<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) INTERMEDIATE
INCOME FUND
ANNUAL REPORT O NOVEMBER 30, 1998
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 12
Financial Statements ...................................................... 15
Notes to Financial Statements ............................................. 21
Independent Auditors' Report .............................................. 30
MFS(R) Prepares for the Year 2000 ......................................... 32
Trustees and Officers ..................................................... 33
MFS CELEBRATES ITS DIAMOND ANNIVERSARY!
MARCH 21, 1999, MARKS THE 75TH ANNIVERSARY OF MFS' INVENTION OF
THE MUTUAL FUND. THE MUTUAL FUND INDUSTRY HAS BROUGHT THE POWER
OF INVESTING TO EVERY AMERICAN, OFFERING THEM THE OPPORTUNITY FOR
COLLEGE DEGREES, HOME OWNERSHIP, AND COMFORTABLE RETIREMENT.
IMAGINE TODAY'S WORLD WITHOUT MUTUAL
FUNDS. WE COULDN'T. AND WHILE THE MFS 75 YEARS
YEARS AHEAD WILL BRING A NUMBER OF [graphic omitted]
CHALLENGES, OUR 75 YEARS OF EXPERIENCE EXPERIENCE THE FUTURE(SM)
WILL HELP GUIDE A NEW GENERATION OF
INVESTORS INTO THE FUTURE.
- ------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- ------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund --
our Massachusetts Investors Trust (MIT) -- was introduced to the public on March
21, 1924. Since then, MFS Investment Management(R), the company that grew out of
that original fund, has helped guide shareholders through many economic and
investment cycles, primarily by focusing on the long-term opportunities created
by an expanding global economy. As of November 30, 1998, MFS manages over $90
billion, and the firm's 2,000 people serve 3.9 million investors and their
financial advisers worldwide. Meanwhile, MIT's assets have grown to over $10
billion, and 56 mutual funds are offered in the MFS Family of Funds(R).
One of the elements in the success of MIT did not exist before our founders
invented it in 1924. That is daily redemption. This innovation means that if you
want to sell your investment in any MFS mutual fund, you have the security of
knowing that you may do so immediately by exchanging into another MFS fund. Or,
if you need your money for other purposes, it can quickly be wired or mailed to
you. This daily redemption feature, through which new shares were created when
people invested in MIT and were redeemed when people sold, brought another
important change to the industry. Now, the price of a mutual fund's shares
wasn't determined by supply and demand, but by the value of the securities owned
by each portfolio.
Another factor in our growth was the development of one of the industry's
first in-house research departments in 1932. Unlike companies that rely on
Wall Street research reports, which can be used by many investors at the same
time, MIT's managers built its long-term track record by visiting companies,
talking to managers and competitors, and "kicking the tires" so they could
judge the quality and potential of each company's products and services for
themselves. Today, MFS has more than 100 full-time portfolio managers, stock
analysts, and credit analysts who track the equity and bond markets. That
number includes over 35 equity analysts who specialize in industries such as
aviation, media, technology, automobiles, and utilities.
While MIT introduced liquidity, that was not our only invention. We also
established the nation's first global bond fund, first high-yield municipal
bond fund, and first high-yield municipal closed-end bond fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial
advisers. Not only do we believe investors can benefit from the advice of
these experts but, as was shown during the market volatility of 1998, people
who work with financial advisers are less likely to abandon their carefully
designed, long-term investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. The MFS Service Center handles millions of transactions and
phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders. That link to our investors has also been enhanced by
our site on the World Wide Web: www.mfs.com. Since 1996, this site has given
investors and the general public access to up-to- date information about MFS
products and services, as well as market outlooks and retirement information.
The site has rapidly become one of our primary vehicles for communicating with
our investors and educating the public about mutual funds in general and MFS in
particular.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible
investment management and shareholder service, just as we have done for the
past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead
and build on our 75 years of innovation and experience to help meet your
investment needs in the next century. We appreciate your confidence and
welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
December 15, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
For the 12 months ended November 30, 1998, Class A shares of the Fund provided
a total return of 5.86%, Class B shares 4.86%, and Class I shares 5.97%. These
returns assume the reinvestment of distributions but exclude the effects of
any sales charges and compare to an 8.89% 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 7.48% return for the Lehman Brothers Mortgage Index (which includes
maturities of both 15 and 30 years); and a 14.04% return for the J.P. Morgan
Non-Dollar Government Bond Index (an aggregate of actively traded government
bonds of 12 countries, excluding the United States, with remaining maturities
of at least one year).
Q. HOW HAS THE FUND PERFORMED THIS YEAR?
A. The Fund has underperformed the Lehman indices, mainly because of turmoil
in global financial markets which adversely impacted several sectors in
which the Fund invests. For example, financial and economic collapse in
Russia drove prices of Russian assets downward, precipitating a sell-off of
emerging markets debt in general.
Q. HOW WOULD YOU DESCRIBE THE INVESTMENT ENVIRONMENT YOU FACED THIS YEAR?
A. Both good and bad. While equity markets around the world corrected sharply
in the late summer and fall, yields on U.S. Treasury bonds declined to
record lows. One would be hard pressed to pick another period that proved
as volatile as the third quarter of 1998 for both the bond and the stock
markets. The Federal Reserve Board (the Fed) responded to the market tumult
by lowering short-term interest rates three times in October and November
and, as a result, Treasury bond yields fell to their lowest levels in 30
years.
Q. COULD YOU DISCUSS SOME OF THE REASONS FOR THE TURMOIL IN THE FIXED-INCOME
MARKETS?
A. By late September, extreme volatility existed in many of these markets,
primarily due to the partial liquidation of a large U.S. hedge fund and
continued worries over troubled economies in Japan and the emerging markets
of Asia, Latin America, and Russia. Slumping equities prompted a flight to
quality into U.S. Treasuries. As a result, the yield on the 30-year
Treasury bond closed the third quarter at the record low of 4.97%.
Meanwhile, all other fixed-income securities began to languish, and yield
spreads on high-quality bonds versus Treasuries widened dramatically, from
45 basis points (0.45%) in July to 83 basis points (0.83%) in September.
Spread widening was more pronounced on lower-rated bonds. For example,
yields on "BBB"-rated securities versus Treasuries widened from 105 basis
points (1.05%) to 189 basis points (1.89%). The high-yield market was
trounced, with spreads over Treasuries reaching the widest levels in seven
years, from 325 basis points (3.25%) to nearly 600 basis points (6.00%).
Interest-rate declines caused mortgages to underperform also due to
concerns of a potential increase in refinancing volume. Mortgages moved
from 96 basis points (0.96%) to 131 basis points (1.31%) versus Treasuries
during the quarter.
Q. SO ARE YOU AVOIDING THE NON-TREASURY MARKETS?
A. No, we're not. When these markets stabilize, which could happen in the
first quarter of 1999, we will probably increase our holdings of higher-
yielding, but quality, securities. Also, we will look to increase
investments in Government National Mortgage Association (Ginnie Mae)
securities when refinancing worries subside. We believe that interest rates
will head lower as the Fed responds to concerns over a possible economic
downturn and inflation fears prove unfounded.
Q. HAVE YOU CHANGED THE FUND'S DURATION, OR SENSITIVITY TO CHANGES IN INTEREST
RATES?
A. We have modestly extended the Fund's duration. In the last quarter of the
period, we shifted some assets from the most recently issued Treasuries to
older, slightly less liquid, but higher-yielding, Treasury securities.
(Principal value and interest on Treasury securities are guaranteed by the
U.S. government if held to maturity.) Unfortunately, the recent liquidity
concerns gripping the fixed-income market caused the most actively traded,
newer issues to dramatically outperform. Therefore, the shift to higher-
yielding older Treasuries was a near-term detriment to performance, but we
believe it should balance out in the long run.
Q. WHAT ABOUT THE INTERNATIONAL SECTOR?
A. The dominant theme of the past 12 months, which was the crisis atmosphere
that began in Asia in the summer of 1997, continued. Emerging markets
stabilized in the first half of the year only to be hit hard when Russia
defaulted in August. Like the U.S. Treasury market, top-quality government
bonds benefited from the flight to quality as well as from the accumulating
evidence that the emerging market crisis will slow growth and dampen
inflation in the industrialized economies. As a result, every major
European bond market generated double-digit returns (in local currency
terms) according to J.P. Morgan global government indices. A narrowing of
yield spreads was also in evidence as the higher-yielding markets -- the
United Kingdom, Ireland, Sweden, and Italy -- outperformed the rest of
Europe in the run-up to European monetary union in January 1999. Similarly,
New Zealand bonds outperformed the lower-yielding markets of the dollar
bloc.
Q. HOW WERE THE FUND'S FOREIGN ASSETS INVESTED DURING THIS PERIOD?
A. Our foreign assets were concentrated in these better-performing markets --
especially the United Kingdom and New Zealand -- throughout the year. And
as we reported a year ago, we cut the Fund's exposure to emerging markets
to 5% during the early stages of the Asian crisis, and we have maintained
this exposure throughout the year.
Q. COULD YOU TALK ABOUT THE FUND'S CURRENCY POSITION?
A. For several months, we have believed that the U.S. dollar's three-year
trend of appreciating versus major currencies might be ending, which turned
out to be the case. Since the end of April the dollar has depreciated by
5.6% against the German mark and by 7.5% against the Japanese yen. While
the fundamental factors that had supported the dollar were waning, the
magnitude of the collapse owes mostly to forced unwinding of leveraged
positions and official intervention designed to relieve pressure on dollar-
dependent emerging markets. As the pressure increased on the dollar, we
removed the currency hedges from the Fund's foreign assets so that, at
present, the Fund has roughly an 8% exposure to foreign currencies.
Q. WHAT'S YOUR OUTLOOK FOR THE GLOBAL MARKETS GOING FORWARD?
A. Over the past several weeks, the global bond markets have taken comfort from
rate cuts by the Fed and European central banks, an increase in funding for
the International Monetary Fund, a bank support package in Japan, and a
fiscal package in Brazil. These developments have renewed hope that further
deterioration of the global economy can be averted. Hence, yields on
top-quality government bonds have risen while credit spreads have narrowed.
Nonetheless, we remain positive on top-quality government bonds. Global
growth continues to depend on U.S. demand, which we believe is likely to slow
in the months ahead. Given their wide yield spreads, the United Kingdom and
New Zealand remain among our favorite places in which to invest.
/s/ Steven E. Nothern
Steven E. Nothern
Portfolio Manager
/s/ Christopher D. Piros
Christopher D. Piros
Portfolio Manager
The opinions expressed in this report are those of the portfolio managers and
are only through the end of the period of the report as stated on the cover.
The managers' views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGERS' PROFILES
- --------------------------------------------------------------------------------
STEVEN E. NOTHERN IS A SENIOR VICE PRESIDENT AND A MEMBER OF THE FIXED INCOME
POLICY COMMITTEE OF MFS INVESTMENT MANAGEMENT(R). HE IS PORTFOLIO MANAGER OF
MFS(R) GOVERNMENT SECURITIES FUND, MFS(R) INTERMEDIATE INCOME FUND AND THE
GOVERNMENT SECURITIES SERIES OFFERED THROUGH MFS(R)/SUN LIFE ANNUITY PRODUCTS.
HE ALSO MANAGES MFS(R) GOVERNMENT MARKETS INCOME TRUST, A CLOSED-END FUND. MR.
NOTHERN JOINED MFS IN 1986 IN THE FIXED INCOME DEPARTMENT AND WAS NAMED VICE
PRESIDENT IN 1989 AND SENIOR VICE PRESIDENT IN 1993. HE IS A GRADUATE OF
MIDDLEBURY COLLEGE AND HOLDS A MASTER OF BUSINESS ADMINISTRATION DEGREE FROM
BOSTON UNIVERSITY. HE IS A CHARTERED FINANCIAL ANALYST AND A MEMBER OF THE
BOSTON SECURITY ANALYSTS SOCIETY, INC.
CHRISTOPHER D. PIROS IS A SENIOR VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R)
AND A PORTFOLIO MANAGER OF MFS(R) INTERMEDIATE INCOME FUND AND MFS(R)
INTERMEDIATE INCOME TRUST. HE ALSO MANAGES THE NOMURA GLOBAL BALANCED OPEN FUND
UNDER SUBADVISORY AGREEMENTS WITH NOMURA ASSET MANAGEMENT CO. OF JAPAN. MR.
PIROS JOINED MFS IN 1989 AS VICE PRESIDENT -- QUANTITATIVE SERVICES IN THE FIXED
INCOME DEPARTMENT AND WORKED IN THE INTERNATIONAL FIXED INCOME AREA BEFORE BEING
NAMED A PORTFOLIO MANAGER IN 1996. HE WAS NAMED SENIOR VICE PRESIDENT IN 1997.
PRIOR TO JOINING MFS, HE HAD BEEN A VICE PRESIDENT AND SENIOR ECONOMIST IN THE
QUANTITATIVE ASSET MANAGEMENT AREA AT A MAJOR CHICAGO-BASED SECURITIES FIRM AND
AN ASSISTANT PROFESSOR AT THE FUQUA SCHOOL OF BUSINESS AT DUKE UNIVERSITY. HE IS
A GRADUATE OF NORTHWESTERN UNIVERSITY AND HOLDS A PH.D. FROM HARVARD UNIVERSITY.
- --------------------------------------------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
- --------------------------------------------------------------------------------
OBJECTIVE: SEEKS PRESERVATION OF CAPITAL AND 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: $133.5 MILLION NET ASSETS AS OF NOVEMBER 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include any applicable contingent deferred sales charges and reflect
the percentage change in net asset value, including reinvestment of dividends.
Benchmark comparisons are unmanaged and do not reflect any fees or expenses.
The performance of other share classes will be greater than or less than the
line shown. (See Notes to Performance Summary for more information.) It is not
possible to invest directly in an index.
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 5-year period ended November 30, 1998)
Lehman J.P. Morgan
MFS Brothers Non-Dollar Lehman Consumer
Intermediate Intermediate Government Brothers Price
Income Fund Government Bond Mortgage Index
- Class B Bond Index Index Index - U.S.
- ----------------------------------------------------------------------------
11/93 $ 9,802 $10,000 $10,000 $10,000 $10,000
11/94 9,289 10,661 9,839 9,834 10,268
11/95 10,600 12,757 11,442 11,178 10,531
11/96 11,186 13,667 12,269 11,810 10,878
11/97 11,585 13,204 13,242 12,551 11,077
11/98 12,148 15,057 14,233 13,674 11,262
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the 10-year period ended November 30, 1998)
Lehman J.P. Morgan
MFS Brothers Non-Dollar Lehman Consumer
Intermediate Intermediate Government Brothers Price
Income Fund Government Bond Mortgage Index
- Class B Bond Index Index Index - U.S.
- ----------------------------------------------------------------------------
11/88 $10,000 $10,000 $10,000 $10,000 $10,000
11/90 11,350 12,188 10,992 12,495 11,122
11/92 13,011 14,886 13,008 15,525 11,804
11/94 13,367 15,973 15,662 16,400 12,444
11/96 16,097 19,183 20,077 20,449 13,184
11/98 17,481 22,210 22,119 23,722 13,649
AVERAGE ANNUAL TOTAL RETURNS THROUGH NOVEMBER 30, 1998
CLASS A
10 Years/
1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 5.86% +5.68% +5.45% +6.32%
- --------------------------------------------------------------------------------
SEC Results + 0.83% +3.98% +4.43% +5.80%
- --------------------------------------------------------------------------------
CLASS B
10 Years/
1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 4.86% +4.65% +4.38% +5.74%
- --------------------------------------------------------------------------------
SEC Results + 0.90% +3.75% +4.07% +5.74%
- --------------------------------------------------------------------------------
CLASS I
10 Years/
1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 5.97% +5.18% +4.70% +5.91%
- --------------------------------------------------------------------------------
COMPARATIVE INDICES
10 Years/
1 Year 3 Years 5 Years Life
- --------------------------------------------------------------------------------
J. P. Morgan Non-Dollar
Government
Bond Index* +14.04% +5.68% +8.53% +8.26%
- --------------------------------------------------------------------------------
Lehman Brothers Intermediate
Government Bond Index+ + 8.89% +6.95% +6.46% +8.31%
- --------------------------------------------------------------------------------
Lehman Brothers Mortgage Index** + 7.48% +7.55% +7.31% +9.02%
- --------------------------------------------------------------------------------
Consumer Price Index+# + 1.67% +2.26% +2.41% +3.16%
- --------------------------------------------------------------------------------
* Source: AIM.
+ Source: CDA/Wiesenberger.
** Source: Lipper Analytical Services, Inc.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
<PAGE>
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 4.75% sales charge. Class
B share ("B") SEC results reflect the applicable contingent deferred sales
charge (CDSC), which declines over six years from 4% to 0%. Class I shares
("I") have no sales charge or Rule 12b-1 fees and are only available to
certain institutional investors.
A results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of B for periods prior to the inception of A. Because operating expenses
of B are greater than those of A, A performance generally would have been
higher than B performance. The B performance included within the A SEC
performance has been adjusted to reflect the maximum initial sales charge
generally applicable to A rather than the CDSC generally applicable to B.
I results include the performance and the operating expenses (e.g., Rule
12b-1 fees) of B for periods prior to the inception of I. Because operating
expenses of B are greater than those of I, I performance generally would have
been higher than B performance. The B performance included in the I
performance has been adjusted to reflect the fact that I 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. 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.
<PAGE>
PORTFOLIO CONCENTRATION AS OF NOVEMBER 30, 1998
LARGEST SECTORS
U.S. TREASURIES 42.6%
MORTGAGE BACKED 27.3%
OTHER GOVERNMENT AGENCIES 9.6%
INTERNATIONAL 7.5%
EMERGING MARKETS 5.6%
CASH 5.5%
HIGH GRADE CORPORATES 1.1%
ASSET BACKED 0.8%
Portfolio information is as of November 30, 1998. The portfolio is actively
managed, and current holdings may be different.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- November 30, 1998
Bonds - 93.4%
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 76.7%
Corporate Asset Backed - 0.8%
California Infra + Economic, 6.17s, 2003 $ 1,000 $ 1,011,250
- -----------------------------------------------------------------------------------------------------------
Government National Mortgage Association - 24.6%
GNMA, 7s, 2023 - 2024 $ 2,755 $ 2,821,591
GNMA, 7.5s, 2023 1,135 1,172,424
GNMA, 8.5s, 2009 3,887 4,054,885
GNMA TBA, 6.5s, 2028 6,787 6,857,425
GNMA TBA, 7s, 2008 11,558 11,847,594
GNMA TBA, 7.5s, 2027 5,622 5,804,639
GNMA TBA, 8.5s, 2008 248 260,989
------------
$ 32,819,547
- -----------------------------------------------------------------------------------------------------------
Oils - 1.1%
Occidental Petroleum Corporation, 10.125s, 2001 $ 1,360 $ 1,485,433
- -----------------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 7.5%
Federal Home Loan Bks, 5.125s, 2003 $ 3,000 $ 3,008,910
Federal Home Loan Mortgage Corporation, 5.75s, 2003 3,500 3,604,440
Federal National Mortgage Assn. TBA, 6s, 2099 3,425 3,429,281
------------
$ 10,042,631
- -----------------------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 0.5%
Government Trust Certificates, 9.25s, 2001 $ 671 $ 716,329
- -----------------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 42.2%
U.S. Treasury Bonds, 10.375s, 2012 $ 12,150 $ 16,808,796
U.S. Treasury Bonds, 10.75s, 2003 2,500 3,065,625
U.S. Treasury Bonds, 11.875s, 2003 4,500 5,895,720
U.S. Treasury Bonds, 12s, 2013 5,100 7,803,816
U.S. Treasury Bonds, 12.375s, 2004 3,000 4,080,480
U.S. Treasury Bonds, 13.875s, 2011 4,500 6,981,345
U.S. Treasury Notes, 4.75s, 2008 5,000 5,007,800
U.S. Treasury Notes, 5.375s, 2003 1,250 1,290,425
U.S. Treasury Notes, 5.625s, 2008 5,000 5,318,750
------------
$ 56,252,757
- -----------------------------------------------------------------------------------------------------------
Total U.S. Bonds $102,327,947
- -----------------------------------------------------------------------------------------------------------
Foreign Bonds - 16.7%
Argentina - 0.6%
Republic of Argentina, 11s, 2005 $ 300 $ 301,500
Republic of Argentina, 9.015s, 2005 500 475,000
------------
$ 776,500
- -----------------------------------------------------------------------------------------------------------
Australia - 0.3%
Commonwealth of Australia, 9.5s, 2003 AUD 565 $ 423,570
- -----------------------------------------------------------------------------------------------------------
Brazil - 1.0%
Republic of Brazil, 5.5s, 2024 $ 318 $ 207,908
Republic of Brazil, 6.625s, 2024 1,025 661,125
Republic of Brazil, 9.375s, 2008 560 443,800
------------
$ 1,312,833
- -----------------------------------------------------------------------------------------------------------
Bulgaria - 0.3%
Republic of Bulgaria, 6.688s, 2024 $ 550 $ 407,715
- -----------------------------------------------------------------------------------------------------------
Colombia - 0.5%
Republic of Colombia, 12.243s, 2005 $ 780 $ 727,350
- -----------------------------------------------------------------------------------------------------------
Denmark - 0.3%
Kingdom of Denmark, 7s, 2007 DKK 2,447 $ 451,897
- -----------------------------------------------------------------------------------------------------------
Greece - 0.9%
Hellenic Republic, 5.75s, 2008 XEU 151 $ 185,706
Hellenic Republic, 8.9s, 2003 GRD 300,000 1,079,186
------------
$ 1,264,892
- -----------------------------------------------------------------------------------------------------------
Israel - 4.0%
State of Israel, 6.625s, 2003 $ 5,000 $ 5,309,900
- -----------------------------------------------------------------------------------------------------------
Mexico - 1.4%
Petroleos Mexicanos Medium Term Note, 10.261s, 2005## $ 250 $ 236,875
United Mexican States, 6.25s, 2019 250 192,500
United Mexican States, 9.875s, 2007 1,450 1,453,625
------------
$ 1,883,000
- -----------------------------------------------------------------------------------------------------------
New Zealand - 1.8%
Government of New Zealand, 8s, 2001 NZD 4,010 $ 2,354,383
- -----------------------------------------------------------------------------------------------------------
Panama - 0.4%
Republic of Panama, 8.25s, 2008 $ 530 $ 506,150
- -----------------------------------------------------------------------------------------------------------
Russia - 0.2%
Russian Federation, 11.75s, 2003## $ 600 $ 207,000
- -----------------------------------------------------------------------------------------------------------
South Korea - 1.1%
Republic of Korea, 8.875s, 2008 $ 850 $ 849,584
Korea Development Bank, 8.875s, 2003## 750 656,250
------------
$ 1,505,834
- -----------------------------------------------------------------------------------------------------------
Foreign Bonds - continued
United Kingdom - 3.9%
United Kingdom Treasury, 6.5s, 2003 GBP 761 $ 1,353,997
United Kingdom Treasury, 6.75s, 2004 290 528,405
United Kingdom Treasury, 7.25s, 2007 315 617,828
United Kingdom Treasury, 8.5s, 2005 1,158 2,327,559
United Kingdom Treasury, 9s, 2008 181 399,158
------------
$ 5,226,947
- -----------------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 22,357,971
- -----------------------------------------------------------------------------------------------------------
Total Bonds (Identified Cost, $122,797,917) $124,685,918
- -----------------------------------------------------------------------------------------------------------
Repurchase Agreement - 6.0%
- -----------------------------------------------------------------------------------------------------------
Goldman Sachs, dated 11/30/98, due 12/01/98,
total to be received $7,959,161 (secured by
various U.S. Treasury and Federal Agency
obligations in a jointly traded account), at
cost $ 7,958 $ 7,958,000
- -----------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $130,755,917) $132,643,918
- -----------------------------------------------------------------------------------------------------------
Call Options Written
- -----------------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
OF CONTRACTS
ISSUER/EXPIRATION MONTH/STRIKE PRICE (000 OMITTED)
- -----------------------------------------------------------------------------------------------------------
Japanese Yen/U.S. Dollars/February/110
(Premiums Received, $59,837) JPY 518,277 $ (12,957)
- -----------------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.6% 838,286
- -----------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $133,469,247
- -----------------------------------------------------------------------------------------------------------
## SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars GRD = Greek Drachmas
CAD = Canadian Dollars ITL = Italian Lira
CHF = Swiss Francs JPY = Japanese Yen
DEM = Deutsche Marks NZD = New Zealand Dollars
DKK = Danish Krone XEU = European Currency Unit
GBP = British Pounds
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- --------------------------------------------------------------------------------
NOVEMBER 30, 1998
- --------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $130,755,917) $132,643,918
Cash 1,025
Net receivable for forward foreign currency exchange
contracts to purchase 281,735
Receivable for Fund shares sold 471,186
Receivable for investments sold 5,056,869
Interest receivable 1,294,632
Other assets 974
------------
Total assets $139,750,339
------------
Liabilities:
Payable for Fund shares reacquired $ 114,004
Payable for investments purchased 5,408,823
Written options outstanding, at value (premiums received,
$59,837) 12,957
Net payable for forward foreign currency exchange
contracts to sell 481,874
Net payable for forward foreign currency exchange
contracts closed or subject to master netting
agreements 36,929
Payable to affiliates -
Management fee 6,013
Shareholder servicing agent fee 1,230
Distribution and service fee 44,081
Accrued expenses and other liabilities 175,181
------------
Total liabilities $ 6,281,092
------------
Net assets $133,469,247
============
Net assets consist of:
Paid-in capital $138,765,981
Unrealized appreciation on investments and translation of
assets and liabilities in foreign currencies 1,694,140
Accumulated net realized loss on investments and foreign
currency transactions (7,064,923)
Accumulated undistributed net investment income 74,049
------------
Total $133,469,247
============
Shares of beneficial interest outstanding 16,061,505
==========
Class A shares:
Net asset value per share
(net assets of $44,116,188 / 5,318,464 shares of
beneficial interest outstanding) $8.29
=====
Offering price per share (100 / 95.25) $8.70
=====
Class B shares:
Net asset value and offering price per share
(net assets of $89,344,851 / 10,742,053 shares of
beneficial interest outstanding) $8.32
=====
Class I shares:
Net asset value and offering price per share
(net assets of $8,208 / 988 shares of beneficial
interest outstanding) $8.31
=====
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, 1998
- --------------------------------------------------------------------------------
Net investment income:
Interest income $10,347,171
-----------
Expenses -
Management fee $ 1,053,505
Trustees' compensation 45,856
Shareholder servicing agent fee 158,863
Distribution and service fee (Class B) 1,008,996
Administrative fee 17,989
Auditing fees 72,256
Custodian fee 63,589
Printing 63,533
Postage 31,243
Legal fees 3,436
Miscellaneous 98,687
-----------
Total expenses $ 2,617,953
Fees paid indirectly (24,510)
Reduction of expenses by investment adviser (41,938)
-----------
Net expenses $ 2,551,505
-----------
Net investment income $ 7,795,666
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $(3,298,251)
Written option transactions (126,868)
Foreign currency transactions 1,137,594
Swap transactions 18,320
Futures contracts (3,233)
-----------
Net realized loss on investments and foreign
currency transactions $(2,272,438)
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 2,714,155
Written options 262,503
Translation of assets and liabilities in foreign currencies (1,433,833)
Swap transactions (32,834)
-----------
Net unrealized gain on investments and foreign currency
translation $ 1,509,991
-----------
Net realized and unrealized loss on investments and
foreign currency $ (762,447)
-----------
Increase in net assets from operations $ 7,033,219
===========
See notes to financial statements
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Statement of Changes in Net Assets
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 7,795,666 $ 9,574,847
Net realized loss on investments and foreign currency
transactions (2,272,438) (140,628)
Net unrealized gain (loss) on investments and foreign
currency translation 1,509,991 (3,846,648)
------------ ------------
Increase in net assets from operations $ 7,033,219 $ 5,587,571
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (2,360,988) $ (1,712,211)
From net investment income (Class B) (5,169,854) (7,829,003)
From net investment income (Class I) (350) (137)
From paid in capital (Class A) (287,926) --
From paid in capital (Class B) (630,471) --
From paid in capital (Class I) (43) --
------------ ------------
Total distributions declared to shareholders $ (8,449,632) $ (9,541,351)
------------ ------------
Decrease in net assets from Fund share transactions $(15,385,822) $(38,212,945)
------------ ------------
Total decrease in net assets $(16,802,235) $(42,166,725)
Net assets:
At beginning of period 150,271,482 192,438,207
------------ ------------
At end of period (including accumulated undistributed net
investment income of $74,049 and $958,326, respectively) $133,469,247 $150,271,482
============ ============
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.39 $ 8.57 $ 8.59 $ 7.96 $ 8.94
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.53 $ 0.55 $ 0.55 $ 0.57 $ 0.59
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.05) (0.18) (0.01) 0.61 (0.95)
------ ------ ------ ------ ------
Total from investment operations $ 0.48 $ 0.37 $ 0.54 $ 1.18 $(0.36)
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.52) $(0.55) $(0.56) $(0.55) $ --
In excess of net investment income+++ -- -- (0.00) -- --
From paid-in capital (0.06) -- -- -- (0.62)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.58) $(0.55) $(0.56) $(0.55) $(0.62)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.29 $ 8.39 $ 8.57 $ 8.59 $ 7.96
====== ====== ====== ====== ======
Total return(+) 5.86% 4.59% 6.61% 15.40% (4.27)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.12% 1.17% 1.17% 1.14% 1.18%
Net investment income 6.33% 6.63% 6.58% 6.81% 7.10%
Portfolio turnover 173% 226% 288% 275% 211%
Net assets at end of period (000 omitted) $44,116 $30,833 $21,291 $12,659 $3,432
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
(+) 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.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee, for certain of the periods indicated. If the
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.52 -- -- -- --
Ratios (to average net assets):
Expenses## 1.15% -- -- -- --
Net investment income 6.30% -- -- -- --
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.40 $ 8.57 $ 8.58 $ 7.96 $ 8.93
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S) $ 0.44 $ 0.47 $ 0.46 $ 0.48 $ 0.47
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.04) (0.18) (0.01) 0.61 (0.92)
------ ------ ------ ------ ------
Total from investment operations $ 0.40 $ 0.29 $ 0.45 $ 1.09 $(0.45)
------ ------ ------ ------ ------
Less distributions declared to shareholders
------
From net investment income $(0.43) $(0.46) $(0.46) $(0.47) $ --
In excess of net investment income+++ -- -- (0.00) -- --
From paid-in capital (0.05) -- -- -- (0.52)
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.48) $(0.46) $(0.46) $(0.47) $(0.52)
------ ------ ------ ------ ------
Net asset value - end of period $ 8.32 $ 8.40 $ 8.57 $ 8.58 $ 7.96
====== ====== ====== ====== ======
Total return 4.86% 3.57% 5.52% 14.12% (5.24)%
Ratios (to average net assets)/Supplemental data(S):
Expenses## 2.12% 2.19% 2.24% 2.23% 2.22%
Net investment income 5.30% 5.61% 5.47% 5.79% 5.60%
Portfolio turnover 173% 226% 288% 275% 211%
Net assets at end of period (000 omitted) $89,345 $119,436 $171,148 $232,312 $292,619
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash maintained
by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995, the Fund's
expenses are calculated without reduction for this expense offset arrangement.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment income was less than $0.01.
(S) The investment adviser voluntarily waived a portion of its management fee, for certain of the periods indicated. If the
fee had been incurred by the Fund, the net investment income per share and the ratios would have been:
Net investment income $ 0.44 -- -- -- --
Ratios (to average net assets):
Expenses## 2.15% -- -- -- --
Net investment income 5.27% -- -- -- --
See notes to financial statements
</TABLE>
<PAGE>
<TABLE>
FINANCIAL STATEMENTS -- continued
Financial Highlights - continued
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997*
- --------------------------------------------------------------------------------------------------------
CLASS I
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 8.41 $ 8.43
------ ------
Income from investment operations# -
Net investment income(S) $ 0.55 $ 0.61
Net realized and unrealized loss on investments and foreign
currency transactions (0.07) (0.17)
------ ------
Total from investment operations $ 0.48 $ 0.44
------ ------
Less distributions declared to shareholders -
From net investment income $(0.52) $(0.46)
From paid-in capital (0.06) --
------ ------
Total distributions declared to shareholders $(0.58) $(0.46)
------ ------
Net asset value - end of period $ 8.31 $ 8.41
====== ======
Total return 5.97% 5.07%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 1.10% 1.03%+
Net investment income 6.36% 6.52%+
Portfolio turnover 173% 226%
Net assets at end of period (000 omitted) $8 $3
* For the period from the inception of offering Class I, January 2, 1997, through November 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the
amount of cash maintained by the Fund with its custodian and dividend disbursing agent. The Fund's
expenses are calculated without reduction for this expense offset arrangement.
(S) The investment adviser voluntarily waived a portion of its management fee, for certain of the periods
indicated. If the fee had been incurred by the Fund, the net investment income per share and the
ratios would have been:
Net investment income $ 0.55 --
Ratios (to average net assets):
Expenses## 1.13% --
Net investment income 6.33% --
See notes to financial statements
</TABLE>
<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 swap
agreements, 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 collateral in a repurchase transaction be transferred to the
custodian in a manner sufficient to enable the Fund to obtain those securities
in the event of a default under the repurchase agreement. The Fund monitors, on
a daily basis, the value of the collateral to ensure that its value, including
accrued interest, is greater than amounts owed to the Fund under each such
repurchase agreement. The Fund, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
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 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 with the broker either in cash or securities an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the Fund each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes
as unrealized gains or losses by the Fund. The Fund's investment in futures
contracts is designed to hedge against anticipated future changes in interest
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 may 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 discount is
accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Interest payments received in additional
securities are recorded on the ex-interest date in an amount equal to the value
of the security on such date. Some securities may be purchased on a
"when-issued" or "forward delivery" basis, which means that the securities will
be delivered to the Fund at a future date, usually beyond customary settlement
time.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an arrangement
that measures the value of cash deposited with the custodian by the Fund. This
amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its 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 net realized gains. During
the year ended November 30, 1998, $230,311 and $748,253 was reclassified from
accumulated undistributed net investment income and paid in capital,
respectively, to accumulated net realized loss on investments due to differences
between book and tax accounting for mortgage-backed securities and currency
transactions. This change had no effect on the net assets or net asset value per
share. In addition $918,440 was redesignated as a tax return of capital
distribution. At November 30, 1998, 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 losses and currency
transactions.
At November 30, 1998, the Fund, for federal income tax purposes, had a capital
loss carryforward of $6,917,451 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), November 30, 2005,
($1,473,779), and November 30, 2006 ($1,217,310).
Multiple Classes of Shares of Beneficial Interest - The Fund offers multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund based on average
daily net assets of each class, without distinction between share classes.
Dividends are declared separately for each class. 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 the Fund's average daily net assets and 5.65% of investment income. As of
November 1, 1998 the investment advisor has voluntarily agreed to waive a
portion of its fee, which is reflected as a reduction of expenses in the
Statement of Operations.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain officers and Trustees of the
Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD), and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $12,201 for the year ended
November 30, 1998.
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee at
the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$23,000 for the year ended November 30, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A and Class B shares
pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35% per
annum of its average daily net assets attributable to Class A shares in order
that MFD may pay expenses on behalf of the Fund related to the distribution and
servicing of its shares. These expenses include a service fee paid to each
securities dealer that enters into a sales agreement with MFD of up to 0.25% per
annum of the Fund's average daily net assets attributable to Class A shares
which are attributable to that securities dealer and a distribution fee to MFD
of up to 0.10% per annum of the Fund's average daily net assets attributable to
Class A shares. Payments of up to 0.25% and 0.10% per annum of the service fee
and distribution fee, respectively, 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 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 $41,365 for Class B shares for the year
ended November 30, 1998. Fees incurred under the distribution plan during the
year ended November 30, 1998, 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 purchase. A contingent
deferred sales charge is imposed on shareholder redemption's 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, 1998, were $111 and $72,884
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
0.1125%. Prior to January 1, 1998, the fee was calculated as a percentage of the
average Fund's daily net assets at an effective annual rate of 0.13%.
(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 $166,521,673 $174,449,197
------------ ------------
Investments (non-U.S. government
securities) $ 68,010,532 $ 79,790,129
------------ ------------
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 $130,922,584
------------
Gross unrealized appreciation $ 2,838,852
Gross unrealized depreciation (1,117,518)
------------
Net unrealized appreciation $ 1,721,334
============
(5) Shares of Beneficial Interest
The Fund's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest. Transactions in
Fund shares were
as follows:
<TABLE>
Class A Shares
<CAPTION>
YEAR ENDED NOVEMBER 30, 1998 YEAR ENDED NOVEMBER 30, 1997
---------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 3,557,110 $ 29,662,076 2,190,188 $ 18,397,180
Shares issued to shareholders
in reinvestment of distributions 216,409 1,800,509 137,190 1,147,221
Shares transferred to Class I -- -- (6) (50)
Shares reacquired (2,129,785) (17,689,458) (1,135,882) (9,537,169)
---------- ------------ ---------- ------------
Net increase 1,643,734 $ 13,773,127 1,191,490 $ 10,007,182
========== ============ ========== ============
</TABLE>
<TABLE>
Class B Shares
<CAPTION>
YEAR ENDED NOVEMBER 30, 1998 YEAR ENDED NOVEMBER 30, 1997
---------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,345,750 $ 11,221,642 957,831 $ 8,034,482
Shares issued to shareholders
in reinvestment of distributions 380,682 3,178,360 503,589 4,220,638
Shares reacquired (5,204,805) (43,564,370) (7,200,752) (60,478,128)
---------- ------------ ---------- ------------
Net decrease (3,478,373) $(29,164,368) (5,739,332) $(48,223,008)
========== ============ ========== ============
</TABLE>
<TABLE>
Class I Shares
YEAR ENDED NOVEMBER 30, 1998 PERIOD ENDED NOVEMBER 30, 1997*
---------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 715 $ 6,023 675 $ 5,663
Shares issued to shareholders
in reinvestment of distributions 47 390 16 136
Shares transferred from Class A -- -- 6 50
Shares reacquired (117) (994) (354) (2,968)
---------- ------------ ---------- ------------
Net increase 645 $ 5,419 343 $ 2,881
========== ============ ========== ============
</TABLE>
*For the period from the inception of Class I, January 2, 1997, through
November 30, 1997.
(6) Line of Credit
The Fund and other affiliated funds participate in an $805 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, 1998, was $933.
(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, swap agreements, 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.
<TABLE>
Written Option Transactions
<CAPTION>
1998 CALLS 1998 PUTS
--------------------------------- ---------------------------------
PRINCIPAL AMOUNTS PRINCIPAL AMOUNTS
OF CONTRACTS OF CONTRACTS
(000 OMITTED) PREMIUMS (000 OMITTED) PREMIUMS
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OUTSTANDING, BEGINNING OF PERIOD
Swiss Francs/Deutsche Marks 7,499 $ 52,298 -- $ --
Options written -
British Pounds 567 7,679 -- --
Canadian Dollars -- -- 1,409 5,271
Deutsche Marks 5,972 25,880 3,692 21,224
Japanese Government Bond 72,300 1,111 144,700 4,091
Japanese Yen 2,702,009 195,656 -- --
Options terminated in closing
transactions -
British Pounds (567) (7,679) -- --
Canadian Dollars -- -- (1,409) (5,271)
Deutsche Marks -- -- (3,692) (21,224)
Japanese Government Bond (72,300) (1,111) (144,700) (4,091)
Swiss Francs/Deutsche Marks (7,499) (52,298) -- --
Options exercised -
Deutsche Marks (5,972) (25,880) -- --
Japanese Yen (1,466,077) (127,153) -- --
Options expired -
Japanese Yen (717,655) (8,666) -- --
--------- --------
OUTSTANDING, END OF PERIOD $ 59,837 $ --
========= ========
Options outstanding at end of
period consist of -
Japanese Yen 518,277 $ 59,837 -- $ --
--------- --------
OUTSTANDING, END OF PERIOD $ 59,837 $ --
========= ========
</TABLE>
At November 30, 1998, the Fund had sufficient cash and/or securities at least
equal to the value of the written options.
<TABLE>
Forward Foreign Currency Exchange Contracts
<CAPTION>
NET UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales
12/15/98 AUD 692,718 $ 410,761 $ 433,945 $ (23,184)
12/15/98 CAD 5,581,605 3,687,878 3,645,394 42,484
12/15/98 DEM 13,034,611 7,782,274 7,689,810 92,464
12/15/98 DKK 7,700,753 1,192,972 1,195,089 (2,117)
12/15/98 GBP 837,971 1,417,931 1,380,507 37,424
12/15/98 JPY 800,657,293 5,902,121 6,511,896 (609,775)
12/15/98 NZD 4,640,299 2,418,632 2,437,802 (19,170)
----------- ----------- ---------
$22,812,569 $23,294,443 $(481,874)
=========== =========== =========
Purchases
12/15/98 AUD 4,042,858 $ 2,404,692 $ 2,532,599 $ 127,907
12/15/98 CAD 7,335,046 4,741,501 4,790,583 49,082
12/15/98 CHF 3,934,329 2,849,120 2,820,409 (28,711)
12/15/98 DEM 9,179,816 5,487,691 5,415,662 (72,029)
12/15/98 DKK 4,139,146 665,265 642,359 (22,906)
12/15/98 ITL 632,557,821 397,011 376,990 (20,021)
12/15/98 JPY 979,141,349 7,717,571 7,963,540 245,969
12/15/98 NZD 903,572 472,252 474,696 2,444
----------- ----------- ---------
$24,735,103 $25,016,838 $ 281,735
=========== =========== =========
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $276,220 with C.S. First
Boston, and a net payable of $63,184 with Deutschebank and $249,965 with
Merrill Lynch at November 30, 1998.
At November 30, 1998, the Fund had sufficient cash and/or securities to cover
any commitments under these contracts.
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of the MFS Series Trust II and the 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 (a
series of MFS Series Trust II) as of November 30, 1998, the related statement
of operations for the year then ended, the statement of changes in net assets
for the years ended November 30, 1998 and 1997, and the financial highlights
for each of the years in the five-year period ended November 30, 1998. 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 audit 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, 1998 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, 1998, 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 8, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 1999, SHAREHOLDERS WERE MAILED A FORM 1099 REPORTING THE
FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR YEAR
1998.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
MFS(R) INTERMEDIATE INCOME FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, State Street Bank and Trust Company
Brigham and Women's Hospital; Professor of
Surgery, Harvard Medical School AUDITORS
Deloitte & Touche LLP
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; Chairman, INVESTOR INFORMATION
Colonial Insurance Company, Ltd. For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
Abby M. O'Neill - Private Investor a touch-tone telephone.
Walter E. Robb, III - President and Treasurer, For information on MFS mutual funds, call your
Benchmark Advisors, Inc. (corporate financial financial adviser or, for an information kit, call
consultants); President, Benchmark Consulting toll free: 1-800-637-2929 any business day from
Group, Inc. (office services) 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime).
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, INVESTOR SERVICE
MFS Investment Management MFS Service Center, Inc.
P.O. Box 2281
Jeffrey L. Shames* - Chairman, Chief Boston, MA 02107-9906
Executive Officer, and Director,
MFS Investment Management For general information, call toll free:
1-800-225-2606 any business day from
J. Dale Sherratt - President, Insight Resources, 8 a.m. to 8 p.m. Eastern time.
Inc. (acquisition planning specialists)
For service to speech- or hearing-impaired,
Ward Smith - Former Chairman (until 1994), call toll free: 1-800-637-6576 any business day
NACCO Industries (holding company) from 9 a.m. to 5 p.m. Eastern time. (To use
this service, your phone must be equipped with
INVESTMENT ADVISER a Telecommunications Device for the Deaf.) For
Massachusetts Financial Services Company share prices, account balances, and exchanges,
500 Boylston Street call toll free: 1-800-MFS-TALK (1-800-637-8255)
Boston, MA 02116-3741 anytime from a touch-tone telephone.
DISTRIBUTOR WORLD WIDE WEB
MFS Fund Distributors, Inc. www.mfs.com
500 Boylston Street
Boston, MA 02116-3741
PORTFOLIO MANAGERS
Steven E. Nothern*
Christopher D. Piros*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
</TABLE>
*Affiliated with the Investment Adviser
<PAGE>
----------------
MFS(R) INTERMEDIATE INCOME FUND Bulk Rate
U.S. Postage
Paid
MFS
----------------
[Logo] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MII-2 1/99 16M 05/205/805
