MFS INTERMEDIATE INCOME FUND
(A SERIES OF MFS SERIES TRUST II)
500 BOYLSTON STREET o BOSTON o MASSACHUSETTS 02116-3741
617 o 954-5000
July 19, 1996
VIA EDGAR
- ---------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Re: MFS Series Trust II (File No. 811-4775), on Behalf of
MFS Intermediate Income Fund
Ladies and Gentlemen:
Pursuant to the requirements of Section 30(b) of the Investment Company Act
of 1940 and Rule 30b2-1 thereunder, we hereby file a copy of the Seminnual
Report to Shareholders dated May 31, 1996 of MFS Intermediate Income Fund.
Very truly yours,
APRIL ANDERSON
April Anderson
Senior Production Editor
<PAGE>
[MFS LOGO] SEMIANNUAL REPORT
THE FIRST NAME IN MUTUAL FUNDS MAY 31, 1996
MFS[Registration Mark] INTERMEDIATE INCOME FUND
[Cover: A Photo of Two Men in a Window]
<PAGE>
MFS [Registration Mark] INTERMEDIATE INCOME FUND
TRUSTEES
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor; Former Chairman and Director (until
1991), Massachusetts Financial Services Company; Director, Cambridge Bancorp;
Director, Cambridge Trust Company
Marshall N. Cohan - Private Investor
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Brigham and Women's
Hospital; Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief Executive Officer, Edmund Gibbons
Ltd.; Chairman, Bank of N.T. Butterfield &Son Ltd.
Abby M. O'Neill - Private Investor; Director, Rockefeller Financial Services,
Inc. (investment advisers)
Walter E. Robb, III - President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, Benchmark Consulting Group,
Inc. (office services); Trustee, Landmark Funds (mutual funds)
Arnold D. Scott* - Senior Executive Vice President, Director and Secretary,
Massachusetts Financial Services Company
Jeffrey L. Shames* - President and Director, Massachusetts Financial Services
Company
J. Dale Sherratt - President, Insight Resources, Inc. (acquisition planning
specialists)
Ward Smith - Former Chairman (until 1994), NACCO Industries; Director,
Sundstrand Corporation
INVESTMENT ADVISER
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGERS
Steven E. Nothern*
Christopher D. Piros*
TREASURER
W. Thomas London*
ASSISTANT TREASURER
James O. Yost*
SECRETARY
Stephen E. Cavan*
ASSISTANT SECRETARY
James R. Bordewick, Jr.*
CUSTODIAN
State Street Bank and Trust Company
AUDITORS
Deloitte & Touche llp
INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free: 1-800-637-4458
anytime from a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for an
information kit, call toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
INVESTOR SERVICE
MFS Service Center, Inc. P.O. Box 2281 Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day from
8 a.m. to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this service,
your phone must be equipped with a Telecommunications Device for the Deaf.)
For share prices, account balances and exchanges, call toll free:
1-800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
TOP-RATED SERVICE
For the second year in a row, MFS earned a #1 ranking in DALBAR, Inc.'s
Broker/Dealer Survey, Main Office Operations Service Quality category. The
firm achieved a 3.49 overall score - on a scale of 1 to 4 - in the 1995
survey. A total of 71 firms responded, offering input on the quality of
service they receive from 36 mutual fund companies nationwide. The survey
contained questions about service quality in 17 categories, including
"knowledge of phone service contacts," "accuracy of transaction processing,"
and "overall ease of doing business with the firm."
*Affiliated with the Investment Adviser
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
The past six months brought mixed results in the fixed-income markets of the
countries in which the Fund invests. While returns were generally negative for
U.S. Treasuries, particularly during the first several months of 1996, returns
for government securities in many European countries were positive as yields
there generally declined. In the United States, for example, two-year Treasury
yields, which were at 5.35% on November 30, 1995, increased to 6.24% by May 31,
1996, while yields on 10-year Treasuries rose from 5.74% to 6.85%. Yields on
10-year government bonds in Italy, by comparison, declined from 11.45% to 9.65%
over the same period. Our ability to allocate up to 50% of assets into
international fixed-income markets greatly benefited the Fund, diversifying the
risk experienced in U.S. Treasuries as interest rates increased. The Fund, which
is designed to provide investors with current income and preservation of
capital, experienced a modest decline in net asset value during this period. The
Fund's net asset value, which stood at $8.59 for Class A shares and $8.58 for
Class B shares on November 30, 1995, declined to $8.30 and $8.29 for Class A and
Class B shares, respectively, as of May 31, 1996. When combined with the
reinvestment of distributions, this represents a total return of -0.18% for
Class A shares and -0.73% for Class B shares for the six months ended May 31,
1996. During this same period, the Lehman Brothers Intermediate Government Bond
Index (an unmanaged index comprised of issues of the U.S. government and its
agencies with remaining maturities of less than 10 years) declined by 0.04%; the
Lehman Brothers Mortgage Index (which includes maturities of both 15 and 30
years) increased by 0.22%; and the J.P. Morgan Non-Dollar Government Bond Index
(an aggregate of actively traded government bonds of 12 countries with remaining
maturities of at least one year) increased by 0.34%.
U.S. Government Sector
Real (inflation-adjusted) economic growth in the first quarter of 1996 was 2.3%
on an annualized basis, and it appears that second-quarter growth could be even
stronger. Thus, real growth in gross domestic product has started the year at a
rate exceeding our expectations. While we continue to believe that growth from
quarter to quarter will be uneven, it is now our expectation that growth for all
of 1996 could exceed 2.5%. Although individual consumers appear to be carrying
an excessive debt load, the consumer sector itself, which represents two-thirds
of the economy, continues to be impressive as the auto and housing markets
remain resilient. Consumer spending has also been positively impacted by
widespread job growth. At the same time, however, the e conomies of Europe and
Japan continue to be in the doldrums, weakening U.S. export markets while
subduing the capital spending plans of American corporations. Finally, due to
the pickup in economic activity and increasing job growth, it appears that
1
<PAGE>
LETTER TO SHAREHOLDERS - continued
inflation may accelerate slightly this year, and the Federal Reserve Board is
expected to continue its diligent anti-inflationary stance.
Our overall portfolio strategy in the past six months has been to reduce
exposure to U.S. securities in favor of the international markets. The portion
of the portfolio allocated to international securities was increased from
approximately 38% to about 48%. Our strategy has also been to reduce average
maturity and shift the emphasis within the funds allocated to the U.S. market
away from Treasuries in favor of agency and mortgage-backed securities, as we
have been able to add attractive incremental yield to the portfolio in these
sectors.
Within the U.S. portion of the portfolio, the allocation to mortgage-backed
pass-through securities was increased from 27% to 36%. Mortgage-backed
securities enjoyed a substantial yield advantage over U.S. Treasuries and
favorable buying conditions moving into 1996. Also, mortgage-backed pass-through
securities have been yielding approximately 0.90% to 1.30% more than Treasuries,
with less price sensitivity. These factors have allowed mortgage indices to
outperform comparable Treasury indices over the period (although principal value
and interest on Treasury securities are guaranteed by the U.S. government if
held to maturity). Issues held in the portfolio are mostly liquid Government
National Mortgage Association (GNMA) pass-through securities; 18% of the U.S.
portion is held in GNMA 30-year, 7% and 7.5% coupons, and 7% is held in GNMA
15-year 8.5% coupons. Another 4% is held in Federal Home Loan Mortgage
Corporation 30-year, 7.5% coupons, and 6% is held in Federal National Mortgage
Association 7% coupons. Our bias has been toward lower coupon issues because we
feel that the price of higher coupon issues reflects too much of a bearish
forecast in their implied prepayment outlook. As rates stabilize, the demand for
lower-coupon securities could start to reemerge. Another positive element for
this sector is our continued expectation of limited issuance of new mortgage
securities. This technical factor could allow the yield spread between mortgage
and Treasury securities to be stable to narrower over the coming months.
Our ability to invest in both Treasuries and mortgage-backed securities
within a range of maturities has proven helpful in this rapidly changing
environment. The Fund will, however, continue to adhere to its policy of
avoiding any exposure to the more volatile mortgage-derivative securities.
International Sector
Foreign bond markets, measured in local currency terms, outperformed U.S.
bonds by a wide margin over the last six months. The best performance was in
the higher-yielding European markets (Italy, Spain, and Sweden). Virtually
all of the yield curves within these markets steepened dramatically over the
period as
2
<PAGE>
LETTER TO SHAREHOLDERS - continued
most European central banks cut official interest rates due to continued slow
growth and lower inflation. Within the dollar-bloc, Canada and Australia also
overperformed the U.S. market, while political concerns and faster growth caused
New Zealand to lag behind the United States.
The Fund's performance has been helped by an allocation to foreign bond
markets which has been maintained near its maximum weighting (50%) since late
1995. In early 1996 we shifted assets from core European markets such as Germany
into the higher-yielding European markets. Italy, Spain, and Sweden currently
account for a combined 37% of the international allocation. Recently, the Fund
added to its holdings in the United Kingdom and added Ireland as a new position.
Within the dollar-bloc, Canada and Austra lia remain core positions, with
further tightening of spreads (overperformance) versus the United States
expected going forward.
During the last six months, the U.S. dollar has appreciated versus almost
all European currencies and the Japanese yen due to a pickup in U.S. economic
growth and interest rate spreads favoring the dollar. Throughout the period,
most of the portfolio's foreign assets have been hedged back into the dollar,
and we anticipate maintaining a similar posture going forward. The exception is
Australia, where the Fund has benefited from holding Australian bonds on an
unhedged basis.
We anticipate that selective European bond markets will continue to offer
the best opportunities for capital appreciation going forward. Efforts to meet
the fiscal austerity criteria of the proposed European Monetary Union are
reinforcing the tendency toward slower growth. Most continental central banks
are therefore expected to continue the process of cutting official interest
rates. In this environment, the shorter end of the higher-yielding markets could
continue to overperform, while the dollar could remain firm versus European
currencies.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
[Signature of [Signature of [Signature of
A. Keith Brodkin] Steven E. Nothern] Christopher D. Piros]
A. Keith Brodkin Steven E. Nothern Christopher D. Piros
Chairman and President Portfolio Manager Portfolio Manager
June 10, 1996
3
<PAGE>
PORTFOLIO MANAGER PROFILES
Steven Nothern began his career at MFS in 1986 in the Fixed Income
Department. A graduate of Middlebury College and Boston University's Graduate
School of Management, he was named Assistant Vice President in 1987, Vice
President in 1989 and Senior Vice President in 1993. Mr. Nothern has been a
Portfolio Manager of MFS Intermediate Income Fund since 1992.
Christopher Piros joined MFS in 1989 as Vice President - Quantitative
Services in the Fixed Income Department. He serves as portfolio manager of
MFS Intermediate Income Fund and MFS Intermediate Income Trust.
OBJECTIVE AND POLICIES
The Fund's investment objective is to preserve capital and provide high
current income.
The Fund seeks to achieve its objective by investing in securities that are
issued or guaranteed as to principal and interest by the U.S. government, its
agencies, authorities or instrumentalities and in obligations issued or
guaranteed by a foreign government or any of its political subdivisions,
authorities, agencies or instrumentalities. The Fund will maintain an
average-weighted portfolio maturity of approximately seven years or less and
will invest substantially all of its assets in securties with remaining
maturities less than or equal to 10 years. Under normal market conditions,
the Fund's average-weighted portfolio maturity will not be less than three
years. This strategy should allow the Fund to preserve capital while seeking
high current income.
4
<PAGE>
PERFORMANCE SUMMARY
Because mutual funds like MFS Intermediate Income 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 and Class B shares for the
applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
Class A Investment Results
(net asset value change including reinvested distributions)
9/07/93+-
6 Months 1 Year 5/31/96
================================================================================
Cumulative Total Return* - 0.18% +4.82% +9.55%
- --------------------------------------------------------------------------------
Average Annual Total Return* -- +4.82% +3.39%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the most
recent calendar quarter as required by the Securities and Exchange Commission
(the SEC), with all distributions reinvested and reflecting the maximum sales
charge of 4.75% on the initial investment for the 1-year period ended March 31,
1996 and for the period from September 7, 1993+ to March 31, 1996 were +3.27%
and +1.62%, respectively.
Class B Investment Results
(net asset value change including reinvested distributions)
8/01/88+-
6 Months 1 Year 5 Years 5/31/96
================================================================================
Cumulative Total Return++ - 0.73% +3.65% +28.46% +58.62%
- --------------------------------------------------------------------------------
Average Annual Total Return++ -- +3.65% + 5.14% + 6.06%
- --------------------------------------------------------------------------------
The average annual total returns, calculated for the period ended as of the
most recent calendar quarter as required by the SEC, with all distributions
reinvested and reflecting the contingent deferred sales charge (CDSC) of 4%,
2% and 0% for the 1- and 5-year periods ended March 31, 1996 and for the
period from August 1, 1988+ to March 31, 1996, were +3.19%, +5.21% and
+6.21%, respectively.
All results represent past performance and are not an indication of future
results. Investment return and principal value will fluctuate, and shares,
when redeemed, may be worth more or less than their original cost.
* These results do not include the sales charge. If the charge had been
included, the results would have been lower.
+ Commencement of offering of this class of shares.
++ These results do not include any CDSC. If the charge had been included, the
results would have been lower.
5
<PAGE>
PORTFOLIO OF INVESTMENTS - May 31, 1996
Bonds - 89.6%
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
U.S. Dollar Denominated - 47.9%
U.S. Federal Agencies - 14.0%
Farm Credit Systems Financial Assistance,
9.375s, 2003 $10,000 $ 11,276,600
Federal Home Loan Mortgage Corp.,
7.5s, 2025 - 2026 4,922 4,823,784
Federal National Mortgage Assn., 6.89s, 2006 6,500 6,365,938
Federal National Mortgage Assn., 6.5s, 2008 69 66,161
Federal National Mortgage Assn., 7s, 2023 7,000 6,674,010
------------
$ 29,206,493
- --------------------------------------------------------------------------------
U.S. Government Guaranteed - 33.9%
Government National Mortgage Association - 13.1%
GNMA, 7s, 2023 - 2026 $12,756 $ 12,137,961
GNMA, 7.5s, 2023 - 2025 7,455 7,289,884
GNMA, 8.5s, 2001 - 2009 7,514 7,803,110
------------
$ 27,230,955
- --------------------------------------------------------------------------------
U.S. Treasury Obligations - 20.8%
U.S. Treasury Notes, 8.75s, 1997 $ 5,000 $ 5,174,200
U.S. Treasury Notes, 8.875s, 1999 8,000 8,480,000
U.S. Treasury Notes, 6.25s, 2001 10,000 9,831,200
U.S. Treasury Bonds, 12s, 2013 14,300 19,961,942
------------
$ 43,447,342
- --------------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 70,678,297
- --------------------------------------------------------------------------------
Total U.S. Dollar Denominated $ 99,884,790
- --------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - 41.7%
Australia - 4.7%
Commonwealth of Australia, 7s, 2000 AUD 5,000 $ 3,792,020
Commonwealth of Australia, 8.75s, 2001 3,000 2,405,668
Commonwealth of Australia, 9.5s, 2003 4,340 3,591,012
------------
$ 9,788,700
- --------------------------------------------------------------------------------
Canada - 5.7%
Government of Canada, 7.5s, 2003 CAD 8,400 $ 6,119,124
Government of Canada, 9s, 2004 5,200 4,112,555
Government of Canada, 8.75s, 2005 2,000 1,562,044
------------
$ 11,793,723
- --------------------------------------------------------------------------------
Denmark - 7.0%
Kingdom of Denmark, 9s, 2000 DKK 24,170 $ 4,557,584
Kingdom of Denmark, 8s, 2001 55,756 10,115,026
------------
$ 14,672,610
- --------------------------------------------------------------------------------
Ireland - 2.4%
Republic of Ireland, 8s, 2000 IEP 3,000 $ 4,941,096
- --------------------------------------------------------------------------------
Italy - 2.8%
Republic of Italy, 8.5s, 1999 ITL 2,705,000 $ 1,753,859
Republic of Italy, 9.5s, 1999 2,255,000 1,495,914
Republic of Italy, 8.5s, 2004 4,135,000 2,569,876
------------
$ 5,819,649
- --------------------------------------------------------------------------------
6
<PAGE>
PORTFOLIO OF INVESTMENTS - continued
Bonds - continued
================================================================================
Principal Amount
Issuer (000 Omitted) Value
- --------------------------------------------------------------------------------
Foreign - Non-U.S. Dollar Denominated - continued
New Zealand - 4.6%
Government of New Zealand, 9s, 1996 NZD 6,600 $ 4,465,324
Government of New Zealand, 8s, 1998 2,350 1,562,019
Government of New Zealand, 8s, 2001 5,500 3,569,945
------------
$ 9,597,288
- --------------------------------------------------------------------------------
Spain - 4.8%
Government of Spain, 10.5s, 2003 ESP 115,000 $ 963,681
Government of Spain, 10.9s, 2003 460,000 3,929,286
Government of Spain, 10s, 2005 620,000 5,046,680
------------
$ 9,939,647
- --------------------------------------------------------------------------------
Sweden - 4.8%
Kingdom of Sweden, 10.25s, 2000 SEK 61,800 $ 10,097,485
- --------------------------------------------------------------------------------
United Kingdom - 4.9%
United Kingdom Gilts, 9s, 2000 GBP 4,100 $ 6,685,007
United Kingdom Treasury, 7s, 2001 2,300 3,463,636
------------
$ 10,148,643
- --------------------------------------------------------------------------------
Total Foreign - Non-U.S. Dollar Denominated $ 86,798,841
- --------------------------------------------------------------------------------
Total Bonds (Identified Cost, $189,705,504) $186,683,631
- --------------------------------------------------------------------------------
Short-Term Obligations - 4.7%
================================================================================
Eurolira Time Deposit, due 10/21/96 ITL 7,700,000 $ 5,000,000
- --------------------------------------------------------------------------------
Eurolira Time Deposit, due 11/11/96 7,445,000 4,834,416
- --------------------------------------------------------------------------------
Total Short-Term Obligations (Identified Cost, $9,693,979) $ 9,834,416
- --------------------------------------------------------------------------------
Repurchase Agreement - 4.0%
================================================================================
Investments in repurchase agreements with
Goldman Sachs, in a joint trading account
($361,806,000 par), dated 5/31/96, due 6/03/96,
total to be received by the Fund $8,387,703,
collateralized by various U.S. Treasury
and Federal Agency obligations (with
$499,229,000 par and valued at $361,806,927),
at Cost $ 8,384 $ 8,384,000
- --------------------------------------------------------------------------------
Total Investments (Identified Cost, $207,783,483) $204,902,047
- --------------------------------------------------------------------------------
Put Option Written
================================================================================
Description/Expiration Principal Amount of Contracts
Month/Strike Price (000 Omitted)
- --------------------------------------------------------------------------------
Canadian Dollars/September/1.385
(Premium Received, $10,779) CAD 4,816 $ (2,509)
- --------------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.7% $ 3,555,767
- --------------------------------------------------------------------------------
Net Assets - 100.0% $208,455,305
- --------------------------------------------------------------------------------
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars DKK = Danish Kroner ITL = Italian Lire
CAD = Canadian Dollars ESP = Spanish Pesetas JPY = Japanese Yen
CHF = Swiss Francs GBP = British Pounds NZD = New Zealand Dollars
DEM = Deutsche Marks IEP = Irish Punts SEK = Swedish Kronor
See notes to financial statements
7
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
May 31, 1996
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $207,783,483) $ 204,902,047
Cash 799
Receivable for interest rate swaps 83,434
Net receivable for forward foreign currency
exchange contracts sold 112,199
Receivable for daily variation margin on
open futures contracts 69,750
Receivable for investments sold 13,678,438
Receivable for Fund shares sold 11,050
Interest receivable 4,019,242
Other assets 2,619
-------------
Total assets $ 222,879,578
-------------
Liabilities:
Payable for investments purchased $ 13,513,281
Payable for Fund shares reacquired 461,073
Written options outstanding, at value
(premiums received, $10,779) 2,509
Net payable for forward foreign currency
exchange contracts purchased 94,049
Net payable for closed forward foreign
currency exchange contracts 76,688
Payable to affiliates -
Management fee 4,398
Shareholder servicing agent fee 1,235
Distribution fee 91,970
Accrued expenses and other liabilities 179,070
-------------
Total liabilities $ 14,424,273
-------------
Net assets $ 208,455,305
=============
Net assets consist of:
Paid-in capital $ 216,395,593
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (2,767,885)
Accumulated net realized loss on investments and
foreign currency transactions (1,502,004)
Accumulated distributions in excess of net investment income (3,670,399)
-------------
Total $ 208,455,305
=============
Shares of beneficial interest outstanding 25,133,515
=============
Class A shares:
Net asset value and redemption price per share
(net assets of $16,477,633 / 1,985,428 shares of
beneficial interest outstanding) $8.30
=====
Offering price per share (100/95.25) $8.71
=====
Class B shares:
Net asset value and offering price per share
(net assets of $191,977,672 / 23,148,087 shares of
beneficial interest outstanding) $8.29
=====
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
8
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
================================================================================
Six Months Ended May 31, 1996
- --------------------------------------------------------------------------------
Net investment income:
Interest income $ 8,882,562
-------------
Expenses -
Management fee $ 871,723
Trustees' compensation 16,017
Shareholder servicing agent fee (Class A) 10,912
Shareholder servicing agent fee (Class B) 237,189
Distribution and service fee (Class B) 1,078,130
Custodian fee 97,982
Auditing fees 40,765
Postage 20,112
Printing 19,944
Legal fees 593
Miscellaneous 102,013
-------------
Total expenses $ 2,495,380
-------------
Net investment income $ 6,387,182
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions $ 4,080
Written option transactions 48,021
Foreign currency transactions 3,273,804
Futures contracts 6,375
-------------
Net realized gain on investments and
foreign currency transactions $ 3,332,280
-------------
Change in unrealized appreciation (depreciation) -
Investments $ (8,585,596)
Written options (34,556)
Translation of assets and liabilities in foreign currencies (2,714,586)
Futures contracts 102,656
Interest rate swaps 83,434
-------------
Net unrealized loss on investments and
foreign currency translation $ (11,148,648)
-------------
Net realized and unrealized loss on investments
and foreign currency $ (7,816,368)
-------------
Decrease in net assets from operations $ (1,429,186)
=============
See notes to financial statements
9
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
=================================================================================================
Six Months Ended Year Ended
May 31, 1996 November 30, 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 6,387,182 $ 15,585,592
Net realized gain on investments and
foreign currency transactions 3,332,280 1,098,197
Net unrealized gain (loss) on investments
and foreign currency translation (11,148,648) 18,956,882
------------- -------------
Increase (decrease) in net assets from operations $ (1,429,186) $ 35,640,671
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (461,946) $ (465,663)
From net investment income (Class B) (5,881,711) (15,003,559)
------------- -------------
Total distributions declared to shareholders $ (6,343,657) $ (15,469,222)
------------- -------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 10,567,998 $ 19,596,804
Net asset value of shares issued to shareholders
in reinvestment of distributions 3,367,615 7,773,413
Cost of shares reacquired (42,678,079) (98,621,737)
------------- -------------
Decrease in net assets from Fund share transactions $ (28,742,466) $ (71,251,520)
------------- -------------
Total decrease in net assets $ (36,515,309) $ (51,080,071)
Net assets:
At beginning of period 244,970,614 296,050,685
------------- -------------
At end of period (including accumulated distributions
in excess of net investment income of $3,670,399
and $3,713,924, respectively) $ 208,455,305 $ 244,970,614
============= =============
</TABLE>
See notes to financial statements
10
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights
====================================================================================================================================
Six Months Six Months Year
Ended Year Ended November 30, Ended Ended
May 31, ----------------------------- May 31, November
1996 1995 1994 1993* 1996 30, 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Class A 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 $ 8.59 $ 7.96 $ 8.94 $ 9.11 $ 8.58 $ 7.96
------- ------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.28 $ 0.57 $ 0.59 $ 0.11 $ 0.23 $ 0.48
Net realized and unrealized gain
(loss) on investments and
foreign currency transactions (0.29) 0.61 (0.95) (0.17) (0.29) 0.61
------- ------- -------- -------- -------- --------
Total from investment operations $ (0.01) $ 1.18 $ (0.36) $ (0.06) (0.06) $ 1.09
------- ------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ (0.28) $ (0.55) $ -- $ (0.09) (0.23) $ (0.47)
From net realized gain on investments
and foreign currency transactions -- -- -- (0.02) -- --
Tax return of capital -- -- (0.62) -- -- --
------- ------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.28) $ (0.55) $ (0.62) $ (0.11) (0.23) $ (0.47)
------- ------- -------- -------- -------- --------
Net asset value - end of period $ 8.30 $ 8.59 $ 7.96 $ 8.94 $ 8.29 $ 8.58
------- ------- -------- -------- -------- --------
Total return+++ (0.18)%++ 15.40% (4.27)% (0.66)%++ (0.73)%++ 14.12%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.17%+ 1.14% 1.18% 1.22%+ 2.24%+ 2.23%
Net investment income 6.63%+ 6.81% 7.10% 6.43%+ 5.49%+ 5.79%
Portfolio turnover 143% 275% 211% 376% 143% 275%
Net assets at end of period (000 omitted) $16,478 $12,659 $ 3,432 $ 258 $191,978 $232,312
<FN>
* For the period from the commencement of offering of Class A shares, September 7, 1993 to November 30, 1993.
+ Annualized.
++ Not annualized.
# Per share data for the periods subsequent to November 30, 1992 is based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
+++ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results would
have been lower.
</FN>
</TABLE>
See notes to financial statements
11
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Financial Highlights - continued
====================================================================================================================================
Year Ended November 30,
----------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988**
- ------------------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.93 $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77 $ 9.47
-------- -------- -------- -------- -------- -------- --------
Income from investment operations# -
Net investment income $ 0.47 $ 0.47 $ 0.62 $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions (0.92) 0.26 (0.26) 0.32 (0.02) (0.08) 0.10
-------- -------- -------- -------- -------- -------- --------
________
Total from investment operations $ (0.45) $ 0.73 $ 0.36 $ 0.90 $ 0.57 $ 0.60 $ 0.45
-------- -------- -------- -------- -------- -------- --------
Less distributions declared to shareholders -
From net investment income $ -- $ (0.45) $ (0.57) $ (0.56) $ (0.45) $ (0.85) $ (0.12)
From net realized gain on
investments and foreign
currency transactions -- (0.16) (0.15) (0.14) -- (0.02) (0.03)
From paid-in capital -- -- (0.07) (0.12) (0.39) -- --
Tax return of capital (0.52) (0.07) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total distributions declared
to shareholders $ (0.52) $ (0.68) $ (0.79) $ (0.82) $ (0.84) $ (0.87) $ (0.15)
-------- -------- -------- -------- -------- -------- --------
Net asset value - end of period $ 7.96 $ 8.93 $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77
-------- -------- -------- -------- -------- -------- --------
Total return (5.24)% 8.42% 3.93% 10.30% 6.59% 6.60% 14.21%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.22% 2.15% 2.20% 2.24% 2.33% 2.47% 2.79%+
Net investment income 5.60% 5.19% 6.70% 6.65% 6.80% 7.13% 17.14%+
Portfolio turnover 211% 376% 372% 603% 579% 433% 120%
Net assets at end of period (000 omitted) $292,619 $466,955 $347,588 $196,753 $126,245 $ 75,039 $ 30,858
<FN>
** For the period from the commencement of investment operations, August 1, 1988 to November 30, 1988.
+ Annualized.
# Per share data for the periods subsequent to November 30, 1992 is based on average shares outstanding.
</FN>
</TABLE>
See notes to financial statements
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Intermediate Income Fund (the Fund) is a non-diversified series of MFS
Series Trust II (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. Investments
in foreign securities are vulnerable to the affects of changes in the values of
the local currency and the U.S. dollar and to the affects of changes in each
country's legal, political and economic environment.
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.
Non-U.S. dollar denominated short-term obligations are valued at amortized cost
as calculated in the base currency and translated into U.S. dollars at the
closing daily exchange rate. Futures contracts, options and options on futures
contracts listed on commodities exchanges are valued at closing settlement
prices. Over-the-counter options are valued by brokers through the use of a
pricing model which takes into account closing bond valuations, implied
volatility and short-term repurchase rates. Securities for which there are no
such quotations or valuations are valued at fair value as determined in good
faith by or at the direction of the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities 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.
Pursuant to an Exemptive Order issued by the Securities and Exchange Commission,
the Fund, along with other affiliated entities of Massachusetts Financial
Services Company (MFS), may utilize a joint trading account for the purposes of
entering into one or more repurchase agreements. These repurchase agreements are
collateralized by U.S. Treasury or Federal Agency Obligations.
13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Fund. The Fund, as writer of an option, may have no
control over whether the underlying security may be sold (call) or purchased
(put) and, as a result, bears the market risk of an unfavorable change in the
price of the securities underlying the written option. In general, written call
options may serve as a partial hedge against decreases in value in the
underlying securities to the extent of the premium received. Written options may
also be used as part of an income producing strategy reflecting the view of the
Fund's management on the direction of interest rates.
Futures Contracts - The Fund may enter into futures contracts for the delayed
delivery of securities, currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest rate, exchange rates, or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. Investments in currency futures for purposes other than hedging may
be made to change the Fund's relative position in one or more currencies without
buying and selling portfolio assets. Investments in indexed contracts, or
contracts on related options, for purposes other than hedging may be made when
the Fund has cash on hand and wishes to participate in anticipated market
appreciation while cash is being invested. Should interest rate, or exchange
rates, or securities prices move unexpectedly, the Fund may not achieve the
anticipated benefits of the futures contracts and may realize a loss.
14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
Forward Foreign Currency Exchange Contracts - The Fund may enter into forward
foreign currency exchange contracts for the purchase or sale of a specific
foreign currency at a fixed price on a future date. Risks may arise upon
entering these contracts from the potential inability of counterparties to meet
the terms of their contracts and from unanticipated movements in the value of a
foreign currency relative to the U.S. dollar. The Fund will enter into forward
contracts for hedging purposes as well as for non-hedging purposes. For hedging
purposes, the Fund may enter into contracts to deliver or receive foreign
currency it will receive from or require for its normal investment activities.
It may also use contracts in a manner intended to protect foreign
currency-denominated securities from declines in value due to unfavorable
exchange rate movements. For non- hedging purposes, the Fund may enter into
contracts with the intent of changing the relative exposure of the Fund's
portfolio of securities to different currencies to take advantage of anticipated
changes. The forward foreign currency exchange contracts are adjusted by the
daily exchange rate of the underlying currency and any gains or losses are
recorded for financial statement purposes as unrealized until the contract
settlement date.
Swap Agreements - The Fund may enter into swap agreements. A swap is an exchange
of cash payments between the Fund and another party which is based on a specific
financial index. Cash payments are exchanged at specified intervals and the
expected income or expense is recorded on the accrual basis. The value of the
swap is adjusted daily and the change in value is recorded as unrealized
appreciation or depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The Fund uses swaps for both hedging
and non-hedging purposes. For hedging purposes, the Fund may use swaps to reduce
its exposure to interest and foreign exchange rate fluctuations. For non-hedging
purposes, the Fund may use swaps to take a position on anticipated changes in
the underlying financial index.
Investment Transactions and Income - Investment transactions are recorded on the
trade date. Interest income is recorded on the accrual basis. All premium and
original issue discount are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. 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.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions
15
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
to shareholders reported in the financial highlights may differ from that
reported to shareholders on Form 1099-DIV. Foreign taxes have been provided for
on interest income earned on foreign investments in accordance with the
applicable country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. 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 November 30, 1995, the Fund, for federal income tax purposes, had a capital
loss carryforward of $5,760,666, which may be applied against any net taxable
realized gains of each succeeding year until the earlier of its utilization or
expiration on November 30, 2002.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on 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 0.32% of average daily net assets and 5.65% of
investment income.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $5,517 for the period ended
May 31, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$2,038 for the period ended May 31, 1996, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD
16
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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. Payments of up to 0.25% per annum of the service fee will
commence under the distribution plan when the value of the net assets of the
Fund attributable to Class A shares first equals or exceeds $40 million. Payment
of the 0.10% per annum distribution fee will commence on such date as the
Trustees of the Fund may determine.
The Class B distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B shares. MFD retains the service fee for accounts not attributable to
a securities dealer, which amounted to $25,961 for Class B shares for the period
ended May 31, 1996. Fees incurred under the distribution plan during the period
ended May 31, 1996 were 1.00% of average daily net assets attributable to Class
B shares on an annualized basis.
Purchases over $1 million into Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within twelve 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 May 31, 1996 were $1 and $269,898 for
Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the average daily net assets of each class of shares at an
effective annual rate of up to 0.15% and up to 0.22% attributable to Class A and
Class B shares, respectively.
(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 $181,681,341 $222,854,655
============ ============
Investments (non-U.S. government securities) $129,864,009 $130,766,991
============ ============
17
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
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 $ 207,783,483
=============
Gross unrealized depreciation $ (5,058,139)
Gross unrealized appreciation 2,176,703
-------------
Net unrealized depreciation $ (2,881,436)
=============
(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 Year Ended
May 31, 1996 November 30, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Shares sold 752,744 $ 6,373,276 1,267,467 $ 10,593,433
Shares issued to shareholders in
reinvestment of distributions 35,014 296,492 37,313 309,025
Shares reacquired (276,404) (2,331,965) (261,755) (2,164,838)
---------- ------------ ---------- ------------
Net increase 511,354 $ 4,337,803 1,043,025 $ 8,737,620
========== ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Class B Shares
Period Ended Year Ended
May 31, 1996 November 30, 1995
----------------------------- ----------------------------
Shares Amount Shares Amount
================================================================================================
<S> <C> <C> <C> <C>
Shares sold 494,873 $ 4,194,722 1,088,366 $ 9,003,371
Shares issued to shareholders in
reinvestment of distributions 361,931 3,071,123 909,234 7,464,388
Shares reacquired (4,770,451) (11,699,599) (96,456,899)
---------- ------------ ---------- ------------
Net decrease (3,913,647) $(33,080,269) (9,701,999) $(79,989,140)
========== ============ ========== ============
</TABLE>
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the period ended May 31,
1996 was $416.
(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 and foreign currency exchange rates. These financial
instruments include written options, forward foreign currency exchange
contracts, futures contracts and swap
18
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
agreements. The notional or contractual amounts of these instruments represent
the investment the Fund has in particular classes of financial instruments and
does not necessarily represent the amounts potentially subject to risk. The
measurement of the risks associated with these instruments is meaningful only
when all related and offsetting transactions are considered.
<TABLE>
<CAPTION>
Written Option Transactions 1996 Calls 1996 Puts
----------------------------- ------------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
======================================================================================================
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Australian Dollars 1,739 $ 11,064 4,297 $ 44,070
Deutsche Marks/British Pounds 7,684 46,611 -- --
Japanese Yen -- -- 401,000 50,954
Options written -
Australian Dollars 2,723 14,760 -- --
Canadian Dollars -- -- 4,816 10,779
Japanese Yen -- -- 185,000 22,763
Options terminated in closing transactions -
Australian Dollars (4,462) (25,824) (1,642) (10,036)
Deutsche Marks/British Pounds (7,684) (46,611) -- --
Japanese Yen -- -- (586,000) (73,717)
Options expired -
Australian Dollars -- -- (2,655) (34,034)
------ ------- ------ -------
Outstanding, end of period -- $ -- 4,816 $ 10,779
====== ======= ====== =======
Options outstanding at end of period consist of -
Canadian Dollars -- $ -- 4,816 $ 10,779
------ ------- ------ -------
Outstanding, end of period -- $ -- 4,816 10,779
====== ======= ====== =======
</TABLE>
At May 31, 1996, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Forward Foreign Currency Exchange Contracts
Net
Unrealized
Contracts to In Exchange Contracts Appreciation
Settlement Date Deliver/Receive for at Value (Depreciation)
========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Sales 8/30/96 CAD 18,059,950 $ 13,193,406 $ 13,205,472 $ (12,066)
8/14/96 CHF 7,522,501 6,045,104 6,067,266 (22,162)
11/04/96 DEM 28,389,796 19,039,944 19,164,191 (124,247)
9/09/96 DKK 88,678,051 15,014,909 15,155,611 (140,702)
8/13/96 ESP 329,991,309 2,566,428 2,561,393 5,035
8/09/96 GBP 6,743,949 10,184,948 10,448,919 (263,971)
8/22/96 IEP 3,279,000 5,125,241 5,208,521 (83,280)
8/06/96 ITL 16,710,671,272 10,607,882 10,778,383 (170,501)
6/07/96 JPY 1,250,036,504 12,611,345 11,584,089 1,027,256
10/18/96 NZD 12,295,376 8,221,756 8,214,922 6,834
8/02/96 SEK 69,713,310 10,268,154 10,378,151 (109,997)
------------ ------------ -----------
$112,879,117 $112,766,918 $ 112,199
============ ============ ===========
Purchases 6/12/96 - 11/04/96 DEM 19,552,984 $ 12,849,794 $ 12,935,435 $ 85,641
6/07/96 JPY 1,250,036,504 11,763,778 11,584,088 (179,690)
------------ ------------ -----------
$ 24,613,572 $ 24,519,523 $ (94,049)
============ ============ ===========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts excluded above amounted
to a net payable of $47,156 with Bankers' Trust, a net receivable of $412 with
Deutsche Bank, a net payable of $6,736 with Swiss Bank Corporation International
and a net payable of $23,208 with Chemical Bank at May 31, 1996.
At May 31, 1996, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
Futures Contracts
Unrealized
Description Expiration Contracts Position Appreciation
================================================================================
U.S. Treasury Note September 1996 25 Short $ 22,436
U.S. Treasury Note September 1996 75 Short 76,682
U.S. Treasury Note September 1996 24 Short 3,538
--------
$102,656
========
At May 31, 1996, the Fund had sufficient cash and/or securities to cover margin
requirements on open futures contracts.
Interest Rate Swaps
Cash Flows Cash Flows
Notional Principal Paid by the Received by Unrealized
Expiration Amount of Contract Fund the Fund Appreciation
================================================================================
4/20/99 ITL 7,700,000,000 ITL-Libor-BBA 9.535% Fixed $81,500
5/10/99 ITL 7,445,000,000 ITL-Libor-BBA 8.835% Fixed 1,934
-------
$83,434
=======
20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust II and Shareholders of MFS Intermediate
Income Fund:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of MFS Intermediate Income Fund (one of the series
constituting MFS Series Trust II) as of May 31, 1996, the related statement of
operations for the six months then ended, the statement of changes in net assets
for the six months then ended and the year ended November 30, 1995, and the
financial highlights for the six months ended May 31, 1996 and for each of the
years in the eight-year period ended November 30, 1995. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned at May
31, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Intermediate
Income Fund at May 31,1996, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 5, 1996
------------------------------------------------------------
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.
21
<PAGE>
MFS [Registration Mark] [DALBAR LOGO] BULK RATE
INTERMEDIATE U.S. POSTAGE
INCOME FUND PAID
PERMIT #55638
500 Boylston Street Boston, Ma
Boston, MA 02116
[MFS LOGO]
MII-3 7/96 20M 5/205
<PAGE>
