 332,844
-----------
Net realized loss on investments $(8,698,399)
-----------
Change in unrealized appreciation -
Investments $ 5,007,180
Futures contracts 247,931
-----------
Net unrealized gain on investments $ 5,255,111
-----------
Net realized and unrealized loss on investments $(3,443,288)
-----------
Increase in net assets from operations $36,615,154
===========
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
----------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 40,058,442 $ 43,909,164
Net realized loss on investments (8,698,399) (10,812,341)
Net unrealized gain (loss) on investments 5,255,111 (23,325,499)
------------ -------------
Increase in net assets from operations $ 36,615,154 $ 9,771,324
------------ -------------
Distributions declared to shareholders -
From net investment income (Class A) $(35,184,285) $ (36,316,688)
From net investment income (Class B) (4,101,257) (6,273,606)
From net investment income (Class I) (1,544) (3,294)
From paid-in capital (Class A) --
(1,390,020)
From paid-in capital (Class B) --
(240,095)
From paid-in capital (Class I) --
(126)
------------ -------------
Total distributions declared to shareholders $(39,287,086) $ (44,223,829)
------------ -------------
Net decrease in net assets from fund share transactions $(84,821,190) $ (86,905,441)
------------ -------------
Total decrease in net assets $(87,493,122) $(121,357,946)
Net assets:
At beginning of period 690,751,541 812,109,487
------------ -------------
At end of period (including accumulated undistributed net
investment income of $410,371 and accumulated
distributions in excess of net investment income of
$156,543, respectively) $603,258,419 $ 690,751,541
============ =============
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.39 $ 6.69 $ 6.72 $ 6.53 $ 6.65
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.40 $ 0.39 $ 0.43 $ 0.44 $ 0.45
Net realized and unrealized gain (loss) on
investments (0.03) (0.30) (0.03) 0.18 (0.14)
------ ------ ------ ------ ------
Total from investment operations $ 0.37 $ 0.09 $ 0.40 $ 0.62 $ 0.31
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.39) $(0.38) $(0.41) $(0.42) $(0.42)
From net realized gain on investments -- -- (0.02) -- --
From paid-in capital -- (0.01) -- (0.01) (0.01)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.39) $(0.39) $(0.43) $(0.43) $(0.43)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.37 $ 6.39 $ 6.69 $ 6.72 $ 6.53
====== ====== ====== ====== ======
Total return(+) 6.09% 1.31% 6.17% 9.90% 4.76%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.90% 0.93% 0.97% 1.09% 1.16%
Net investment income 6.34% 5.86% 6.43% 6.75% 6.75%
Portfolio turnover 65% 177% 72% 33% 25%
Net assets at end of period (000,000 Omitted) $543 $597 $657 $653 $541
(S) The investment adviser voluntarily waived a portion of its fee for the periods indicated. If this fee had been incurred by
the fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.40 $ 0.39 -- -- --
Ratios (to average net assets):
Expenses## 0.95% 0.97% -- -- --
Net investment income 6.29% 5.82% -- -- --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
(+) 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.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 2000 1999 1998 1997 1996
------------------------------------------------------------------------------------------------------------------------------
CLASS B
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.40 $ 6.70 $ 6.72 $ 6.53 $ 6.65
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.36 $ 0.34 $ 0.38 $ 0.40 $ 0.40
Net realized and unrealized gain (loss) on
investments (0.04) (0.30) (0.03) 0.17 (0.13)
------ ------ ------ ------ ------
Total from investment operations $ 0.32 $ 0.04 $ 0.35 $ 0.57 $ 0.27
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.34) $(0.33) $(0.35) $(0.37) $(0.38)
From net realized gain on investments -- -- (0.02) -- --
From paid-in capital -- (0.01) -- (0.01) (0.01)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.34) $(0.34) $(0.37) $(0.38) $(0.39)
------ ------ ------ ------ ------
Net asset value - end of period $ 6.38 $ 6.40 $ 6.70 $ 6.72 $ 6.53
====== ====== ====== ====== ======
Total return 5.24% 0.49% 5.40% 9.09% 3.98%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.65% 1.68% 1.72% 1.78% 1.87%
Net investment income 5.55% 5.11% 5.67% 6.02% 6.01%
Portfolio turnover 65% 177% 72% 33% 25%
Net assets at end of period (000,000 Omitted) $61 $94 $155 $286 $553
(S) The investment adviser voluntarily waived a portion of its fee for the periods indicated. If this fee had been incurred
by the fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.35 $ 0.34 -- -- --
Ratios (to average net assets):
Expenses## 1.70% 1.72% -- -- --
Net investment income 5.50% 5.07% -- -- --
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</TABLE>
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 2000 1999 1998 1997*
------------------------------------------------------------------------------------------------------------------------------
CLASS I
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
<S> <C> <C> <C> <C>
Net asset value - beginning of period $ 6.38 $ 6.69 $ 6.72 $ 6.59
------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.40 $ 0.41 $ 0.44 $ 0.31
Net realized and unrealized gain (loss) on
investments -- (0.30) (0.02) 0.09
------ ------ ------ ------
Total from investment operations $ 0.40 $ 0.11 $ 0.42 $ 0.40
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.41) $(0.41) $(0.43) $(0.26)
From net realized gain on investments -- -- (0.02) --
From paid-in capital -- (0.01) -- (0.01)
------ ------ ------ ------
Total distributions declared to shareholders $(0.41) $(0.42) $(0.45) $(0.27)
------ ------ ------ ------
Net asset value - end of period $ 6.37 $ 6.38 $ 6.69 $ 6.72
====== ====== ====== ======
Total return 6.53% 1.42% 6.47% 6.19%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.65% 0.68% 0.73% 0.73%+
Net investment income 6.37% 6.11% 6.67% 7.06%+
Portfolio turnover 65% 177% 72% 33%
Net assets at end of period (000 Omitted) $ -- +++ $61 $51 $113
(S) The investment adviser voluntarily waived a portion of its 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 $ 0.39 $ 0.41 -- --
Ratios (to average net assets):
Expenses## 0.70% 0.72% -- --
Net investment income 6.32% 6.07% -- --
* For the period from the inception of Class I shares, January 2, 1997, through July 31, 1997.
+ Annualized.
++ Not annualized.
+++ Class I net assets were less than $500.
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
</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 and forward contracts are
valued on the basis of valuations furnished by dealers or by a pricing service
with consideration to factors such as institutional-size trading in similar
groups of securities, yield, quality, coupon rate, maturity, type of issue,
trading characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short- term obligations, which mature in 60
days or less, are valued at amortized cost, which approximates market value.
Futures contracts listed on commodities exchanges are reported at market value
using closing settlement prices. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
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 currency, or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the fund is required
to deposit 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 discount is
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.
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 distributions from paid-in
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, 2000, $239,559 was reclassified from net realized
loss on investments to accumulated undistributed net investment income and paid
in capital due to differences between book and tax accounting for
mortgage-backed securities. This change had no effect on the net assets or net
asset value per share. At July 31, 2000, the fund, for federal income tax
purposes, had a capital loss carryforward of $52,540,612 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), July 2005, ($1,857,304), July 31,
2007, ($5,100,994), and July 31, 2008, ($5,253,445).
Multiple Classes of Shares of Beneficial Interest - The fund offers multiple
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. 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
the fund's average daily net assets. The investment adviser has voluntarily
agreed to waive a portion of its fee, which is shown as a reduction of expenses
in the Statement of Operations.
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. Included in Trustees' compensation is a net
periodic pension expense of $ 27,635 for the year ended year ended July 31,
2000.
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 $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$28,909 for the year ended July 31, 2000, 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 0.10% per annum Class A distribution fee is not
currently imposed, and will 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 $117,846 for the year ended July 31,
2000. Fees incurred under the distribution plan during the year ended July 31,
2000, 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 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 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 $20,361 for the year ended July 31, 2000.
Fees incurred under the distribution plan during the year ended June 30, 2000,
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, 2000, were $9,983 and $84,682 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 annual rate of 0.10%.
(4) Portfolio Securities
Purchases and sales of investments in U.S. government securities, other than
short-term obligations, aggregated $402,781,788 and $491,587,925, respectively.
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the fund, as computed on a federal income tax basis, are as
follows:
Aggregate cost $618,985,608
------------
Gross unrealized depreciation $(17,762,484)
Gross unrealized appreciation 824,222
------------
Net unrealized depreciation $(16,938,262)
============
(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. Transactions in
fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED JULY 31, 2000 YEAR ENDED JULY 31, 1999
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 35,652,456 $ 224,485,367 31,993,681 $ 211,522,023
Shares issued to shareholders in
reinvestment of distributions 2,892,507 18,263,326 2,848,073 18,841,361
Shares reacquired (46,740,101) (294,747,199) (39,521,723) (260,742,840)
------------- ------------- ------------- -------------
Net decrease (8,195,138) $ (51,998,506) (4,679,969) $ (30,379,456)
============= ============= ============= =============
<CAPTION>
Class B Shares
YEAR ENDED JULY 31, 2000 YEAR ENDED JULY 31, 1999
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,205,076 $ 7,657,463 2,049,005 $ 13,625,506
Shares issued to shareholders in
reinvestment of distributions 405,022 2,565,817 568,645 3,778,588
Shares reacquired (6,821,747) (42,985,526) (11,091,050) (73,942,860)
------------- ------------- ------------- -------------
Net decrease (5,211,649) $ (32,762,246) (8,473,400) $ (56,538,766)
============= ============= ============= =============
<CAPTION>
Class I Shares
YEAR ENDED JULY 31, 2000 YEAR ENDED JULY 31, 1999
--------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 223 $ 1,437 2,401 $ 15,992
Shares issued to shareholders in
reinvestment of distributions 244 1,544 518 3,417
Shares reacquired (10,021) (63,419) (997) (6,628)
------------- ------------- ------------- -------------
Net increase (decrease) (9,554) $ (60,438) 1,922 $ 12,781
============= ============= ============= =============
</TABLE>
(6) Line of Credit
The fund and other affiliated funds participate in a $820 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, 2000, was $2,635. The fund had no significant borrowings
during the period.
(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 included futures contracts.
The 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
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION APPRECIATION
-------------------------------------------------------------------------------
U.S. Treasury Bonds September 2000 12,500 Long $183,208
--------
At July 31, 2000, the fund had sufficient cash and/or securities to cover any
margin requirements under these contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust X and Shareholders of MFS Government
Mortgage Fund:
We have audited the accompanying statement of assets and liabilities of MFS
Government Mortgage Fund (one of the series comprising MFS Series Trust),
including the portfolio of investments, as of July 31, 2000, and the related
statement of operations for the year then ended, the statement of changes in net
assets for each of the two years in the period then ended, and the financial
highlights for each of the five years in the period then ended. These financial
statements and financial highlights are the responsibility of the Trust'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 auditing standards generally accepted
in the United States of America. 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
securities owned as of July 31, 2000, 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, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of MFS
Government Mortgage Fund as of July 31, 2000, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended, in conformity with accounting principles generally
accepted in the United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 7, 2000
<PAGE>
--------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
--------------------------------------------------------------------------------
IN JANUARY 2001, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR 2000.
<PAGE>
MFS(R) GOVERNMENT MORTGAGE FUND
TRUSTEES SECRETARY
J. Atwood Ives+ - Chairman and Chief Stephen E. Cavan*
Executive Officer, Eastern Enterprises
(diversified services company) ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Lawrence T. Perera+ - Partner,
Hemenway & Barnes (attorneys) CUSTODIAN
State Street Bank and Trust Company
William J. Poorvu+ - Adjunct
Professor, Harvard University Graduate INVESTOR INFORMATION
School of Business Administration For information on MFS mutual funds,
call your investment professional or,
Charles W. Schmidt+ - Private Investor for an information kit, call toll
free: 1-800-637-2929 any business day
Arnold D. Scott* - Senior Executive from 9 a.m. to 5 p.m. Eastern time
Vice President, Director, and (or leave a message anytime).
Secretary, MFS Investment Management
INVESTOR SERVICE
Jeffrey L. Shames* - Chairman and Chief MFS Service Center, Inc.
Executive Officer, MFS Investment P.O. Box 2281
Management Boston, MA 02107-9906
Elaine R. Smith+ - Independent For general information, call toll
Consultant free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
David B. Stone+ - Chairman,
North American Management Corp. For service to speech- or
(investment adviser) hearing-impaired, call toll free:
1-800-637-6576 any business day from
INVESTMENT ADVISER 9 a.m. to 5 p.m. Eastern time. (To
use this service, your phone must be
Massachusetts Financial Services Company equipped with a Telecommunications
500 Boylston Street Device for the Deaf.)
Boston, MA 02116-3741
For share prices, account balances,
DISTRIBUTOR exchanges, or stock and bond
outlooks, call toll free:
MFS Fund Distributors, Inc. 1-800-MFS-TALK (1-800-637-8255)
500 Boylston Street anytime from a touch-tone telephone.
Boston, MA 02116-3741
WORLD WIDE WEB
CHAIRMAN AND PRESIDENT www.mfs.com
Jeffrey L. Shames*
PORTFOLIO MANAGER
D. Richard Smith*
TREASURER
James O. Yost*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
+ Independent Trustee
*MFS Investment Management
<PAGE>
MFS(R) GOVERNMENT MORTGAGE FUND ------------
BULK RATE
U.S. POSTAGE
[Logo] M F S(R) PAID
INVESTMENT MANAGEMENT MFS
We invented the mutual fund(R) ------------
500 Boylston Street
Boston, MA 02116-3741
(c)2000 MFS Investment Management(R).
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
MGM-2 03/00 62.9M 31/231/831
