<PAGE>
[LOGO] M F S(SM) Semiannual Report
INVESTMENT MANAGEMENT May 31, 1997
- --------------------------------------------------------------------------------
MFS(R) INTERMEDIATE INCOME FUND
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
- ----------------------------------------------------
LEARNING FINANCIAL BASICS THE EASY WAY (see page 26)
- ----------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Portfolio Managers' Overview ............................................... 2
Portfolio Managers' Profiles ............................................... 4
Fund Facts ................................................................. 5
Performance Summary ........................................................ 5
Portfolio of Investments ................................................... 7
Financial Statements .......................................................10
Notes to Financial Statements ..............................................17
Independent Auditors' Report ...............................................25
The ABCs of Investing ......................................................26
It's Easy to Contact Us ....................................................27
The MFS Family of Funds(R) .................................................28
Trustees and Officers ......................................................29
HIGHLIGHTS
o FOR THE SIX MONTHS ENDED MAY 31, 1997, THE FUND'S CLASS A SHARES PROVIDED A
TOTAL RETURN AT NET ASSET VALUE OF 0.92%, CLASS B SHARES 0.46%, AND CLASS I
SHARES 0.91%.
o IN ANTICIPATION OF THE MARCH TIGHTENING OF MONETARY POLICY BY THE FEDERAL
RESERVE BOARD, THE FUND DE-EMPHASIZED INTERMEDIATE-MATURITY U.S. TREASURIES
AND INCREASED ALLOCATIONS TO SHORTER-MATURITY TREASURIES, OFFSET BY A
SLIGHTLY GREATER EMPHASIS ON LONGER-MATURITY 10-YEAR TREASURIES.
o IN THE INTERNATIONAL SECTOR, THE FUND'S FOREIGN ALLOCATION HAS RECENTLY
BEEN REDUCED BECAUSE U.S. INTEREST RATES APPEAR INCREASINGLY ATTRACTIVE
FROM A GLOBAL PERSPECTIVE.
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
After more than six years of expansion, the U.S. economy is experiencing another
year of growth in 1997, although a few signs point to the possibility of a
modest rise in inflation during the year. On the positive side, the pattern of
moderate growth and inflation set over the past few years now seems fairly well
entrenched in the economy and, short of a major international or domestic
crisis, appears to have enough momentum to remain on track for some time. The
U.S. economy exhibited a great deal of strength in the first quarter of 1997,
growing at an annualized rate of 5.8%. This pace would clearly lead to
inflationary pressures were it to continue, as could the ongoing tightness in
the labor market. Moreover, there is reason for caution as a result of the
continuing high level of consumer debt and rising personal bankruptcies. Given
these somewhat conflicting indicators, we expect real (inflation-adjusted)
growth to revolve around 2% to 2 1/2% in 1997, with the strength of the first
quarter moderating as we move through the balance of the year.
In the bond markets, conflicting signals over the strength of the economy have
also created near-term volatility, and the Federal Reserve Board (the Fed) has
begun taking measured steps to control inflation by raising short-term interest
rates. Although we do not expect a repeat of the rapid growth in the first
quarter, we would expect the Fed to raise interest rates at least one more time
this year in reaction to the continuing economic momentum. While inflationary
forces largely remained in check in 1996, the persistent strength in the labor
market suggests that a pickup in inflation is still possible. At the same time,
the U.S. budget deficit continues to decline and, as a percentage of gross
domestic product, is now approaching 1%, which we consider a positive
development for the bond markets. Although interest rates may remain volatile
over the coming months, we believe that, at current levels, fixed-income markets
remain equitably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
June 12, 1997
<PAGE>
PORTFOLIO MANAGERS' OVERVIEW
Dear Shareholders:
The central theme for the past six months has been strong U.S. economic growth.
During this period, the nation's unemployment rate dropped to a 23- year low of
4.8%, while the Federal Reserve Board (the Fed) demonstrated its determination
to check inflation by hiking interest rates. Accordingly, the U.S. bond market
turned in a lackluster performance, while the dollar soared. The 10-year U.S.
Treasury yield rose by 60 basis points (0.60%), while the dollar appreciated
from 1.5339 to 1.7016 German marks per dollar.
Economic growth has been much less robust outside the United States. Fiscal
austerity and structural rigidities continue to constrain growth in Europe,
while Japan's private sector is struggling to overcome the deflationary impact
of deregulation and fiscal tightening. As a consequence, 10-year yields in
Germany and Japan rose only modestly over the period, by 14 and 17 basis points
(0.14% and 0.17%), respectively. Meanwhile, the higher-yielding markets of Spain
and Italy, driven by anticipation of European monetary union in 1999 as well as
by global investors' efforts to maintain portfolio yield, continued to
experience narrowing yield spreads versus Germany. As in past periods, our
ability to allocate up to 50% of the Fund's assets to international fixed-income
markets enhanced returns and diversified the risk in the U.S.
government market.
For the six months ended May 31, 1997, Class A shares of the Fund provided a
total return of 0.92%, Class B shares 0.46%, and Class I shares 0.91%. These
returns include the reinvestment of distributions but exclude the effects of any
sales charges. During the same period, the Salomon Brothers Intermediate Term
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)
returned 1.36%; the Lehman Brothers Mortgage Index (which includes maturities of
both 15 and 30 years) returned 1.62%; and the J.P. Morgan Non-Dollar Government
Bond Index (an aggregate of actively traded government bonds of 12 countries,
excluding the United States, with remaining maturities of at least one year)
appreciated by 2.14% in local currency terms.
U.S. Government Sector
With the backdrop of an economy operating near its long-term growth potential,
the U.S. fixed-income market has vacillated between opposing themes. The first
has been concern that, seven years into this business expansion, and with the
economy operating near what is commonly viewed as full employment, inflationary
pressures could be building. The second has been the belief that, by some
measures, inflationary pressures have actually been abating. Stronger momentum
in the economy during the second half of 1996 and early in 1997 led the Fed and
the fixed-income market to focus on inflationary risks, pushing yields on 2- and
10-year Treasuries from 5.58% and 6.05%, respectively, in November to highs of
6.54% and 6.98% in April. In anticipation of the March tightening of monetary
policy, our strategy was to de-emphasize intermediate-maturity Treasuries and
increase allocations to shorter-maturity Treasuries, offset by a slightly
greater emphasis on longer- maturity 10-year Treasuries. Although the degree of
further Fed tightening over the next several months remains uncertain, we
believe the Fed may perceive the need for further modest tightening. Should it
choose to raise interest rates, short- and intermediate-maturity securities
would be the most adversely affected. By repositioning our Treasury exposure
between cash and longer maturities, we believe we can reduce overall
interest-rate sensitivity in the portfolio while reducing exposure to
intermediate maturities.
In this environment, the mortgage-backed pass-through sector posted strong
relative performance, and we anticipate a continuation of this trend in the
months ahead. Mortgage securities tend to outperform Treasuries in uncertain
market environments for two important reasons. First, they are, on average,
shorter in maturity than outstanding Treasuries and, thus, decline less in price
as yields increase, as they did during 1996 and early 1997. Second, because they
are higher-yielding securities, their additional coupon income provides a total
return cushion to help offset price declines. (Principal value and interest on
Treasury securities are guaranteed by the U.S. government if held to maturity.)
An index, or average, allocation to this sector would be about 36%. We recently
reduced our weighting of this sector to approximately 36% but will add to it
should yield spreads widen during the next few months.
International Sector
In 1996, we maintained the Fund's exposure to foreign markets near the limit of
50%, enabling the portfolio to capture the strong performance of the
higher-yielding Canadian, Australian, and European markets. More recently, the
foreign allocation has been reduced because U.S. interest rates appear
increasingly attractive from a global perspective. Of the 35% of assets
allocated to foreign bonds, 12% is invested in the dollar bloc, 13% in higher-
yielding European bonds, and 10% in emerging market instruments offering
attractive yields with low duration.
With the Fed tightening in the United States and yield spreads already tight
by historical standards, we do not anticipate rapid price appreciation in
international bond markets. Therefore, our focus is on earning an attractive
yield from a high-quality portfolio and on capturing potential gains from the
convergence of longer-term yields. Within the dollar bloc, we remain
concentrated in Australian bonds based on their high real (inflation-adjusted)
yield and the potential for further easing by the Reserve Bank of Australia. In
Europe, we believe that European monetary union will begin on time in 1999. This
should maintain downward pressure on yield spreads throughout Europe -- even for
countries such as Italy that may not participate right away. As part of the
convergence process, official interest rates are likely to be cut in Italy,
Spain, and possibly Sweden. Over time, we would also expect emerging market
spreads to shrink as investors become more comfortable with these markets.
Although some of the forces pushing the dollar up may be waning, we remain
virtually fully hedged back into the dollar. In the near term, we believe it
should be supported by capital inflows induced by favorable interest-rate and
growth differentials. Longer term, however, concern over worsening trade and
current-account deficits may temper this strength.
Respectfully,
/s/Steven E. Nothern /s/ Christopher D. Piros
Steven E. Nothern Christopher D. Piros
Portfolio Manager Portfolio Manager
PORTFOLIO MANAGERS' PROFILES
STEVEN E. NOTHERN JOINED MFS IN 1986 IN THE FIXED INCOME DEPARTMENT AND
WAS NAMED VICE PRESIDENT IN 1989 AND SENIOR VICE PRESIDENT IN 1993. A
GRADUATE OF MIDDLEBURY COLLEGE WITH A MASTER'S DEGREE IN BUSINESS
ADMINISTRATION FROM BOSTON UNIVERSITY, HE HAS CO-MANAGED MFS(R)
INTERMEDIATE INCOME FUND SINCE 1992. MR. NOTHERN IS A CHARTERED
FINANCIAL ANALYST AND A MEMBER OF THE BOSTON SECURITY ANALYSTS SOCIETY.
CHRISTOPHER D. PIROS JOINED MFS IN 1989 AS VICE PRESIDENT AND HEAD OF
QUANTITATIVE ANALYSIS IN THE FIXED INCOME DEPARTMENT. A GRADUATE OF
NORTHWESTERN UNIVERSITY WITH A PH.D. FROM HARVARD UNIVERSITY, HE WAS
NAMED VICE PRESIDENT - INVESTMENTS IN 1992 AND SENIOR VICE PRESIDENT IN
1997. HE HAS CO-MANAGED MFS INTERMEDIATE INCOME FUND SINCE 1996.
<PAGE>
FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO
PRESERVE CAPITAL AND PROVIDE HIGH CURRENT
INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: CLASS A: SEPTEMBER 7, 1993
CLASS B: AUGUST 1, 1988
CLASS I: JANUARY 2, 1997
SIZE: $165.2 MILLION NET ASSETS AS OF MAY 31, 1997
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, Class B, and Class I shares for
the applicable time periods.
AVERAGE ANNUAL AND CUMULATIVE TOTAL RATES OF RETURN
AS OF MAY 31, 1997
<TABLE>
<CAPTION>
CLASS A INVESTMENT RESULTS
(net asset value change including reinvested distributions)
Life of
6 Months 1 Year 5 Years Fund*
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +0.92% +7.79% +30.51% +76.19%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +7.79% + 5.47% + 6.62%
- -----------------------------------------------------------------------------------------------------------------
SEC Results -- +2.72% + 4.45% + 6.03%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS B INVESTMENT RESULTS
(net asset value change including reinvested distributions)
Life of
6 Months 1 Year 5 Years Fund*
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +0.46% +6.78% +25.52% +69.44%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +6.78% + 4.65% + 6.15%
- -----------------------------------------------------------------------------------------------------------------
SEC Results -- +2.78% + 4.34% + 6.15%
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
CLASS I INVESTMENT RESULTS
(net asset value change including reinvested distributions)
Life of
6 Months 1 Year 5 Years Fund*
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cumulative Total Return +0.91% +6.59% +25.28% +69.02%
- -----------------------------------------------------------------------------------------------------------------
Average Annual Total Return -- +6.59% + 4.61% + 6.12%
- -----------------------------------------------------------------------------------------------------------------
*For the period from the commencement of the Fund's investment operations, August 1, 1988, through May 31, 1997.
</TABLE>
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. Past performance
is no guarantee of future results.
Class A share SEC results include the maximum 4.75% sales charge. Class B share
SEC results reflect the applicable contingent deferred sales charge (CDSC),
which declines over six years as follows: 4%, 4%, 3%, 3%, 2%, 1%, 0%. Class I
shares, which became available on January 2, 1997, have no sales charge or Rule
12b-1 fees and are only available to certain institutional investors.
Class A share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class A shares. Because operating expenses
attributable to Class B shares are greater than those of Class A shares, Class A
share performance generally would have been higher than Class B share
performance. The Class B share performance included within the Class A share SEC
performance has been adjusted to reflect the maximum sales charge generally
applicable to Class A shares rather than the CDSC generally applicable to Class
B shares.
Class I share results include the performance and the operating expenses (e.g.,
Rule 12b-1 fees) of the Fund's Class B shares for periods prior to the
commencement of offering of Class I shares. Because operating expenses
attributable to Class B shares are greater than those of Class I shares, Class I
share performance generally would have been higher than Class B share
performance. The Class B share performance included in the Class I share
performance has been adjusted to reflect the fact that Class I shares have no
CDSC.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Current subsidies and
waivers may be discontinued at any time.
<PAGE>
PORTFOLIO OF INVESTMENTS - May 31, 1997
Bonds - 93.8%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Bonds - 60.2%
U.S. Federal Agencies - 12.5%
Federal National Mortgage Assn., 7.55s, 2007 $ 2,000 $ 2,000,620
Federal National Mortgage Assn., 6.5s, 2008 54 52,765
Federal National Mortgage Assn., 7s, 2026 6,571 6,394,470
Guaranteed Trade Trust, 7.39s, 2006 11,875 12,167,125
------------
$ 20,614,980
- -----------------------------------------------------------------------------
U.S. Government Guaranteed - 47.7%
Government National Mortgage Association - 21.9%
GNMA, 7s, 2023 - 2026 $ 12,187 $ 11,876,865
GNMA, 8.5s, 2004 - 2009 6,151 6,416,055
GNMA, 7.5s, 2023 - 2026 13,139 13,098,339
GNMA, 8s, 2026 4,679 4,760,565
------------
$ 36,151,824
- -----------------------------------------------------------------------------
U.S. Treasury Obligations - 25.8%
U.S. Treasury Notes, 9.25s, 1998 $ 11,000 $ 11,409,090
U.S. Treasury Notes, 7.5s, 1999 6,000 6,158,460
U.S. Treasury Notes, 9.125s, 1999 6,400 6,737,984
U.S. Treasury Bonds, 12.375s, 2004 3,500 4,608,520
U.S. Treasury Bonds, 13.875s, 2011 4,500 6,619,230
U.S. Treasury Bonds, 12s, 2013 5,100 7,124,037
------------
$ 42,657,321
- -----------------------------------------------------------------------------
Total U.S. Government Guaranteed $ 78,809,145
- -----------------------------------------------------------------------------
Total U.S. Bonds $ 99,424,125
- -----------------------------------------------------------------------------
Foreign Bonds - 33.6%
Australia - 8.8%
Commonwealth of Australia, 8.75s, 2001 AUD 3,485 $ 2,841,710
Commonwealth of Australia, 9.75s, 2002 4,080 3,472,810
Commonwealth of Australia, 10s, 2002 4,090 3,532,677
Commonwealth of Australia, 9.5s, 2003 5,500 4,675,205
------------
$ 14,522,402
- -----------------------------------------------------------------------------
Denmark - 1.0%
Nykredit, 8s, 2026 DKK 6,895 $ 1,088,964
Realkredit Danmark, 8s, 2026 3,415 538,823
------------
$ 1,627,787
- -----------------------------------------------------------------------------
Greece - 1.7%
Hellenic Republic, 12.6s, 2003 GRD 470,000 $ 1,818,242
Hellenic Republic, 14.3s, 2003 150,000 574,234
Hellenic Republic, 14.5s, 2003 100,000 382,639
------------
$ 2,775,115
- -----------------------------------------------------------------------------
Ireland - 2.0%
Republic of Ireland, 6.5s, 2001 IEP 480 $ 738,581
Republic of Ireland, 8s, 2000 1,590 2,544,382
------------
$ 3,282,963
- -----------------------------------------------------------------------------
Israel - 3.0%
State of Israel, 6.625s, 2003 $ 5,000 $ 4,977,800
- -----------------------------------------------------------------------------
Italy - 1.2%
Republic of Italy, 9.5s, 1999 ITL 3,305,000 $ 2,038,540
- -----------------------------------------------------------------------------
Mexico - 2.9%
United Mexican States, 7.875s, 2001# $ 3,750 $ 3,778,125
United Mexican States, 7.875s, 2001 1,000 1,007,300
------------
$ 4,785,425
- -----------------------------------------------------------------------------
New Zealand - 1.8%
Government of New Zealand, 8s, 2001 NZD 4,100 $ 2,893,536
- -----------------------------------------------------------------------------
Poland - 1.9%
Government of Poland, 6.938s, 2024 $ 3,250 $ 3,180,937
- -----------------------------------------------------------------------------
Spain - 3.0%
Government of Spain, 10.1s, 2001 ESP 277,740 $ 2,213,382
Government of Spain, 10.5s, 2003 276,930 2,344,021
Government of Spain, 7.35s, 2007 60,670 439,388
------------
$ 4,996,791
- -----------------------------------------------------------------------------
Sweden - 1.1%
Kingdom of Sweden, 10.25s, 2000 SEK 13,000 $ 1,888,981
- -----------------------------------------------------------------------------
Thailand - 2.4%
Total Access Communication, 10.4s, 2004 THB 100,000 $ 3,975,659
- -----------------------------------------------------------------------------
United Kingdom - 2.8%
United Kingdom Treasury, 9.5s, 2004 GBP 2,500 $ 4,635,860
- -----------------------------------------------------------------------------
Total Foreign Bonds $ 55,581,796
- -----------------------------------------------------------------------------
Total Bonds (Identified Cost, $155,750,043) $155,005,921
- -----------------------------------------------------------------------------
Short-Term Obligation - 2.1%
- -----------------------------------------------------------------------------
Czech Basket Certificate of Deposit, due
7/23/97 (Identified cost, $4,000,000) $ 4,000 $ 3,444,800
- -----------------------------------------------------------------------------
Repurchase Agreement - 2.3%
- -----------------------------------------------------------------------------
Goldman Sachs, dated 5/30/97, due 6/02/97,
total to be received $3,850,748 (secured by
various U.S. Treasury and Federal Agency
obligations in a jointly traded account),
at Cost $ 3,849 $ 3,849,000
- -----------------------------------------------------------------------------
Call Option Purchased
- -----------------------------------------------------------------------------
Principal Amount
of Contracts
Issuer/Expiration Month/Strike Price (000 Omitted) Value
- -----------------------------------------------------------------------------
Canadian Dollars/
June/1.36500 (Premiums Paid, $77,047) CAD 6,044 $ 580
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $163,676,090) $162,300,301
- -----------------------------------------------------------------------------
Call Option Written - (0.1)%
- -----------------------------------------------------------------------------
Swiss Francs/Deutsche Marks
March/0.847 (Premium Received, $52,297) CHF 7,499 $ (216,242
- -----------------------------------------------------------------------------
Other Assets, Less Liabilities - 1.9% 3,157,118
- -----------------------------------------------------------------------------
Net Assets - 100.0% $165,241,177
- -----------------------------------------------------------------------------
#SEC Rule 144A restriction.
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 GRD = Greek Drachma
CAD = Canadian Dollars IEP = Irish Punts
CHF = Swiss Francs ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner NZD = New Zealand Dollars
ESP = Spanish Pesetas SEK = Swedish Kroner
GBP = British Pounds THB = Thai Baht
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
May 31, 1997
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $163,676,090) $162,300,301
Cash 419
Net receivable for forward currency exchange contracts sold 74,626
Net receivable for forward foreign currency exchange
contracts closed 1,064,829
Receivable for Fund shares sold 23,516
Interest receivable 2,659,982
Other assets 1,648
------------
Total assets $166,125,321
------------
Liabilities:
Payable for Fund shares reacquired $ 311,248
Written options outstanding, at value (premiums
received, $52,297) 216,242
Net payable for forward foreign currency exchange
contracts purchased 98,721
Payable for interest rate swaps 30,402
Payable to affiliates -
Management fee 7,061
Administrative fee 136
Shareholder servicing agent fee 1,178
Distribution and service fee 68,919
Accrued expenses and other liabilities 150,237
------------
Total liabilities $ 884,144
------------
Net assets $165,241,177
============
Net assets consist of:
Paid-in capital $170,580,283
Unrealized depreciation on investments and translation
of assets and liabilities in foreign currencies (552,836)
Accumulated net realized loss on investments and foreign
currency transactions (4,112,005)
Accumulated distributions in excess of net investment
income (674,265)
------------
Total $165,241,177
============
Shares of beneficial interest outstanding 19,731,182
==========
Class A shares:
Net asset value per share
(net assets of $26,611,902 / 3,179,437 shares of
beneficial interest outstanding) $8.37
=====
Offering price per share (100 / 95.25) $8.79
=====
Class B shares:
Net asset value and offering price per share
(net assets of $138,627,686 / 16,551,555 shares of
beneficial interest outstanding) $8.38
=====
Class I shares:
Net asset value, offering and redemption price per share
(net assets of $1,589 / 190 shares of beneficial
interest outstanding) $8.36
=====
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
- ------------------------------------------------------------------------------
Six Months Ended May 31, 1997
- ------------------------------------------------------------------------------
Net investment income:
Interest income $ 6,844,569
------------
Expenses -
Management fee $ 677,344
Trustees' compensation 22,792
Shareholder servicing agent fee 93,933
Shareholder servicing agent fee (Class A) 1,927
Shareholder servicing agent fee (Class B) 32,605
Distribution and service fee (Class B) 769,686
Administrative fee 6,480
Custodian fee 66,490
Auditing fees 37,632
Postage 28,205
Printing 14,976
Legal fees 1,060
Miscellaneous 53,216
------------
Total expenses $ 1,806,346
Fees paid indirectly (5,020)
------------
Net expenses $ 1,801,326
------------
Net investment income $ 5,043,243
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (1,541,285)
Written option transactions 26,274
Foreign currency transactions 1,496,002
Interest rate swaps 133,367
------------
Net realized gain on investments and foreign currency
transactions $ 114,358
------------
Change in unrealized appreciation (depreciation) -
Investments $ (5,790,098)
Written options (163,945)
Translation of assets and liabilities in foreign
currencies 1,708,956
Interest rate swaps (338,546)
------------
Net unrealized loss on investments and foreign
currency translation $ (4,583,633)
------------
Net realized and unrealized loss on investments
and foreign currency $ (4,469,275)
------------
Increase in net assets from operations $ 573,968
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
May 31, 1997 November 30, 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 5,043,243 $ 11,918,902
Net realized gain on investments and foreign
currency transactions 114,358 3,116,047
Net unrealized loss on investments and foreign
currency translation (4,583,633) (4,349,966)
------------ ------------
Increase in net assets from operations $ 573,968 $ 10,684,983
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (771,288) $ (1,050,116)
From net investment income (Class B) (4,180,345) (10,868,786)
From net investment income (Class I) (18) --
In excess of net investment income (Class A) -- (6,786)
In excess of net investment income (Class B) -- (70,239)
------------ ------------
Total distributions declared to shareholders $ (4,951,651) $(11,995,927)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 14,369,904 $ 22,417,332
Net asset value of shares issued to shareholders
in reinvestment of distributions 2,744,632 6,417,230
Cost of shares reacquired (39,933,883) (80,056,025)
------------ ------------
Decrease in net assets from Fund share
transactions $(22,819,347) $(51,221,463)
------------ ------------
Total decrease in net assets $(27,197,030) $(52,532,407)
Net assets:
At beginning of period 192,438,207 244,970,614
------------ ------------
At end of period (including accumulated
distributions in excess of net investment income
of $674,265 and $765,857, respectively) $165,241,177 $192,438,207
============ ============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
Six Months Ended ---------------------------------------------------------
May 31, 1997 1996 1995 1994 1993*
- -------------------------------------------------------------------------------------------------------------------------------
Class A
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.57 $ 8.59 $ 7.96 $ 8.94 $ 9.11
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.28 $ 0.55 $ 0.57 $ 0.59 $ 0.11
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.20) (0.01) 0.61 (0.95) (0.17)
------ ------ ------ ------ ------
Total from investment operations $ 0.08 $ 0.54 $ 1.18 $(0.36) $(0.06)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income(++) $(0.28) $(0.56) $(0.55) $ -- $(0.09)
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) $(0.56) $(0.55) $(0.62) $(0.11)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.37 $ 8.57 $ 8.59 $ 7.96 $ 8.94
====== ====== ====== ====== ======
Total return(+) 0.92%++ 6.61% 15.40% (4.27)% (0.66)%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.16%+ 1.17% 1.14% 1.18% 1.22%+
Net investment income 6.69%+ 6.58% 6.81% 7.10% 6.43%+
Portfolio turnover 138% 288% 275% 211% 376%
Net assets at end of period (000 omitted) $26,612 $21,291 $12,659 $ 3,432 $ 258
* For the period from the commencement of investment operations, 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.
(++) The Fund had distributions in excess of net investment of $0.003 for the year ended November 30, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Year Ended November 30,
Six Months Ended -------------------------------------------------------------------------
May 31, 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
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 $ 8.57 $ 8.58 $ 7.96 $ 8.93 $ 8.88 $ 9.31
------ ------ ------ ------ ------ ------
Income from investment operations# -
Net investment income $ 0.23 $ 0.46 $ 0.48 $ 0.47 $ 0.47 $ 0.62
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions (0.19) (0.01) 0.61 (0.92) 0.26 (0.26)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.04 $ 0.45 $ 1.09 $(0.45) $ 0.73 $ 0.36
------ ------ ------ ------ ------ ------
Less distributions declared to
shareholders -
From net investment income(++) $(0.23) $(0.46) $(0.47) $ -- $(0.45) $(0.57)
From net realized gain on
investments and foreign
currency transactions -- -- -- -- (0.16) (0.15)
From paid-in capital -- -- -- -- -- (0.07)
Tax return of capital -- -- -- (0.52) (0.07) --
------ ------ ------ ------ ------ ------
Total distributions
declared
to shareholders $(0.23) $(0.46) $(0.47) $(0.52) $(0.68) $(0.79)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.38 $ 8.57 $ 8.58 $ 7.96 $ 8.93 $ 8.88
====== ====== ====== ====== ====== ======
Total return 0.46%++ 5.52% 14.12% (5.24)% 8.42% 3.93%
Ratios (to average net assets)/
Supplemental data:
Expenses## 2.18%+ 2.24% 2.23% 2.22% 2.15% 2.20%
Net investment income 5.57%+ 5.47% 5.79% 5.60% 5.19% 6.70%
Portfolio turnover 138% 288% 275% 211% 376% 372%
Net assets at end of period
(000 omitted) $138,628 $171,148 $232,312 $292,619 $466,955 $347,588
+ 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.
(++) The Fund had distributions in excess of net investment of $0.003 for the year ended November 30, 1996.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Year Ended November 30, 1991 1990 1989 1988**
- ------------------------------------------------------------------------------------------------------------------------
Class B
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.23 $ 9.50 $ 9.77 $ 9.47
------ ------ ------ ------
Income from investment operations -
Net investment income $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.32 (0.02) (0.08) 0.10
------ ------ ------ ------
Total from investment operations $ 0.90 $ 0.57 $ 0.60 $ 0.45
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.56) $(0.45) $(0.85) $(0.12)
From net realized gain on investments and foreign
currency transactions (0.14) -- (0.02) (0.03)
From paid-in capital (0.12) (0.39) -- --
------ ------ ------ ------
Total distributions declared to shareholders $(0.82) $(0.84) $(0.87) $(0.15)
------ ------ ------ ------
Net asset value - end of period $ 9.31 $ 9.23 $ 9.50 $ 9.77
====== ====== ====== ======
Total return 10.30% 6.59% 6.60% 14.21%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.24% 2.33% 2.47% 2.79%+
Net investment income 6.65% 6.80% 7.13% 17.14%+
Portfolio turnover 603% 579% 433% 120%
Net assets at end of period (000 omitted) $196,753 $126,245 $75,039 $30,858
** For the period from the commencement of investment operations, August 1, 1988, to November 30, 1988.
+ Annualized.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
Period Ended
May 31, 1997****
- --------------------------------------------------------------------------------
Class I
- --------------------------------------------------------------------------------
Per share data (for a share outstanding throughout the period):
Net asset value - beginning of period $ 8.43
------
Income from investment operations# -
Net investment income $ 0.29
Net realized and unrealized loss on investments and foreign
currency transactions (0.18)
------
Total from investment operations $ 0.11
------
Less distributions declared to shareholders from net investment
income $(0.18)
------
Net asset value - end of period $ 8.36
======
Total return 1.26%++
Ratios (to average net assets)/Supplemental data:
Expenses## 0.70%+
Net investment income 6.88%+
Portfolio turnover 138%
Net assets at end of period (000 omitted) $2
**** For the period from the commencement of offering of Class I shares,
January 2, 1997, to May 31, 1997.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
See notes to financial statements
<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 effects of changes in the relative
values of the local currency and the U.S. dollar and to the effects of changes
in each country's legal, political, and economic environment.
Investment Valuations - Debt securities (including short-term obligations which
mature in 60 days or less), 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. 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 Trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Fund requires
that the securities purchased in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Fund to obtain those securities
in the event of a default under the repurchase agreement. The Fund monitors, on
a daily basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement. The
Fund, along with other affiliated entities of Massachusetts Financial Services
Company (MFS), may utilize a joint trading account for the purpose of entering
into one or more repurchase agreements.
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 securities 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.
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 into 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.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. 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, 1996, the Fund, for federal income tax purposes, had a capital
loss carryforward of $4,226,362, 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 Class A,
Class B, and Class I shares. The classes of shares differ in their respective
distribution and service fees. All shareholders bear the common expenses of the
Fund pro rata based on average daily net assets of each class, without
distinction between share classes. Dividends are declared separately for each
class. No class has preferential dividend rights; differences in per share
dividend rates are generally due to differences in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The Fund has an investment advisory agreement with MFS to
provide overall investment advisory and administrative services, and general
office facilities. The management fee is computed daily and paid monthly at an
annual effective rate of 0.32% of average daily net assets and 5.65% of gross
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 its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $5,067 for the period ended
May 31, 1997.
Administrator - Effective March 1, 1997, the Trust (or Fund) has an
administrative services agreement with MFS to provide the Trust (or Fund) with
certain financial, legal, compliance, shareholder communications, and other
administrative services. As a partial reimbursement for the cost of providing
these services, the Fund pays MFS an administrative fee up to 0.015% per annum
of the Fund's average daily net assets, provided that the administrative fee is
not assessed on Fund assets that exceed $3 billion.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$2,321 for the period ended May 31, 1997, as its portion of the sales charge on
sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A and Class B shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee to each securities
dealer that enters into a sales agreement with MFD of up to 0.25% per annum of
the Fund's average daily net assets attributable to Class A shares which are
attributable to that securities dealer, a distribution fee to MFD of up to 0.10%
per annum of the Fund's average daily net assets attributable to Class A shares,
commissions to dealers, and payments to MFD wholesalers for sales at or above a
certain dollar level, and other such distribution-related expenses that are
approved by the Fund. 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 Fund's distribution plan provides that the Fund will pay MFD a distribution
fee of 0.75% per annum, and a service fee of up to 0.25% per annum, of the
Fund's average daily net assets attributable to Class B shares. MFD will pay to
securities dealers that enter into a sales agreement with MFD all or a portion
of the service fee attributable to Class B shares. The service fee is intended
to be additional consideration for services rendered by the dealer with respect
to Class B shares. MFD retains the service fee for accounts not attributable to
a securities dealer, which amounted to $28,775 for Class B shares for the period
ended 5/31/97. Fees incurred under the distribution plan during the period ended
May 31, 1997, was 1.00% of average daily net assets attributable to Class B
shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the event
of a shareholder redemption within 12 months following such purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the period ended May 31, 1997, were $9,367 and $140,696
for Class A and Class B shares, respectively.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as a
percentage of the Fund's average daily net assets at an effective annual rate of
0.13%. Prior to January 1, 1997, the fee was calculated as a percentage of the
average daily net assets of each class of shares at an effective annual rate of
up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions and
short-term obligations, were as follows:
Purchases Sales
- -------------------------------------------------------------------------------
U.S. government securities $122,726,240 $128,598,537
============ ============
Investments (non-U.S. government
securities) $ 95,444,915 $ 99,966,105
============ ============
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 $163,676,090
============
Gross unrealized appreciation $ 731,149
Gross unrealized depreciation (2,106,938)
------------
Net unrealized depreciation $ (1,375,789)
============
(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 May 31, 1997 Year Ended November 30, 1996
--------------------------------- ----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,233,145 $ 10,375,552 1,756,734 $ 14,794,352
Shares issued to shareholders in
reinvestment of distributions 60,649 508,537 82,176 689,249
Shares transferred to Class I (6) (50) -- --
Shares reacquired (597,591) (5,025,917) (829,744) (6,965,804)
---------- ------------ ---------- ------------
Net increase 696,197 $ 5,858,122 1,009,166 $ 8,517,797
========== ============ ========== ============
<CAPTION>
Class B Shares
Period Ended May 31, 1997 Year Ended November 30, 1996
--------------------------------- ----------------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 476,514 $ 3,992,790 904,517 $ 7,622,980
Shares issued to shareholders in
reinvestment of distributions 266,061 2,236,077 681,076 5,727,981
Shares reacquired (4,150,778) (34,907,966) (8,687,569) (73,090,221)
---------- ------------ ---------- ------------
Net decrease (3,408,203) $(28,679,099) (7,101,976) $(59,739,260)
========== ============ ========== ============
<CAPTION>
Class I Shares
Period Ended May 31, 1997*
---------------------------------
Shares Amount
- --------------------------------------------------------------------
<S> <C> <C>
Shares sold 182 $1,562
Shares issued to shareholders in
reinvestment of distributions 2 18
Shares transferred from Class A 6 50
--- -----
Net increase 190 $1,630
=== ======
*For the period from the commencement of offering of Class I shares, January 2, 1997, to May 31, 1997.
</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 $400 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,
1997, was $276.
(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 agreements. The notional or contractual
amounts of these 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. A summary of obligations under these financial instruments at May
31, 1997, is as follows:
Written Option Transactions
1997 Calls
-------------------------------------
Principal Amounts
of Contracts
(000 Omitted) Premiums
- -----------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD - -- $ --
Options written -
Australian Dollars 1,099 7,427
SwissFranc/Deutsche Marks 10,714 71,945
Options terminated in closing transactions -
Australian Dollars (1,099) (7,427)
SwissFranc/Deutsche Marks (3,215) (19,648)
------ ---------
OUTSTANDING, END OF PERIOD 7,499 $ 52,297
====== =========
OUTSTANDING, END OF PERIOD CONSIST OF:
SwissFranc/Deutsche Marks 7,499 $ 52,297
====== =========
At May 31, 1997, the Fund had sufficient cash and/or securities at least equal
to the value of the written options.
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 6/30/97 - 9/30/97 DEM 13,440,685 $ 7,992,573 $ 7,938,278 $ 54,295
6/30/97 - 9/30/97 ESP 559,514,077 3,907,707 3,877,032 30,675
6/30/97 JPY 54,123,513 457,067 467,411 (10,344)
----------- ----------- --------
$12,357,347 $12,282,721 $ 74,626
=========== =========== ========
Purchases 9/30/97 CHF 6,881,142 $ 4,949,258 $ 4,946,357 $ (2,901)
9/30/97 DKK 13,439,836 2,101,288 2,082,624 (18,664)
6/30/97 ESP 371,922,402 2,610,165 2,575,563 (34,602)
6/30/97 IEP 126,980 201,632 191,877 (9,755)
6/30/97 ITL 4,799,858,035 2,842,446 2,836,716 (5,730)
6/30/97 SEK 2,047,259 291,624 264,555 (27,069)
----------- ----------- --------
$12,996,413 $12,897,692 $(98,721)
=========== =========== ========
</TABLE>
Foward foreign currency purchases and sales under master netting arrangements
and closed forward currency exchange contracts, excluded from above, amounted to
a net receivable of $151,452 with Banker's Trust, $471,152 with Merrill Lynch,
$178,451 with Deutschebank, $8,848 with Morgan Stanley, and $434,215 with Swiss
Bank Corp. and a net payable of $177,937 with First Boston, $487 with Goldman
Sachs, Co., and $865 with Chase Manhattan Bank at May 31, 1997.
At May 31, 1997, the Fund had sufficient cash and/or securities to cover any
commitments under these contracts.
Interest Rate Swaps
Cash Flows Cash Flows
Notional Principal Paid by the Received by the Unrealized
Expiration Amount of Contract Trust Fund Depreciation
- ------------------------------------------------------------------------------
5/22/04 ITL 3,455,000,000 ITL-LIBOR-BBA 6.6875% $30,402
=======
At May 31, 1997, the Fund has segregated sufficient cash and/or securities to
cover margin requirements on open interest rate swaps.
<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, 1997, the related statement of
operations for the six months then ended, the statement of changes in net assets
for the six months ended May 31, 1997 and the year ended November 30, 1996 and
the financial highlights for the six months ended May 31, 1997 and for each of
the years in the nine-year period ended November 30, 1996. 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, 1997 by correspondence with the custodian. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Intermediate
Income Fund at May 31, 1997, the results of its operations, the changes in its
net assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 3, 1997
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS(R) Intermediate Income Fund
Trustees Assistant Secretary
A. Keith Brodkin* - Chairman and James R. Bordewick, Jr.*
President
Custodian
Richard B. Bailey* - Private Investor; State Street Bank and Trust Company
Former Chairman and Director (until
1991), Massachusetts Financial Auditors
Services Company; Director, Cambridge Deloitte & Touche LLP
Bancorp; Director, Cambridge Trust
Company Investor Information
For MFS stock and bond market
Marshall N. Cohan - Private Investor outlooks, call toll free:
1-800-637-4458 anytime from a
Lawrence H. Cohn, M.D. - Chief of touch-tone telephone. For
Cardiac Surgery, Brigham and Women's information on MFS mutual funds,
Hospital; Professor of Surgery, call your financial adviser or, for
Harvard Medical School The Hon. Sir J. an information kit, call toll free:
David Gibbons, KBE - Chief Executive 1-800-637-2929 any business day
Officer, Edmund Gibbons Ltd.; from 9 a.m. to 5 p.m. Eastern time
Chairman, Bank of N.T. Butterfield & (or leave a message anytime).
Son Ltd.
Investor Service
Abby M. O'Neill - Private Investor; MFS Service Center, Inc. P.O. Box
Director, Rockefeller Financial 2281 Boston, MA 02107-9906 For
Services, Inc. (investment advisers) general information, call toll
free: 1-800-225-2606 any business
Walter E. Robb, III - President and day from 8 a.m. to 8 p.m. Eastern
Treasurer, Benchmark Advisors, Inc. time.
(corporate financial consultants);
President, Benchmark Consulting Group, For service to speech- or
Inc. (office services); Trustee, hearing-impaired, call toll free:
Landmark Funds (mutual funds) 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time.
Arnold D. Scott* - Senior Executive (To use this service, your phone
Vice President, Director and must be equipped with a
Secretary, Massachusetts Financial Telecommunications Device for the
Services Company Deaf.)
Jeffrey L. Shames* - President and For share prices, account balances,
Director, Massachusetts Financial and exchanges, call toll free:
Services Company 1-800-MFS-TALK (1-800-637-8255)
anytime from a touch-tone
J. Dale Sherratt - President, Insight telephone.
Resources, Inc. (acquisition planning
specialists) World Wide Web
www.mfs.com
Ward Smith - Former Chairman (until
1994), NACCO Industries; Director,
Sundstrand Corporation
[DALBAR For the third year in a row,
Investment Adviser LOGO] MFS earned a #1 ranking in the
Massachusetts Financial Services DALBAR, Inc. Broker/Dealer Survey
Company 500 Boylston Street Boston, MA Main Office Operations Service Quality
02116-3741 Category. The firm achieved a 3.48
overall score on a scale of 1 to 4 in
Distributor the 1996 survey. A total of 110 firms
MFS Fund Distributors, Inc. responded, offering input on the
500 Boylston Street quality of service they received from
Boston, MA 02116-3741 29 mutual fund companies nationwide.
The survey contained questions about
Portfolio Managers service quality in 15 categories,
Steven E. Nothern* including "knowledge of phone service
Christopher D. Piros* contacts," "accuracy of transaction
processing," and "overall ease of
Treasurer doing business with the firm."
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
*Affiliated with the Investment Adviser
<PAGE>
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MFS(R) INTERMEDIATE [DALBAR LOGO] Bulk Rate
INCOME FUND U.S. Postage
P a i d
500 Boylston Street MFS
Boston, MA 02116-3741 -------------
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MII-3 7/97 18.5M 05/205/805
