<PAGE>
[LOGO] MFS(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
November 30, 1996
MFS(R) INTERMEDIATE INCOME FUND
[GRAPHIC OMITTED]
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AMERICA LEARNS HOW "WE INVENTED THE MUTUAL FUND" (see page 27)
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<PAGE>
TABLE OF CONTENTS
Letter from the Chairman ................................................... 1
Portfolio Managers' Overview ............................................... 3
Portfolio Managers' Profiles ............................................... 5
Fund Facts ................................................................. 6
Performance Summary ........................................................ 6
Portfolio of Investments ................................................... 8
Financial Statements .......................................................10
Notes to Financial Statements ..............................................16
Independent Auditors' Report ...............................................25
The MFS Family of Funds(R) .................................................28
Trustees and Officers ......................................................29
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HIGHLIGHTS
o FOR THE 12 MONTHS ENDED NOVEMBER 30, 1996, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 6.61%, WHILE CLASS B SHARES
RETURNED 5.52%.
o THE FUND'S ALLOCATION TO GOVERNMENT AGENCY MORTGAGE-BACKED PASS-THROUGH
SECURITIES WAS INCREASED AS THIS MARKET HAS BENEFITED FROM HIGHER YIELDS,
LESS PRICE SENSITIVITY, AND LOW MORTGAGE REFINANCINGS.
o FOREIGN BOND MARKETS TURNED IN A STRONG PERFORMANCE OVER THE PAST YEAR,
WITH EACH OF THE 15 DEVELOPED FOREIGN MARKETS TRACKED BY THE J.P. MORGAN
INDICES OUTPERFORMING THE U.S. MARKET BY A SUBSTANTIAL MARGIN IN LOCAL
CURRENCY TERMS.
o THE FUND'S ALLOCATION TO FOREIGN BONDS WAS MAINTAINED NEAR THE 50% MAXIMUM
LEVEL FOR VIRTUALLY THE ENTIRE YEAR, WITH EMPHASIS ON FOUR OF THE FIVE
BEST- PERFORMING MARKETS: ITALY, SPAIN, AUSTRALIA, AND CANADA. INVESTMENTS
IN FOREIGN SECURITIES MAY PROVIDE SUPERIOR RETURNS BUT ALSO INVOLVE
GREATER RISKS.
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<PAGE>
LETTER FROM THE CHAIRMAN
- ----------------------------
[Photo of A. Keith Brodkin]
- ----------------------------
A. Keith Brodkin
Dear Shareholders:
The U.S. economy appears to have settled into a pattern of moderate growth and
inflation -- two factors that we think can be important contributors to a
favorable long-term investment climate. During the first quarter of 1996, real
(inflation-adjusted) economic growth was 2.3% on an annualized basis, followed
by a rate of 4.7% in the second quarter. However, this unexpectedly high level
was followed by a more moderate 2.0% pace during the third quarter. Overall,
real growth in gross domestic product has surpassed our expectations this year,
and we now expect that growth for all of 1996 could exceed 2.5%. While the
consumer appears to be carrying an excessive debt load, this sector, which
represents two-thirds of the economy, provided some support to the automobile
and housing markets through much of the year. Consumer spending has also been
positively impacted by widespread job growth and, more recently, modestly rising
wages. Retail sales, which have been flat for several months, appear to be
improving during the holiday shopping season. The economies of Europe and Japan,
meanwhile, continue to be in the doldrums, weakening U.S. export markets.
Finally, the capital spending plans of American corporations are far from
robust. Thus, while economic growth should continue, we expect some slackening
toward the end of the year.
In the bond markets, persistent signs of economic weakness led to decreases in
short-term interest rates by the Federal Reserve Board in late 1995 and early
1996. Should signs of more rapid economic growth and, particularly, of higher
inflation resurface, we would expect the Fed to maintain its anti- inflationary
stance. Through the middle of the year, bond markets traded in a narrow range as
investors shifted between concern for the lack of a budget resolution in
Washington and hope that sluggish economic reports and low inflation might lead
to lower interest rates. Later, fixed-income markets began reacting to
conflicting signals regarding the economy's strength with more volatile trading
patterns marked by a downward bias in interest rates. Interest rates may move
higher over the coming months, but we believe that, at current levels,
fixed-income markets are equitably valued.
Finally, as you may notice, this report to shareholders incorporates a number
of changes which we hope you will find informative and useful. Following the
Portfolio Managers' Overview, we have added new information on the Fund's
holdings. Near the back of the report, telephone numbers and addresses are
listed if you would like to contact MFS.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
December 12, 1996
<PAGE>
PORTFOLIO MANAGERS' OVERVIEW
Dear Shareholders:
While the United States enjoyed a firm employment and growth environment during
the past 12 months, many of our major trading partners experienced generally
weak economic conditions. This, coupled with favorable fiscal and political
developments, particularly in Europe, led to declining interest rates and
created opportunities to earn attractive total returns in many of the
international fixed-income markets in which the Fund has the flexibility to
invest. Whereas U.S. interest rates rose during the past year, interest rates in
many foreign economies declined sharply. For example, two-year U.S. Treasury
yields, which were at 5.37% on December 1, 1995, increased to 5.59% by the end
of November 1996, while yields on 10-year Treasuries rose from 5.75% to 6.05%.
Yields on one-year government bonds in Italy, by way of comparison, declined
from 11.43% to 7.56% over the same period. The ability to allocate up to 50% of
its assets in international fixed-income markets benefited the Fund, helping to
diversify the risk experienced in U.S.
Treasuries and adding to its performance.
The Fund's net asset value (NAV), which stood at $8.59 for Class A shares and
$8.58 for Class B shares on November 30, 1995, declined to $8.57 for both Class
A and Class B shares as of November 30, 1996. When combined with the
reinvestment of distributions, this represents a total return of 6.61% for Class
A shares and 5.52% for Class B shares for the 12 months ended November 30, 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) returned 5.66%; the Lehman
Brothers Mortgage Index (which includes maturities of both 15 and 30 years)
returned 7.22%; 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) returned 7.13%.
Our overall portfolio strategy in the past 12 months has been to maintain
reduced exposure to U.S. securities in favor of the international markets. The
portion of the portfolio allocated to international securities was increased
from approximately 36% to about 43%. Our strategy has also been to 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.
U.S. Government Sector
Within the U.S. portion of the portfolio, the allocation to government agency
mortgage-backed pass-through securities was increased and is currently at 42.6%.
Over the past year, mortgage securities have returned 7.15%, approximately 1.52%
more than the relevant Treasury/government-sponsored universe. There are several
factors which helped this sector's performance. First, issues held in the
portfolio yield approximately 1.0% to 1.4% more than their Treasury counterparts
(although principal value and interest on Treasury securities are guaranteed by
the U.S. government if held to maturity). Given that yield spreads have remained
somewhat constant over the past year, this yield advantage has flowed through to
portfolio returns. Second, the mortgage universe is less price sensitive than
the Treasury universe. This factor helped maintain value during the bond market
sell-off that occurred in the early part of the year. Finally, mortgage
refinancings have remained quite low despite the strong housing market. Low
refinancings give investors confidence that expected yields will be realized for
their portfolios. Moving forward, we remain optimistic about the mortgage
sector. Yield spreads versus U.S. Treasuries are attractive relative to other
sectors. Foreign buyers have emerged and U.S. agencies continue to be aggressive
and opportunistic buyers. The one factor to monitor closely is a new and
vigorous refinancing wave. This possibility exists in an environment which has
brought U.S. Treasury 10-year yields significantly through 6.0%.
Our ability to invest in both Treasury 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 turned in a strong performance over the past year. Each of
the 15 developed foreign markets tracked by the J.P. Morgan indices outperformed
the U.S. market by a substantial margin in local currency terms. The
high-yielding European markets -- Italy (up 26.47%), Spain (up 23.41%), and
Sweden (up 18.58%) -- led the pack, with Canada close behind. Most yield curves
steepened over the year, reflecting official rate cuts induced by slow growth
and benign inflation. The U.S. dollar appreciated sharply against the German
mark and the Japanese yen but lost ground against the Australian, Canadian, and
New Zealand dollars, as well as against the Italian lira.
The Fund's ability to invest up to half its assets in foreign markets allowed
it to reap substantial benefit from their strength. The allocation to foreign
bonds was maintained near the 50% maximum level for virtually the entire year,
with emphasis on four of the five best-performing markets: Italy, Spain,
Australia, and Canada. The Fund also benefited from our decision to limit
exposure to foreign currencies other than the Canadian, Australian, and New
Zealand dollars.
We anticipate that European markets will continue to offer the best
opportunities for capital appreciation going forward. However, the view is
becoming more balanced as growth in Europe picks up and U.S. growth appears to
be slowing somewhat. Efforts to meet the fiscal austerity criteria of the
proposed European Monetary Union (EMU) imply that continental central banks may
retain a bias toward accommodative monetary policy. In this environment, we
expect the higher-yielding markets to continue to outperform as long as the
prospect of membership in the EMU remains alive. We also expect the dollar to
remain well supported versus European currencies. Canada and Australia remain
attractive by virtue of their high real (inflation-adjusted) yields and
improving fundamentals. Firmer growth in the Japanese economy makes Japanese
bonds unattractive at present yield levels.
Respectfully,
/s/ Steven E. Nothern /s/ Christopher D. Piros
Steven E. Nothern Christopher D. Piros
Portfolio Manager Portfolio Manager
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PORTFOLIO MANAGERS' 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. MR.
PIROS IS A GRADUATE OF NORTHWESTERN UNIVERSITY AND HOLDS A PH.D. FROM
HARVARD UNIVERSITY.
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<PAGE>
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FUND FACTS
STRATEGY: THE FUND'S INVESTMENT OBJECTIVE IS TO PRESERVE CAPITAL
AND PROVIDE HIGH CURRENT INCOME.
COMMENCEMENT OF
INVESTMENT OPERATIONS: AUGUST 1, 1988
SIZE: $192.4 MILLION NET ASSETS AS OF NOVEMBER 30, 1996
TAX FORM SUMMARY
IN JANUARY 1997, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY
REPORTING THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE
CALENDAR YEAR 1996.
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PERFORMANCE SUMMARY
The information below and on the following page illustrates the historical
performance of MFS Intermediate Income Fund Class B shares in comparison to
various market indicators. Graph results do not reflect the deduction of any
contingent deferred sales charges (CDSC) since the CDSC is not applicable after
a six-year period. Benchmark comparisons are unmanaged and do not reflect any
fees or expenses. You cannot invest in an index. All results are historical and
assume the reinvestment of dividends and capital gains.
The performance of Class A shares will be greater or less than the line shown,
based on differences in loads and fees.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from August 1, 1988 through November 30, 1996)
Lehman J.P. Morgan
MFS Brothers Non-Dollar Lehman
Intermediate Consumer Intermediate Government Brothers
Income Fund Price Index - Government Bond Mortgage
Class B U.S. Index Index Index
------------ ------------- ------------ ----------- --------
8/88 $10,000 $10,000 $10,000 $ 9,796 $10,290
11/88 10,474 10,152 10,238 11,215 11,869
11/90 11,888 11,291 12,478 12,311 13,142
11/92 13,628 11,983 15,240 14,590 16,267
11/94 14,001 12,633 16,353 17,568 17,100
11/96 16,860 13,401 19,639 22,518 21,042
<PAGE>
PERFORMANCE SUMMARY -- continued
AVERAGE ANNUAL TOTAL RETURNS
<TABLE>
<CAPTION>
Life
1 Year 3 Years 5 Years of Fund+
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Intermediate Income Fund (Class A)
including 4.75% sales charge +1.53% + 3.89% + 4.86% + 6.29%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class A)
at net asset value +6.61% + 5.61% + 5.88% + 6.91%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class B) with CDSC +1.53% + 3.61% + 4.85% + 6.47%
- -----------------------------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class B) without CDSC +5.52% + 4.50% + 5.15% + 6.47%
- -----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Government Bond Index** +7.13% +10.97% +10.04% +11.34%
- -----------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Intermediate Government Bond
Index** +5.66% + 5.70% + 6.86% + 7.79%
- -----------------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Mortgage Index** +7.22% + 7.05% + 7.25% + 8.87%
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer Price Index* +3.42% + 2.89% + 2.88% + 3.70%
- -----------------------------------------------------------------------------------------------------------------------------------
+ For the period from the commencement of investment operations, August 1, 1988 to November 30, 1996.
* The Consumer Price Index is a popular measure of change in prices.
** Benchmark comparisions begin on August 1, 1988. Source: Lipper Analytical Services, Inc.
</TABLE>
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 B results including the contingent deferred sales charge (CDSC) reflect
the applicable CDSC, which declines over six years as follows: 4%, 4%, 3%, 3%,
2%, 1%, 0%.
Class A share performance includes the performance of the Fund's Class B
shares for periods prior to the commencement of offering of Class A shares on
September 7, 1993. Sales charges and operating expenses for Class A and Class
B shares differ. The Class B share performance, which is included within the
Class A share performance, including the sales charge, has been adjusted to
reflect the initial sales charge generally applicable to Class A shares rather
than the CDSC generally applicable to Class B shares. Class A share
performance has not been adjusted, however, to reflect differences in
operating expenses (e.g., Rule 12b-1 fees), which generally are higher for
Class B shares.
Fund results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1996
Bonds - 89.8%
- -----------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- -----------------------------------------------------------------------------
U.S. Bonds - 52.2%
U.S. Federal Agencies - 9.6%
Farm Credit Systems Financial
Assistance Co., 9.375s, 2003 $ 10,000 $ 11,742,200
Federal National Mortgage Assn.,
6.5s, 2008 63 62,779
Federal National Mortgage Assn.,
7s, 2026 6,754 6,701,454
------------
$ 18,506,433
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U.S. Government Guaranteed - 42.6%
Government National Mortgage Association - 19.7%
GNMA, 7s, 2023 - 2026 $ 12,468 $ 12,394,345
GNMA, 7.5s, 2023 - 2026 13,357 13,548,972
GNMA, 8s, 2026 4,773 4,919,592
GNMA, 8.5s, 2001 - 2009 6,827 7,140,556
------------
$ 38,003,465
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U.S. Treasury Obligations - 22.9%
U.S. Treasury Notes, 8.75s, 1997 $ 5,000 $ 5,138,300
U.S. Treasury Notes, 6.375s,
1999 5,000 5,081,250
U.S. Treasury Notes, 7.5s, 1999 7,500 7,856,250
U.S. Treasury Notes, 6.25s, 2001 4,000 4,068,120
U.S. Treasury Bonds, 14.25s,
2002 2,000 2,746,560
U.S. Treasury Bonds, 12.375s,
2004 3,500 4,826,710
U.S. Treasury Bonds, 10.375s,
2012## 10,800 14,264,424
------------
$ 43,981,614
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Total U.S. Government Guaranteed $ 81,985,079
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Total U.S. Bonds $100,491,512
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Foreign Bonds - 37.6%
Australia - 9.9%
Commonwealth of Australia, 8.75s,
2001 AUD 7,640 $ 6,654,754
Commonwealth of Australia, 9.75s,
2002 800 731,397
Commonwealth of Australia, 10s,
2002 5,500 5,120,270
Commonwealth of Australia, 9.5s,
2003 7,100 6,534,561
------------
$ 19,040,982
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Canada - 4.8%
Government of Canada, 7.5s, 2003 CAD 9,400 $ 7,713,392
Government of Canada, 9s, 2004 1,700 1,516,809
------------
$ 9,230,201
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Denmark - 9.8%
Kingdom of Denmark, 6s, 1999 DKK 16,172 $ 2,842,541
Kingdom of Denmark, 9s, 2000 24,170 4,662,507
Kingdom of Denmark, 8s, 2001 53,173 9,986,417
Kingdom of Denmark, 7s, 2007 7,855 1,356,656
------------
$ 18,848,121
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Ireland - 2.8%
Republic of Ireland, 8s, 2000 IEP 3,000 $ 5,417,902
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Mexico - 1.4%
United Mexican States, 7.563s,
2001# $ 2,750 $ 2,754,675
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Spain - 2.6%
Government of Spain, 10.1s, 2001 ESP 576,400 $ 5,071,929
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Sweden - 0.7%
Kingdom of Sweden, 10.25s, 2000 SEK 8,200 $ 1,391,937
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United Kingdom - 5.6%
United Kingdom Treasury, 9s, 2000 GBP 1,400 $ 2,495,333
United Kingdom Treasury, 7s, 2001 1,500 2,517,567
United Kingdom Treasury, 9.75s,
2002 3,000 5,646,597
------------
$ 10,659,497
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Total Foreign Bonds $ 72,415,244
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Total Bonds (Identified Cost, $168,599,701) $172,906,756
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Short-Term Obligations - 6.8%
- -----------------------------------------------------------------------------
Bangchak Petroleum, due 2/10/97 THB 25,000 $ 960,107
Eurolira Time Deposit, due 4/21/97 ITL 6,990,000 4,632,542
Eurolira Time Deposit, due 5/12/97 7,000,000 4,625,313
IFCT, due 2/05/97 THB 75,000 2,882,481
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Total Short-Term Obligations (Identified Cost, $12,993,189) $ 13,100,443
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Repurchase Agreement - 1.7%
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Investment in repurchase
agreements with Goldman Sachs,
in a joint trading account
($143,939,000 par), dated
11/29/96, due 12/02/ 96, total
to be received by the Fund
$3,246,531 collateralized by
various U.S. Treasury
obligations (with $141,990,000
par and valued at $146,817,903),
at Cost $ 3,245 $ 3,245,000
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Total Investments (Identified Cost, $184,837,890) $189,252,199
Other Assets, Less Liabilities - 1.7% 3,186,008
- -----------------------------------------------------------------------------
Net Assets - 100.0% $192,438,207
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#SEC Rule 144A restriction.
##Security segregated as collateral for interest rate swaps.
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 IEP = Irish Punts
CAD = Canadian Dollars ITL = Italian Lire
DEM = Deutsche Marks JPY = Japanese Yen
DKK = Danish Kroner SEK = Swedish Kronor
ESP = Spanish Pesetas THB = Thai Baht
GBP = British Pounds
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1996
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $184,837,890) $189,252,199
Cash 217
Net receivable for forward foreign currency exchange
contracts sold 252,392
Receivable for Fund shares sold 22,581
Interest receivable 4,000,278
Receivable for interest rate swaps 308,144
Other assets 12,919
------------
Total assets $193,848,730
------------
Liabilities:
Payable for Fund shares reacquired $ 208,172
Net payable for forward foreign currency exchange contracts
purchased 211,951
Net payable for closed forward foreign currency exchange
contracts 727,444
Payable to affiliates -
Management fee 5,052
Shareholder servicing agent fee 3,350
Distribution fee 85,858
Accrued expenses and other liabilities 168,696
------------
Total liabilities $ 1,410,523
------------
Net assets $192,438,207
============
Net assets consist of:
Paid-in capital $193,399,630
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 4,030,797
Accumulated net realized loss on investments and foreign
currency transactions (4,226,363)
Accumulated distributions in excess of net investment income (765,857)
------------
Total $192,438,207
============
Shares of beneficial interest outstanding 22,442,998
==========
Class A shares:
Net asset value per share
(net assets of $21,290,540 / 2,483,240 shares of
beneficial interest outstanding) $ 8.57
======
Offering price per share (100 / 95.25) $ 9.00
======
Class B shares:
Net asset value and offering price per share
(net assets of $171,147,667 / 19,959,758 shares of
beneficial interest outstanding) $ 8.57
======
On sales of $100,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Interest income $16,534,707
-----------
Expenses -
Management fee $ 1,615,538
Trustees' compensation 39,582
Shareholder servicing agent fee (Class A) 25,102
Shareholder servicing agent fee (Class B) 435,879
Distribution and service fee (Class B) 1,981,267
Custodian fee 190,109
Auditing fees 76,516
Postage 48,176
Printing 32,937
Legal fees 4,593
Miscellaneous 172,427
-----------
Total expenses $ 4,622,126
Fees paid indirectly (6,321)
-----------
Net expenses $ 4,615,805
-----------
Net investment income $11,918,902
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 1,986,836
Written option transactions 58,800
Foreign currency transactions 861,918
Interest rate swaps 337,499
Futures contracts (129,006)
-----------
Net realized gain on investments and foreign currency
transactions $ 3,116,047
-----------
Change in unrealized appreciation (depreciation) -
Investments $(1,289,851)
Written options (42,826)
Translation of assets and liabilities in foreign currencies (3,325,433)
Interest rate swaps 308,144
-----------
Net unrealized loss on investments and foreign currency $(4,349,966)
-----------
Net realized and unrealized loss on investments and
foreign currency $(1,233,919)
-----------
Increase in net assets from operations $10,684,983
===========
See notes to financial statements
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
- -------------------------------------------------------------------------------
Year Ended November 30, 1996 1995
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 11,918,902 $ 15,585,592
Net realized gain (loss) on foreign currency
transactions 3,116,047 1,098,197
Net unrealized gain (loss) on investments
and foreign currency translation (4,349,966) 18,956,882
------------ ------------
Increase in net assets from operations $ 10,684,983 $35,640,671
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $(1,050,116) $(465,663)
From net investment income (Class B) (10,868,786) (15,003,559)
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 $(11,995,927) $(15,469,222)
------------ ------------
Fund share (principal) transactions -
Net proceeds from sale of shares $22,417,332 $19,596,804
Net asset value of shares issued to
shareholders in reinvestment of
distributions 6,417,230 7,773,413
Cost of shares reacquired (80,056,025) (98,621,737)
------------ ------------
Decrease in net assets from Fund share
transactions $(51,221,463) $(71,251,520)
------------ ------------
Total decrease in net assets $(52,532,407) $(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 $765,857 and $3,713,924,
respectively) $192,438,207 $244,970,614
============ ============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -----------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994 1993*
- -----------------------------------------------------------------------------
Class A
- -----------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 8.59 $ 7.96 $ 8.94 $ 9.11
------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.55 $ 0.57 $ 0.59 $ 0.11
Net realized and unrealized
gain (loss) on investments
and foreign currency
transactions (0.01) 0.61 (0.95) (0.17)
------ ------ ------ ------
Total from investment
operations $ 0.54 $ 1.18 $(0.36) $(0.06)
------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income(++) $(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 $(0.56) $(0.55) $(0.62) $(0.11)
------ ------ ------ ------
Net asset value - end of period $ 8.57 $ 8.59 $ 7.96 $ 8.94
====== ====== ====== ======
Total return(+) 6.61% 15.40% (4.27)% (0.66)%++
Ratios (to average net assets)/
Supplemental data:
Expenses## 1.17% 1.14% 1.18% 1.22%+
Net investment income 6.58% 6.81% 7.10% 6.43%+
Portfolio turnover 288% 275% 211% 376%
Net assets at end of period
(000 omitted) $21,291 $12,659 $3,432 $258
*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.
(++)The Fund had distributions in excess of net investment income of $0.003 for
the year ended November 30, 1996.
See notes to financial statements
<PAGE>
Financial Highlights - continued
- --------------------------------------------------------------------------------
Year Ended November 30, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------
Class B
- --------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value -
beginning of period $ 8.58 $ 7.96 $ 8.93 $ 8.88 $ 9.31
------ ------ ------ ------ ------
Income from investment
operations# -
Net investment income $ 0.46 $ 0.48 $ 0.47 $ 0.47 $ 0.62
Net realized and
unrealized gain (loss) on
investments and foreign
currency transactions (0.01) 0.61 (0.92) 0.26 (0.26)
------ ------ ------ ------ ------
Total from investment
operations $ 0.45 $ 1.09 $(0.45) $ 0.73 $ 0.36
------ ------ ------ ------ ------
Less distributions declared
to shareholders -
From net investment income
(++) $(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 $(0.46) $(0.47) $(0.52) $(0.68) $(0.79)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.57 $ 8.58 $ 7.96 $ 8.93 $ 8.88
====== ====== ====== ====== ======
Total return 5.52% 14.12% (5.24)% 8.42% 3.93%
Ratios (to average net assets)/
Supplemental data:
Expenses## 2.24% 2.23% 2.22% 2.15% 2.20%
Net investment income 5.47% 5.79% 5.60% 5.19% 6.70%
Portfolio turnover 288% 275% 211% 376% 372%
Net assets at end of period
(000 omitted) $171,148 $232,312 $292,619 $466,955 $347,588
#Per share data for the periods subsequent to November 30, 1993 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 income of $0.003 for
the year ended November 30, 1996.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- -----------------------------------------------------------------------------
Year Ended November 30, 1991 1990 1989 1988**
- -----------------------------------------------------------------------------
Class B
- -----------------------------------------------------------------------------
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.
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 (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. 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.
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 value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investment 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 equity index 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 the cash is being invested. Should interest 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.
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. During the year ended November 30, 1996, $3,025,092 was reclassified from
accumulated distributions in excess of net investment income and $2,508,126 and
$516,966 were reclassified to accumulated net realized loss on investments and
foreign currency transactions and paid-in capital, respectively, due to
differences between book and tax accounting for investment losses and currency
transactions. At November 30, 1996, accumulated distributions in excess of net
investment income and accumulated net realized loss on investments and foreign
currency transactions under book accounting were different for tax accounting
due to temporary differences in accounting for capital loss carryforward. This
change had no effect on the net assets or net asset value per share.
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 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 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 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 $10,007 for the year ended
November 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$3,770 for the year ended November 30, 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 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 $57,872 for Class B shares for the year
ended November 30, 1996. Fees incurred under the distribution plan during the
year ended November 30, 1996 were 1.00% of average daily net assets attributable
to Class B shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases 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 year ended November 30, 1996 were $52 and $468,472
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 $291,716,596 $334,988,401
============ ============
Investments (non-U.S. government securities) $210,524,540 $232,202,385
============ ============
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 $184,837,890
============
Gross unrealized appreciation $ 5,668,072
Gross unrealized depreciation (1,253,763)
------------
Net unrealized appreciation $ 4,414,309
============
(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:
Class A Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 1,756,734 $ 14,794,352 1,267,467 $ 10,593,433
Shares issued to
shareholders in
reinvestment of
distributions 82,176 689,249 37,313 309,025
Shares reacquired (829,744) (6,965,804) (261,755) (2,164,838)
--------- ------------- --------- -------------
Net increase 1,009,166 $ 8,517,797 1,043,025 $ 8,737,620
========= ============= ========= =============
Class B Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
--------------------------- ----------------------------
Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 904,517 $ 7,622,980 1,088,366 $ 9,003,371
Shares issued to
shareholders in
reinvestment of
distributions 681,076 5,727,981 909,234 7,464,388
Shares reacquired (8,687,569) (73,090,221) (11,699,599) (96,456,899)
---------- ----------- ----------- -----------
Net decrease (7,101,976) $(59,739,260) (9,701,999) $(79,989,140)
========== ============ ========== ============
(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 year ended November
30, 1996 was $2,294.
(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 do 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
November 30, 1996 is as follows:
<TABLE>
<CAPTION>
Written Option Transactions
1996 Calls 1996 Puts
---------------------------- ----------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- ----------------------------------------------------------------------------------------------------------------
OUTSTANDING, BEGINNING OF PERIOD -
<S> <C> <C> <C> <C>
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)
Canadian Dollars -- -- (4,816) (10,779)
----- -------- ------- --------
OUTSTANDING, END OF PERIOD -- $ -- -- $ --
===== ======== ======= ========
<CAPTION>
Forward Foreign Currency Exchange Contracts
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange for at Value (Depreciation)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales 2/20/97 AUD 2,288,642 $ 1,812,559 $ 1,861,719 $ (49,160)
2/05/97 - 2/10/97 DEM 345,719 230,945 225,695 5,250
12/12/96 ESP 1,383,100,201 10,890,553 10,655,404 235,149
2/05/97 - 2/10/97 JPY 51,070,958 461,748 452,923 8,825
2/03/97 SEK 18,660,467 2,833,783 2,781,455 52,328
----------- ----------- --------
$16,229,588 $15,977,196 $ 252,392
=========== =========== =========
Purchases 2/20/97 CAD 10,605,592 $ 7,979,261 $ 7,905,376 $ (73,885)
12/12/96 DEM 12,277,558 8,100,790 7,987,276 (113,514)
2/03/97 SEK 10,821,530 1,637,566 1,613,014 (24,552)
----------- ----------- --------
$17,717,617 $17,505,666 $(211,951)
=========== =========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting arrangements
and closed forward foreign currency exchange contracts, excluded from above,
amounted to a net payable of $112,587 with Banker's Trust, $23,360 with Chase
Manhattan Bank, $437,068 with Deutschebank and $283,455 with Swiss Bank Corp.
and a net receivable of $129,026 with Merrill Lynch at November 30, 1996.
At November 30, 1996, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<TABLE>
<CAPTION>
Interest Rate Swaps
Notional Principal Cash Flows Cash Flows Unrealized
Expiration Amount of Contract Paid by the Fund Received by the Fund Appreciation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
10/22/01 ITL 6,990,000,000 ITL-LIBOR-BBA 8.055% $308,144
-------
</TABLE>
At November 30, 1996, 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 November 30,
1996, the related statement of operations for the year then ended, the statement
of changes in net assets for the years ended November 30, 1996 and 1995, and the
financial highlights 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
November 30, 1996 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 November 30, 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
January 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
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES ASSISTANT SECRETARY
A. Keith Brodkin* - Chairman and President James R. Bordewick, Jr.*
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), CUSTODIAN
Massachusetts Financial Services Company; State Street Bank and Trust Company
Director, Cambridge Bancorp;
Director, Cambridge Trust Company AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital; INVESTOR INFORMATION
Professor of Surgery, Harvard Medical School For MFS stock and bond market outlooks,
The Hon. Sir J. David Gibbons, KBE - Chief call toll free: 1-800-637-4458 anytime from
Executive Officer, Edmund Gibbons Ltd.; a touch-tone telephone.
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill - Private Investor; For information on MFS mutual funds,
Director, Rockefeller Financial Services, Inc. call your financial adviser or, for an
(investment advisers) information kit, call toll free:
Walter E. Robb, III - President and Treasurer, 1-800-637-2929 any business day from
Benchmark Advisors, Inc. (corporate financial 9 a.m. to 5 p.m. Eastern time (or leave
consultants); President, Benchmark Consulting a message anytime).
Group, Inc. (office services); Trustee,
Landmark Funds (mutual funds) INVESTOR SERVICE
Arnold D. Scott* - Senior Executive Vice MFS Service Center, Inc.
President, Director and Secretary, P.O. Box 2281
Massachusetts Financial Services Company Boston, MA 02107-9906
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company For general information, call toll free:
J. Dale Sherratt - President, Insight 1-800-225-2606 any business day from
Resources, Inc. 8 a.m. to 8 p.m. Eastern time.
(acquisition planning specialists)
Ward Smith - Former Chairman (until 1994), For service to speech- or hearing-impaired,
NACCO Industries; Director, Sundstrand call toll free: 1-800-637-6576 any business
Corporation day from 9 a.m. to 5 p.m. Eastern time.
(To use this service, your phone must be equipped
INVESTMENT ADVISER with a Telecommunications Device for the Deaf.)
Massachusetts Financial Services Company
500 Boylston Street For share prices, account balances and
Boston, MA 02116-3741 exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
DISTRIBUTOR telephone.
MFS Fund Distributors, Inc.
500 Boylston Street WORLD WIDE WEB
Boston, MA 02116-3741 www.mfs.com
PORTFOLIO MANAGERS TOP RATED SERVICE
Steven E. Nothern* For the third year in a row,
Christopher D. Piros* [DALBAR MFS earned a #1 ranking in the
LOGO] DALBAR, Inc. Broker/Dealer
TREASURER Survey, Main Office Operations
W. Thomas London* Service Quality Category. The
firm achieved a 3.48 overall score on a
ASSISTANT TREASURER scale of 1 to 4 in the 1996 survey. A total
James O. Yost* of 110 firms responded, offering input on the
quality of service they received from 29
SECRETARY mutual fund companies nationwide. The survey
Stephen E. Cavan* contained questions about service quality in
15 categories, including "knowledge of phone
service contracts," "accuracy of transaction
processing," and "overall ease of doing
business with the firm."
*Affiliated with the Investment Adviser
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MFS(R) INTERMEDIATE -------------
INCOME FUND [DALBAR BULK RATE
LOGO] U.S. POSTAGE
500 Boylston Street TOP-RATED SERVICE P A I D
Boston, MA 02116 PERMIT #55638
BOSTON, MA
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[LOGO]
INVESTMENT MANAGEMENT
We invented the mutual fund(TM)
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MII-2 1/97 17M 5/205
