<PAGE>
[LOGO] M F S(SM) Annual Report
INVESTMENT MANAGEMENT for Year Ended
November 30, 1997
MFS(R) INTERMEDIATE INCOME FUND
[Graphic Omitted]
LEARNING FINANCIAL BASICS THE EASY WAY (see page 27)
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Portfolio Managers' Overview .............................................. 2
Portfolio Managers' Profiles .............................................. 4
Fund Facts ................................................................ 5
Performance Summary ....................................................... 5
Portfolio Concentration ................................................... 7
Tax Form Summary .......................................................... 7
Portfolio of Investments .................................................. 8
Financial Statements ...................................................... 10
Notes to Financial Statements ............................................. 17
Independent Auditors' Report .............................................. 26
The ABCs of Investing ..................................................... 27
The MFS Family of Funds(R) ................................................ 28
Trustees and Officers ..................................................... 29
HIGHLIGHTS
o FOR THE 12 MONTHS ENDED NOVEMBER 30, 1997, CLASS A SHARES OF THE FUND
PROVIDED A TOTAL RETURN AT NET ASSET VALUE OF 4.59%, CLASS B SHARES 3.57%,
AND CLASS I SHARES 4.06%. (SEE PERFORMANCE SUMMARY FOR MORE INFORMATION.)
o WHILE U.S. ECONOMIC DATA STILL INDICATE A HEALTHY COMBINATION OF ROBUST
GROWTH AND LOW INFLATION, THE UPHEAVALS IN SOUTHEAST ASIA SUGGEST A
MODERATION OF BOTH GLOBAL GROWTH AND INFLATION EXPECTATIONS.
o BY REPOSITIONING THE FUND'S U.S. TREASURY EXPOSURE BETWEEN CASH AND LONGER
MATURITIES, WHILE SOMEWHAT REDUCING THE ALLOCATION TO INTERMEDIATE
MATURITIES, WE BELIEVE WE CAN REDUCE THE PORTFOLIO'S OVERALL INTEREST-RATE
SENSITIVITY.
o OVER THE PAST YEAR, WE HAVE GRADUALLY REDUCED THE FUND'S EXPOSURE TO FOREIGN
MARKETS FROM THE 50% ALLOWABLE MAXIMUM TO ROUGHLY 15%, AS U.S. INTEREST
RATES HAVE BECOME INCREASINGLY ATTRACTIVE FROM A GLOBAL PERSPECTIVE.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of A. Keith Brodkin]
Dear Shareholders:
An unprecedented combination of generally positive factors has helped the U.S.
economy enjoy a sustained period of relative stability and moderate growth in
which thousands of new jobs have been created every month, inflation remains
under control, and the investment climate -- at least until now -- has been
favorable. For example, the increased use of technology and other productivity
enhancements, as well as corporate restructuring and global competition, is
improving companies' balance sheets and helping control inflation. Meanwhile,
borrowing by corporations and governments continues to decline, while consumer
confidence is increasing, although consumer debt levels are still uncomfortably
high. The rapid pace of growth seen in the first quarter slowed to an annual
rate of 3.3% in the second quarter and 3.5% in the third. We believe economic
momentum will carry well into the first quarter of 1998, as the money supply is
increasing at a rapid rate. Because economic growth continues to be impressive,
markets are likely to continue to focus on the Federal Reserve Board's (the
Fed's) willingness to raise interest rates.
The U.S. government bond market has benefited from the deflationary events in
Asia, while the high-yield and emerging-debt markets have come under severe
pressure. Inflation remains under control, and the Fed will most likely take a
wait-and-see attitude toward raising interest rates. As a result, our near-term
outlook for high-grade markets is neutral to moderately positive. At the same
time, high-yield markets, having gone through a substantial correction, could
offer reasonable value but require careful selection. Overall, fixed-income
markets appear to be reasonably valued.
We appreciate your support and welcome any questions or comments you may have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
December 15, 1997
<PAGE>
PORTFOLIO MANAGERS' OVERVIEW
Dear Shareholders:
For the 12 months ended November 30, 1997, Class A shares of the Fund provided a
total return of 4.59%, Class B shares 3.57%, and Class I shares 4.06%. These
returns assume the reinvestment of distributions but exclude the effects of any
sales charges and compare to a 6.29% return for 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); a
7.94% return for the Lehman Brothers Mortgage Index (which includes maturities
of both 15 and 30 years); and a -3.39% return for the J.P. Morgan Non-Dollar
Government Bond Index (an aggregate of actively traded government bonds issued
by 12 countries, excluding the United States, with remaining maturities of at
least one year).
U.S. economic momentum remains firm, with almost all recent data still
suggesting a healthy combination of robust growth and low inflation. However, as
the upheavals in Southeast Asia have broadened to the entire region, at the very
least the data suggest a moderation of both global growth and inflation
expectations. In the very near term, we believe weaker Asian currencies will
help keep a lid on U.S. inflation and will slow export growth. Just how much of
an impact these events will have longer term on U.S. growth and earnings,
however, remains uncertain. They do, though, suggest that the Fed will stay its
hand, at least into 1998, as officials evaluate the impact of these events on
the U.S. economy.
Clearly, the United States stands out as attractive given recent market turmoil
around the globe. Domestic fundamentals are strong, inflation remains subdued
and, on a relative basis, U.S. yields stand out. For this reason, we have
increased the Fund's U.S. allocation to approximately 80% of the portfolio.
Yield levels on 10-year maturity U.S. Treasuries, which had climbed to as high
as 7.00% in April 1997, have more recently declined to approximately 5.80%, near
their low for the year. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) An investment in 10-year
Treasuries would have produced a total return of 7.59% over the past 12 months.
Similarly, yields on two-year Treasury securities, which peaked at 6.50% during
April, declined to 5.60% more recently and would have produced a total return of
5.86%. Although many global trends continue to provide a very positive backdrop
for our market, we believe caution is still warranted as our economy approaches
full capacity.
U.S. Government Sector
Earlier in 1997, strong economic momentum led the Fed to raise short-term
interest rates slightly in order to forestall inflationary pressures. In
anticipation of the March tightening of monetary policy, our strategy has been
to reduce our allocation to intermediate-maturity (4-7 year) Treasuries and
increase our allocation to very short-maturity Treasuries, offset by a slightly
greater emphasis on longer-maturity 10-year Treasuries. Although the extent of
additional Fed action over the next several months remains uncertain, we believe
the Fed could eventually see a need for further modest tightening. Should it
choose to raise interest rates, short- and intermediate- maturity securities
will be the most adversely affected. By repositioning our Treasury exposure
between cash and longer maturities, while reducing exposure to intermediate
maturities, we believe we can reduce the overall impact to the portfolio of a
Fed move.
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. An index, or average, allocation to this sector would be about
36%. Over the course of the year our weighting of this sector was neutral, but
we will add to it as opportunities present themselves.
International Sector
Over the past year, we have gradually reduced the Fund's exposure to foreign
markets from the 50% allowable maximum to roughly 15%, as U.S. interest rates
have become increasingly attractive from a global perspective. Throughout this
process, we continued to emphasize the higher-yielding European and dollar- bloc
markets. According to the J.P. Morgan indices, these markets, such as Italy,
Spain, the United Kingdom, and Australia, provided the best local currency
performance among the major sovereign bond markets. Core Europe and Japan lagged
the U.S. market. The Fund also benefited from our decision to hedge most of its
foreign assets back into the U.S. dollar, which appreciated sharply against all
major currencies except the British pound. The Fund's 10% allocation to emerging
market instruments was a mixed blessing. For most of the year, the Fund
benefited from tightening spreads and high current income from this sector.
However, the Fund's holdings in Thailand suffered a sharp loss in value at the
beginning of the currency crisis that has spread throughout Asia in the past few
months.
The Asian crisis has created concern that global growth will slow sharply in
1998 and has reinforced the market's confidence that inflation will remain low,
if not decline. We believe there is little doubt that the recovery process in
Asia will be slow and painful, but the magnitude of its impact on the rest of
the world remains to be seen. Overall, the turmoil has changed our outlook for
the developed bond markets very little. In our view, slower global growth and
lower inflation should support core markets such as Germany and the United
States and provide the potential for a further rally if the downturn is more
severe than the market currently expects. We still believe European monetary
union will proceed on schedule with a broad group of participants. Our
investments in Italy and Sweden should therefore benefit from further spread
tightening. Since Australia and New Zealand are particularly vulnerable to a
recession in Asia, we remain quite positive on these markets. In response to the
turmoil in the emerging markets, we recently cut our exposure there to roughly
5% of the portfolio. As the crisis unfolds, we will be looking for opportunities
to acquire assets at attractive valuations.
The U.S. dollar is currently subject to strong countervailing forces. It is
supported by the flight to quality, the productivity of U.S. assets, and
strong U.S. growth. However, concern over the impact of the Asian crisis on
the already large U.S. current-account deficit limits the potential for
further appreciation. For now, the Fund remains fully hedged back into the
dollar.
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 THE MFS FIXED INCOME DEPARTMENT IN 1986 AND WAS NAMED
VICE PRESIDENT IN 1989 AND SENIOR VICE PRESIDENT IN 1993. A GRADUATE OF
MIDDLEBURY COLLEGE, HE HOLDS A MASTER OF BUSINESS ADMINISTRATION DEGREE FROM
BOSTON UNIVERSITY AND IS A CHARTERED FINANCIAL ANALYST AND A MEMBER OF THE
BOSTON SECURITY ANALYSTS SOCIETY, INC. HE HAS MANAGED MFS(R) INTERMEDIATE INCOME
FUND SINCE 1992.
CHRISTOPHER D. PIROS JOINED MFS IN 1989 AS VICE PRESIDENT -- QUANTITATIVE
SERVICES IN THE FIXED INCOME DEPARTMENT AND WAS NAMED SENIOR VICE PRESIDENT IN
1997. A GRADUATE OF NORTHWESTERN UNIVERSITY, HE HOLDS A PH.D. FROM HARVARD
UNIVERSITY AND HAS MANAGED THE FUND SINCE 1996.
<PAGE>
FUND FACTS
OBJECTIVE: THE FUND'S INVESTMENT OBJECTIVE IS TO PRESERVE
CAPITAL AND PROVIDE HIGH CURRENT INCOME.
COMMENCEMENT OF INVESTMENT OPERATIONS: AUGUST 1, 1988
CLASS INCEPTION: CLASS A SEPTEMBER 7, 1993
CLASS B AUGUST 1, 1988
CLASS I JANUARY 2, 1997
SIZE: $150.3 MILLION NET ASSETS AS OF NOVEMBER 30, 1997
PERFORMANCE SUMMARY
The information below illustrates the historical performance of MFS Intermediate
Income Fund -- Class B shares in comparison to various market indicators. Class
B share performance results do not reflect the deduction of any contingent
deferred sales charges; benchmark comparisons are unmanaged and do not reflect
any fees or expenses. The performance of other share classes will be greater
than or less than the line shown, based on differences in charges and fees paid
by shareholders investing in different classes. It is not possible to invest
directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the period from August 1, 1988, through November 30, 1997)
MFS Lehman J.P. Morgan Lehman Brothers Consumer
Intermediate Brothers Non-Dollar Intermediate Price
Income Fund Mortgage Government Goverment Index
-- Class B Index Bond Index Bond Index -- U.S.
- --------------------------------------------------------------------------------
8/88 $10,000 $10,000 $10,000 $10,000 $10,000
11/91 13,113 14,907 13,677 14,094 11,629
11/93 14,775 17,236 16,819 16,629 12,304
11/95 15,978 19,722 21,456 18,587 12,957
11/97 17,461 22,827 22,208 20,872 13,671
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS AS OF NOVEMBER 30, 1997
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years Life of Fund*
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MFS Intermediate Income Fund (Class A)
including 4.75% sales charge (SEC results) -0.40% + 7.01% +4.99% +6.10%
- ------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class A)
at net asset value +4.59% + 8.77% +6.02% +6.66%
- ------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class B)
with CDSC (SEC results) -0.35% + 6.77% +4.77% +6.15%
- ------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class B)
at net asset value +3.57% + 7.64% +5.08% +6.15%
- ------------------------------------------------------------------------------------------------------------
MFS Intermediate Income Fund (Class I)
at net asset value +4.06% + 7.81% +5.18% +6.21%
- ------------------------------------------------------------------------------------------------------------
J.P. Morgan Non-Dollar Government
Bond Index** -3.39% + 7.39% +8.32% +8.68%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Intermediate Government
Bond Index+ +6.29% + 8.47% +6.49% +8.14%
- ------------------------------------------------------------------------------------------------------------
Lehman Brothers Mortgage Index++ +7.94% +10.41% +7.29% +9.25%
- ------------------------------------------------------------------------------------------------------------
Consumer Price Index+# +2.15% + 2.67% +2.67% +3.44%
- ------------------------------------------------------------------------------------------------------------
* For the period from the commencement of the Fund's investment operations, August 1, 1988, through
November 30, 1997.
** Source: Lipper Analytical Services, Inc.
+ Source: CDA/Wiesenberger.
++ Source: AIM.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics and measures the cost
of living (inflation).
</TABLE>
All results are historical and assume the reinvestment of dividends and capital
gains. Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past performance
is no guarantee of future results.
Class A share 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 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 inception
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 initial 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 inception
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 within 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. Subsidies and waivers
may be rescinded at any time. See the prospectus for details.
PORTFOLIO CONCENTRATION AS OF NOVEMBER 30, 1997
LARGEST SECTORS
Mortgage Backed 35%
U.S. Government 32%
Other Government Agencies 15%
Foreign Governments 11%
Emerging Markets 4%
Cash 3%
TAX FORM SUMMARY
IN JANUARY 1998, SHAREHOLDERS WILL BE MAILED A TAX FORM SUMMARY REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR 1997.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1997
Bonds - 96.5%
- -------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -------------------------------------------------------------------------------
U.S. Bonds - 78.7%
U.S. Treasury Obligations - 34.7%
U.S Treasury Bonds, 13.875s, 2011 $ 4,500 $ 6,821,730
U.S. Treasury Bonds, 11.875s, 2003 2,000 2,593,120
U.S. Treasury Bonds, 12s, 2013 5,100 7,461,912
U.S. Treasury Bonds, 12.375s, 2004 3,500 4,702,565
U.S. Treasury Notes, 5.875s, 2002 2,500 2,501,550
U.S. Treasury Notes, 6.125s, 2007 12,000 12,230,640
U.S. Treasury Notes, 9.125s, 1999 6,400 6,694,976
U.S. Treasury Notes, 9.25s, 1998 9,000 9,216,540
-------------
$ 52,223,033
- -------------------------------------------------------------------------------
U.S. Federal Agencies - 24.2%
Federal Home Loan Mortgage Corp., 7.5s, 2099 $ 3,948 $ 4,032,299
Federal National Mortgage Assn., 6.65s, 2002 2,000 2,000,000
Federal National Mortgage Assn., 7s, 2026 13,301 13,325,959
Federal National Mortgage Assn., 7.5s, 2003 3,052 3,110,682
Federal National Mortgage Assn., 7.55s, 2007 2,000 2,043,440
Federal National Mortgage Assn., 6.5s, 2008 52 51,846
Guaranteed Trade Trust, 7.39s, 2006 11,250 11,802,038
-------------
$ 36,366,264
- -------------------------------------------------------------------------------
Government National Mortgage Association - 19.1%
GNMA, 7s, 2023 - 2024 $ 3,044 $ 3,061,115
GNMA, 7.5s, 2023 - 2026 14,728 15,028,946
GNMA, 8s, 2026 4,457 4,609,298
GNMA, 8.5s, 2003 - 2009 5,667 5,944,011
-------------
$ 28,643,370
- -------------------------------------------------------------------------------
U.S. Government Guaranteed - 0.7%
Government Trust Certificates, 9.25s, 2001 $ 890 $ 948,068
- -------------------------------------------------------------------------------
Total U.S. Bonds $ 118,180,735
- -------------------------------------------------------------------------------
Foreign Bonds - 17.8%
Australia - 2.1%
Commonwealth of Australia, 9.75s, 2002 AUD 145 $ 113,742
Commonwealth of Australia, 9.5s, 2003 3,020 2,413,341
Commonwealth of Australia, 7.5s, 2005 835 618,482
-------------
$ 3,145,565
- -------------------------------------------------------------------------------
Israel - 3.4%
State of Israel, 6.625s, 2003 $ 5,000 $ 5,139,950
- -------------------------------------------------------------------------------
Italy - 2.2%
Republic of Italy, 8.5s, 2004 ITL 1,240,000 $ 820,590
Republic of Italy, 9.5s, 1999 - 2006 3,840,000 2,488,476
-------------
$ 3,309,066
- -------------------------------------------------------------------------------
Mexico - 1.1%
United Mexican States "A", 6.25s, 2019 $ 2,000 $ 1,620,000
- -------------------------------------------------------------------------------
New Zealand - 2.2%
Government of New Zealand, 8s, 2001 - 2005 NZD 5,120 $ 3,298,782
- -------------------------------------------------------------------------------
Poland - 0.6%
Government of Poland, 6.688s, 2024 PLN 1,000 $ 947,500
- -------------------------------------------------------------------------------
Russia - 0.6%
Russia Min Finance, 9.25s, 2001 $ 1,000 $ 952,000
- -------------------------------------------------------------------------------
Sweden - 1.1%
Kingdom of Sweden, 10.25s, 2000 SEK 9,800 $ 1,398,531
Kingdom of Sweden, 13s, 2001 1,200 190,150
-------------
$ 1,588,681
- -------------------------------------------------------------------------------
Thailand - 1.2%
Total Access Communication, 10.4s, 2004 THB 100,000 $ 1,786,946
- -------------------------------------------------------------------------------
United Kingdom - 2.3%
Treasury, 10s, 2003 GBP 1,800 $ 3,493,459
- -------------------------------------------------------------------------------
Venezuela - 1.0%
Venezuela Rep of, 9.25s, 2027 $ 1,700 $ 1,491,750
- -------------------------------------------------------------------------------
Total Foreign Bonds $ 26,773,699
- -------------------------------------------------------------------------------
Total Bonds (Identified Cost, $145,780,588) $ 144,954,434
- -------------------------------------------------------------------------------
Short-Term Obligations - 3.4%
- -------------------------------------------------------------------------------
Federal Home Loan Bank, due 12/01/97,
at Amortized Cost $ 5,100 $ 5,100,000
- -------------------------------------------------------------------------------
Total Investments (Identified Cost, $150,880,588) $ 150,054,434
- -------------------------------------------------------------------------------
Call Option Written - (0.2)%
- --------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE 000 OMITTED)
- -------------------------------------------------------------------------------
Swiss Francs/Deutsche Marks
March/0.847 (Premium Received, $52,298) CHF 7,499 $ (267,920)
- -------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.3% $ 484,968
- -------------------------------------------------------------------------------
Net Assets - 100.0% $ 150,271,482
- -------------------------------------------------------------------------------
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 NZD = New Zealand Dollars
CHF = Swiss Francs PLN = Polish Zloty
GBP = British Pounds SEK = Swedish Kronor
ITL = Italian Lira THB = Thai Bahts
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
NOVEMBER 30, 1997
- ------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $150,880,588) $150,054,434
Cash 99,507
Foreign currency, at value (identified cost, $70,718) 67,670
Net receivable for forward currency exchange contracts sold 181,399
Net receivable for forward foreign currency exchange
contracts closed or subject to master netting agreements 1,106,608
Receivable for Fund shares sold 89,629
Receivable for investments sold 478,271
Interest receivable 1,998,571
Receivable for interest rate swaps 32,834
Other assets 1,648
------------
Total assets $154,110,571
------------
Liabilities:
Payable for Fund shares reacquired $ 178,485
Payable for investments purchased 3,060,000
Written options outstanding, at value
(premiums received, $52,298) 267,920
Net payable for forward foreign currency exchange
contracts purchased 85,228
Payable to affiliates -
Management fee 12,395
Administrative fee 247
Shareholder servicing agent fee 2,137
Distribution and service fee 63,680
Accrued expenses and other liabilities 168,997
------------
Total liabilities $ 3,839,089
------------
Net assets $150,271,482
============
Net assets consist of:
Paid-in capital $154,900,056
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 184,149
Accumulated net realized loss on investments and foreign
currency transactions (5,771,049)
Accumulated undistributed net investment income 958,326
------------
Total $150,271,482
============
Shares of beneficial interest outstanding 17,895,499
==========
Class A shares:
Net asset value per share (net assets of $30,832,646 / 3,674,730
shares of beneficial interest outstanding) $8.39
=====
Offering price per share (100 / 95.25) $8.81
=====
Class B shares:
Net asset value and offering price per share (net assets of
$119,435,952 / 14,220,426 shares of beneficial interest
outstanding) $8.40
=====
Class I shares:
Net asset value and offering price per share (net assets of
$2,884 / 343 shares of beneficial interest outstanding) $8.41
=====
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, 1997
- -------------------------------------------------------------------------------
Net investment income:
Interest income $ 12,936,617
-------------
Expenses -
Management fee $ 1,274,191
Trustees' compensation 44,202
Shareholder servicing agent fee 196,788
Shareholder servicing agent fee (Class A) 1,927
Shareholder servicing agent fee (Class B) 32,605
Distribution and service fee (Class B) 1,417,862
Administrative fee 18,349
Custodian fee 109,539
Auditing fees 75,934
Postage 42,819
Printing 36,041
Legal fees 4,419
Miscellaneous 133,787
-------------
Total expenses $ 3,388,463
Fees paid indirectly (26,693)
-------------
Net expenses $ 3,361,770
-------------
Net investment income $ 9,574,847
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (2,990,019)
Written option transactions (22,471)
Foreign currency transactions 2,622,286
Interest rate swaps 250,391
Futures contracts (815)
-------------
Net realized loss on investments and foreign
currency transactions $ (140,628)
-------------
Change in unrealized appreciation (depreciation) -
Investments $ (5,240,463)
Written options (215,622)
Translation of assets and liabilities in foreign
currencies 1,884,747
Interest rate swaps (275,310)
-------------
Net unrealized loss on investments and foreign
currency translation $ (3,846,648)
-------------
Net realized and unrealized loss on investments
and foreign currency $ (3,987,276)
-------------
Increase in net assets from operations $ 5,587,571
=============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ----------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 9,574,847 $ 11,918,902
Net realized gain (loss) on investments and foreign
currency transactions (140,628) 3,116,047
Net unrealized loss on investments and foreign
currency translation (3,846,648) (4,349,966)
------------- -------------
Increase in net assets from operations $ 5,587,571 $ 10,684,983
------------- -------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,712,211) $ (1,050,116)
From net investment income (Class B) (7,829,003) (10,868,786)
From net investment income (Class I) (137) --
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 $ (9,541,351) $ (11,995,927)
------------- -------------
Decrease in net assets from Fund share transactions $ (38,212,945) $ (51,221,463)
------------- -------------
Total decrease in net assets $ (42,166,725) $ (52,532,407)
Net assets:
At beginning of period 192,438,207 244,970,614
------------- -------------
At end of period (including accumulated
undistributed (distributions in excess of)
net investment income of $958,326 and $(765,857),
respectively) $ 150,271,482 $ 192,438,207
============= =============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 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 $ 0.55 $ 0.55 $ 0.57 $ 0.59 $ 0.11
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.18) (0.01) 0.61 (0.95) (0.17)
------- ------- ------- ------- -------
Total from investment operations $ 0.37 $ 0.54 $ 1.18 $ (0.36) $ (0.06)
------- ------- ------- ------- -------
Less distributions declared to shareholders -
From net investment income""
$ (0.55) $ (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 $ (0.55) $ (0.56) $ (0.55) $ (0.62) $ (0.11)
------- ------- ------- ------- -------
Net asset value - end of period $ 8.39 $ 8.57 $ 8.59 $ 7.96 $ 8.94
======= ======= ======= ======= =======
Total return+ 4.59% 6.61% 15.40% (4.27)% (0.66)%**
Ratios (to average net assets)/Supplemental data:
Expenses## 1.17% 1.17% 1.14% 1.18% 1.22%*
Net investment income 6.63% 6.58% 6.81% 7.10% 6.43%*
Portfolio turnover 226% 288% 275% 211% 376%
Net assets at end of period (000 omitted) $30,833 $21,291 $12,659 $ 3,432 $ 258
* Annualized.
** Not annualized.
*** For the period from the inception of Class A shares, September 7, 1993, through November 30, 1993.
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
+ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
"" 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
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
CLASS B
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.57 $ 8.58 $ 7.96 $ 8.93 $ 8.88
----------- ----------- ----------- ----------- -----------
Income from investment operations# -
Net investment income $ 0.47 $ 0.46 $ 0.48 $ 0.47 $ 0.47
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.18) (0.01) 0.61 (0.92) 0.26
----------- ----------- ----------- ----------- -----------
Total from investment operations $ 0.29 $ 0.45 $ 1.09 $ (0.45) $ 0.73
----------- ----------- ----------- ----------- -----------
Less distributions declared to shareholders -
From net investment income"" $
$ (0.46) $ (0.46) $ (0.47) -- $ (0.45)
From net realized gain on investments
and foreign currency transactions -- -- -- -- (0.16)
Tax return of capital -- -- -- (0.52) (0.07)
----------- ----------- ----------- ----------- -----------
Total distributions declared to
shareholders $ (0.46) $ (0.46) $ (0.47) $ (0.52) $ (0.68)
----------- ----------- ----------- ----------- -----------
Net asset value - end of period $ 8.40 $ 8.57 $ 8.58 $ 7.96 $ 8.93
=========== =========== =========== =========== ===========
Total return 3.57% 5.52% 14.12% (5.24)% 8.42%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.19% 2.24% 2.23% 2.22% 2.15%
Net investment income 5.61% 5.47% 5.79% 5.60% 5.19%
Portfolio turnover 226% 288% 275% 211% 376%
Net assets at end of period (000 omitted) $ 119,436 $ 171,148 $ 232,312 $ 292,619 $ 466,955
# Per share data for the periods subsequent to November 30, 1993, are based on average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid indirectly.
"" 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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1992 1991 1990 1989 1988***
- ----------------------------------------------------------------------------------------------------------------------------
CLASS B
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 9.31 $ 9.23 $ 9.50 $ 9.77 $ 9.47
-------- -------- -------- ------- -------
Income from investment operations -
Net investment income $ 0.62 $ 0.58 $ 0.59 $ 0.68 $ 0.35
Net realized and unrealized gain (loss)
on investments and foreign currency
transactions (0.26) 0.32 (0.02) (0.08) 0.10
-------- -------- -------- ------- -------
Total from investment operations $ 0.36 $ 0.90 $ 0.57 $ 0.60 $ 0.45
-------- -------- -------- ------- -------
Less distributions declared to shareholders -
From net investment income $ (0.57) $ (0.56) $ (0.45) $ (0.85) $ (0.12)
From net realized gain on investments
and foreign currency transactions (0.15) (0.14) -- (0.02) (0.03)
From paid in capital (0.07) (0.12) (0.39) -- --
-------- -------- -------- ------- -------
Total distributions declared to
shareholders $ (0.79) $ (0.82) $ (0.84) $ (0.87) $ (0.15)
-------- -------- -------- ------- -------
Net asset value - end of period $ 8.88 $ 9.31 $ 9.23 $ 9.50 $ 9.77
======== ======== ======== ======= =======
Total return 3.93% 10.30% 6.59% 6.60% 14.21%*
Ratios (to average net assets)/Supplemental data:
Expenses 2.20% 2.24% 2.33% 2.47% 2.79%*
Net investment income 6.70% 6.65% 6.80% 7.13% 17.14%*
Portfolio turnover 372% 603% 579% 433% 120%
Net assets at end of period (000 omitted) $347,588 $196,753 $126,245 $75,039 $30,858
* Annualized.
*** For the period from the commencement of the Fund's investment operations, August 1, 1998, through November 30, 1988.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
- --------------------------------------------------------------------------------
PERIOD ENDING NOVEMBER 30, 1997***
- ------------------------------------------------------------------------------
CLASS I
- ------------------------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.43
------
Income from investment operations# -
Net investment income $ 0.61
Net realized and unrealized loss on investments and foreign
currency transactions (0.17)
------
Total from investment operations $ 0.44
------
Less distributions declared to shareholders -
From net investment income $(0.46)
------
Net asset value - end of period $ 8.41
======
Total return 5.07%** Ratios (to average net assets)/Supplemental data:
Expenses## 1.03%*
Net investment income 6.52%*
Portfolio turnover 226%
Net assets at end of period (000 omitted) $ 3
* Annualized.
** Not annualized.
*** For the period from the inception of Class I shares, January 2, 1997,
through November 30, 1997.
# Per share data are based on average shares outstanding.
## The Fund's expenses are calculated without reduction for fees paid
indirectly.
See notes to financial statements
<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, forward contracts, and
interest rate swaps, 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 foreign 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 reported at
market value using closing settlement prices. Over-the-counter options on
securities are valued by brokers. Over-the-counter currency options are valued
through the use of a pricing model which takes into account foreign currency
exchange spot and forward rates, 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 result from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Fund may also write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, the Fund realizes a gain equal to the amount of the premium received.
When a written call option is exercised or closed, the premium received is
offset against the proceeds to determine the realized gain or loss. When a
written 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 or currency or contracts based on financial indices at a
fixed price on a future date. In entering such contracts, the Fund is required
to deposit either in cash or securities an amount equal to a certain percentage
of the contract amount. Subsequent payments are made or received by the Fund
each day, depending on the daily fluctuations in the value of the underlying
security, and are recorded for financial statement purposes as unrealized gains
or losses by the Fund. The Fund's investment in futures contracts is designed to
hedge against anticipated future changes in interest or exchange rates or
securities prices. Investments in interest rate futures for purposes other than
hedging may be made to modify the duration of the portfolio without incurring
the additional transaction costs involved in buying and selling the underlying
securities. 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. The Fund 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 as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
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 is 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- dividend or
ex-interest date in an amount equal to the value of the security on such date.
Some government securities may be purchased on a "when-issued" or "forward
delivery" basis, which means that the securities will be delivered to the Fund
at a future date, usually beyond customary settlement time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's average daily net assets. The fee is reduced according to an
arrangement which measures the value of cash deposited with the custodian by the
Fund. This amount is shown as a reduction of expenses on the Statement of
Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return and, consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Distributions to
shareholders are recorded on the ex-dividend date. The Fund distinguishes
between distributions on a tax basis and a financial reporting basis and
requires that only distributions in excess of tax basis earnings and profits are
reported in the financial statements as a tax return of capital. Differences in
the recognition or classification of income between the financial statements and
tax earnings and profits which result in temporary over-distributions for
financial statement purposes are classified as distributions in excess of net
investment income or accumulated net realized gains. During the year ended
November 30, 1997, $286,629 and $1,404,058 were reclassified from paid in
capital and accumulated net realized loss on investments and foreign currency
transactions, respectively, and $1,690,687 was reclassified to accumulated
undistributed net investment income due to differences between book and tax
accounting for currency transactions. This change had no effect on the net
assets or net asset value per share. At November 30, 1997, accumulated
undistributed net investment income and accumulated net realized loss on
investments and foreign currency transactions under book accounting were
different from tax accounting due to temporary differences in accounting for
capital loss carryforward.
At November 30, 1997, the Fund, for federal income tax purposes, had a capital
loss carryforward of $5,700,141 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, ($4,226,362) and November 30, 2005,
($1,473,779).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares. The classes of shares differ in their respective distribution
and service fees. All shareholders bear the common expenses of the Fund 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
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.32% of
average daily net assets and 5.65% of gross investment income.
Administrator - Effective March 1, 1997, the Fund has an administrative services
agreement with MFS to provide the Fund with certain financial, legal,
shareholder servicing, compliance, and other administrative services. As a
partial reimbursement for the cost of providing these services, the Fund pays
MFS an administrative fee at the following annual percentages of the Fund's
average daily net assets, provided that the administrative fee is not assessed
on Fund assets that exceed $3 billion:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $10,775 for the year ended
November 30, 1997.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$9,052 for the year ended November 30, 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 shares 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 Class A 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 $53,636 for Class B shares for the year
ended November 30, 1997. Fees incurred under the distribution plan during the
year ended November 30, 1997, were 1.00% of average daily net assets
attributable to Class B shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases by retirement
plans are subject to a contingent deferred sales charge in the event of a
shareholder redemption within 12 months following such purchase. A contingent
deferred sales charge is imposed on shareholder redemptions of Class B shares in
the event of a shareholder redemption within six years of purchase. MFD receives
all contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1997, were $9,367 and $244,072 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 $206,879,026 $200,947,661
------------ ------------
Investments (non-U.S. government securities) $142,034,554 $168,914,706
------------ ------------
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 $150,951,495
------------
Gross unrealized depreciation $ (3,067,528)
Gross unrealized appreciation 2,170,467
------------
Net unrealized depreciation $ (897,061)
============
(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
YEAR ENDED NOVEMBER 30, 1997 YEAR ENDED NOVEMBER 30, 1996
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 2,190,188 $ 18,397,180 1,756,734 $ 14,794,352
Shares issued to shareholders in
reinvestment of distributions 137,190 1,147,221 82,176 689,249
Shares transferred to Class I (6) (50) -- --
Shares reacquired (1,135,882) (9,537,169) (829,744) (6,965,804)
---------- -------------- ---------- --------------
Net increase 1,191,490 $ 10,007,182 1,009,166 $ 8,517,797
========== ============== ========== ==============
<CAPTION>
Class B Shares
YEAR ENDED NOVEMBER 30, 1997 YEAR ENDED NOVEMBER 30, 1996
--------------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 957,831 $ 8,034,482 904,517 $ 7,622,980
Shares issued to shareholders in
reinvestment of distributions 503,589 4,220,638 681,076 5,727,981
Shares reacquired (7,200,752) (60,478,128) (8,687,569) (73,090,221)
---------- -------------- ---------- --------------
Net decrease (5,739,332) $ (48,223,008) (7,101,976) $ (59,739,260)
========== ============== ========== ==============
<CAPTION>
Class I Shares
PERIOD ENDED NOVEMBER 30, 1997*
- -----------------------------------------------------------------------
SHARES AMOUNT
- ---------------------------------------------------------------------
<S> <C> <C>
Shares sold 675 $ 5,663
Shares issued to shareholders in
reinvestment of distributions 16 136
Shares transferred from Class A 6 50
Shares reacquired (354) (2,968)
---------- --------------
Net increase 343 $ 2,881
========== ==============
* For the period from the inception of Class I shares, January 2, 1997, through November 30, 1997.
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in a $400 million unsecured line
of credit provided by a syndication of banks under a line of credit agreement.
Borrowings may be made to temporarily finance the repurchase of Fund shares.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the bank's base rate. In addition, a commitment fee, based on the average daily
unused portion of the line of credit, is allocated among the participating funds
at the end of each quarter. The commitment fee allocated to the Fund for the
year ended November 30, 1997, was $1,545.
(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, interest rate swap contracts, and futures contracts. The notional or
contractual amounts of these instruments represent the investment the Fund has
in particular classes of financial instruments and does not necessarily
represent the amounts potentially subject to risk. The measurement of the risks
associated with these instruments is meaningful only when all related and
offsetting transactions are considered.
Written Option Transactions
<TABLE>
<CAPTION>
1997 CALLS 1997 PUTS
------------------------------------- -------------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OUTSTANDING, BEGINNING OF
PERIOD -- $ -- -- $ --
Options written
Australian Dollars 2,644 14,030
Deutsche Marks/British
Pounds 2,864 6,023
Swiss Francs/Deutsche
Marks 10,714 71,946
Options terminated in closing
transactions
Australian Dollars (2,644) (14,030)
Deutsche Marks/British
Pounds (2,864) (6,023)
Swiss Francs/Deutsche Marks (3,215) (19,648)
----- --------- ----- --------
OUTSTANDING, END OF PERIOD 7,499 $ 52,298 -- $ --
===== ========= ===== ========
Options outstanding at end of
period consist of -
Swiss Francs/Deutsche Marks 7,499 $ 52,298 -- $ --
----- --------- ----- --------
OUTSTANDING, END OF PERIOD 7,499 $ 52,298 -- $ --
===== ========= ===== ========
</TABLE>
At November 30, 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
1/7/98 CAD 1,156,272 $ 848,640 $ 814,307 $ 34,333
1/7/98 DEM 7,101,616 4,181,849 4,034,783 147,066
------------ ------------ --------
$ 5,030,489 $ 4,849,090 $181,399
============ ============ ========
Purchases
1/7/98 CHF 6,881,142 $ 4,898,307 $ 4,847,214 $(51,093)
1/7/98 DKK 15,533,758 2,384,795 2,317,419 (67,376)
1/7/98 ESP 531,113,523 3,550,201 3,564,834 14,633
1/7/98 GBP 1,402,509 2,345,485 2,357,988 12,503
1/7/98 ITL 3,757,191,756 2,169,309 2,175,414 6,105
------------ ------------ --------
$ 15,348,097 $15,262,869 $(85,228)
============ =========== ========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net payable of $173,550 with Deutschebank and
$43,614 with C.S. First Boston and a net receivable of $657,682 with Banker's
Trust, $570,226 with Merrill Lynch, and $83,472 with Swiss Bank at November 30,
1997. Closed forward foreign currency exchange contracts excluded above amount
to a net receivable of $12,392 with Goldman Sachs at November 30, 1997.
At November 30, 1997, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
Interest Rate Swaps
<TABLE>
<CAPTION>
CASH FLOWS UNREALIZED
NOTIONAL PRINCIPAL CASH FLOWS PAID RECEIVED BY APPRECIATION
EXPIRATION AMOUNT OF CONTRACT BY THE TRUST THE TRUST (DEPRECIATION)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ITL 4,260,000,000/ $18,621
9/18/00 DEM (4,371,024) DEM - Fixed - 4.565% ITL - Fixed - 5.685% 14,213
-------
$32,834
=======
</TABLE>
At November 30, 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 November 30, 1997, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended November 30, 1997 and 1996, and the financial highlights for
each of the years in the ten-year period ended November 30, 1997. 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, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Intermediate
Income Fund at November 30, 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
January 9, 1998
--------------------------------------------
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 SECRETARY
A. Keith Brodkin* - Chairman and Stephen E. Cavan*
President; Chairman and Director,
Massachusetts Financial Services ASSISTANT SECRETARY
Company James R. Bordewick, Jr.*
Richard B. Bailey* - Private CUSTODIAN
Investor; Former Chairman and State Street Bank and Trust Company
Director (until 1991), Massachusetts
Financial Services Company INVESTOR INFORMATION For MFS stock and
bond market outlooks, call toll free:
Marshall N. Cohen - Private Investor 1-800-637-4458 anytime from a
touch-tone telephone.
Lawrence H. Cohn, M.D. - Chief of
Cardiac Surgery, Brigham and Women's For information on MFS mutual funds,
Hospital; Professor of Surgery, call your financial adviser or, for an
Harvard Medical School information kit, call toll free:
1-800-637-2929 any business day from 9
The Hon. Sir J. David Gibbons, KBE - a.m. to 5 p.m. Eastern time (or leave a
Chief Executive Officer, Edmund message anytime).
Gibbons Ltd.
INVESTOR SERVICE MFS Service Center,
Abby M. O'Neill - Private Investor Inc.
P.O. Box 2281
Walter E. Robb, III - President and Boston, MA 02107-9906
Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); For general information, call toll free:
President, Benchmark Consulting Group, 1-800-225-2606 any business day from 8
Inc. (office services) a.m. to 8 p.m. Eastern time.
Arnold D. Scott* - Senior Executive For service to speech- or
Vice President, Director and hearing-impaired, call toll free:
Secretary, Massachusetts Financial 1-800-637-6576 any business day from 9
Services Company a.m. to 5 p.m. Eastern time. (To use
this service, your phone must be
Jeffrey L. Shames* - President and equipped with a Telecommunications
Director, Massachusetts Financial Device for the Deaf.)
Services Company
For share prices, account balances,
J. Dale Sherratt - President, Insight and exchanges, call toll free:
Resources, Inc. (acquisition planning 1-800-MFS-TALK (1-800-637-8255)
specialists) anytime from a touch-tone telephone.
Ward Smith - Former Chairman (until WORLD WIDE WEB
1994), NACCO Industries (holding www.mfs.com
company)
[Dalbar Logo] For the fourth year
INVESTMENT ADVISER in a row, MFS earned
Massachusetts Financial Services a #1 ranking in the DALBAR, Inc.
Company Broker/Dealer Survey, Main Office
500 Boylston Street Operations Service Quality Category.
Boston, MA 02116-3741 The firm achieved a 3.42 overall score
on a scale of 1 to 4 in the 1997
DISTRIBUTOR survey. A total of 111 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 11 categories,
Steven E. Nothern* including "knowledge of operations
Christopher D. Piros* contact," "keeping you informed," and
"ease of doing business" with the
TREASURER firm.
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
<PAGE>
-------------
MFS(R) INTERMEDIATE BULK RATE
INCOME FUND U.S. POSTAGE
PAID
MFS
-------------
500 Boylston Street
Boston, MA 02116-3741
[LOGO] M F S(SM)
INVESTMENT MANAGEMENT
We invented the mutual fund(SM)
[DALBAR
LOGO]
TOP-RATED SERVICE
(c)1998 MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116-3741
MIL-2 1/98 24M 05/205/805
