MFS Intermediate Income Fund
MII Series Trust II
MFS Investment Management
75 Years
WE INVENTED THE MUTUAL FUND (registered trademark)
MFS(registered trademark) Intermediate Income Fund
Semiannual Report
[bullet] May 31, 1999
Diversifying your investment portfolio (see page 30)
Table of Contents
Letter from the Chairman 1
Management Review and Outlook 3
Performance Summary 7
Portfolio of Investments 10
Financial Statements 14
Notes to Financial Statements 20
MFS' Year 2000 Readiness Disclosure 29
Trustees and Officers 33
MFS(registered trademark) Original Research SM
Research has been central to investment management at MFS since 1932,
when we created one of the first in-house research departments in the
mutual fund industry. Original Research at MFS is more than just
crunching numbers and creating economic models: it's getting to know
each security and each company personally.
[GRAPHIC OMITTED: MFS LOGO]
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
Letter from the Chairman
[GRAPHIC OMITTED: PHOTO OF JEFFREY L. SHAMES]
Dear Shareholders,
It has been almost two years since financial turmoil began to rock
markets in Asia, Russia, and Latin America. Even developed markets such
as Europe and the United States were not immune. In the U.S. equity
market, for example, investors focused on a narrow group of 50 of the
largest-company growth stocks because they seemed to offer less
volatility in uncertain times. Fixed-income investors also became more
concerned about risk, moving money into U.S. Treasury securities and out
of corporate and municipal bonds and mortgage-backed securities.
The narrowness of the market was just one of three broad issues that
dominated the U.S. equity market until recently. The other two were a
slowdown in corporate earnings growth and high valuations, with stocks
of many companies selling at extremely high prices relative to their
earnings.
Although these have been challenging issues, we now see signs that we
feel demonstrate each one is changing for the better. Today, we believe
the markets are presenting more opportunities for investors to
diversify, for our portfolio managers to find good values, and for us to
show the benefits of staying with our long-term objectives and
strategies. Investors seem to be regaining confidence in a wider range
of companies. Stocks of some small and mid-sized companies, as well as
some large industrial companies, have begun to perform better in the
past few months than they had for the previous year or so. These
companies appear to have benefited from early signs of stability in
emerging markets and a continuation of economic growth in the United
States.
U.S. companies also have produced better earnings. Corporate earnings
were, on average, relatively flat in 1998. However, we expect earnings
to grow 12% to 14% this year because more companies have benefited from
the strong economy and from aggressive consolidation and cost-cutting
measures they have taken over the past several years.
Based on their earnings projections, our analysts estimate that the U.S.
stock market is still about 30% overvalued. While there has been some
shift to a wider group of stocks, many investors are still focusing on
the large-company stocks. As a result, most of the overvaluation is in
the 50 largest stocks in the Standard & Poor's 500 Composite Index (the
S&P 500), a popular, unmanaged index of common stock total return
performance. That means about 450 stocks are selling at more attractive
prices, particularly given what we see as the improved earnings outlooks
for these and many small and mid-sized companies not in the S&P 500.
These companies also benefit from consolidation, cost cutting, and
global growth. Because they are smaller, they may be able to respond to
these changes more quickly, and thus they have the potential to grow
faster than the big companies.
The fixed-income markets, meanwhile, seem to be approaching the level of
relative stability they enjoyed before the Asian turmoil. Some credit
for this stability goes to the Federal Reserve Board (the Fed), which
has reassured investors that it will act to prevent rapid economic
growth from causing higher inflation and reduced purchasing power. Also,
once investors saw that the overseas turmoil had little, if any, effect
on the financial strength of most domestic bond issuers, the major non-
Treasury markets -- corporate, municipal, and mortgage -- began to
rebound. Our portfolio managers are now finding more opportunities to
buy bonds with relatively stable prices and attractive yields.
The past two years have challenged investors. However, we believe we
are well positioned for the current environment because our analysts and
portfolio managers continue to rely on MFS(registered trademark)
Original Research SM to help evaluate the long-term investment potential
of each holding being considered for our portfolios. Also, we believe
our discipline of maintaining diversified portfolios and of staying with
our funds' clearly defined investment strategies can help us offer
investment products with the potential to sustain returns over a variety
of market cycles.
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(registered trademark)
June 17, 1999
Management Review and Outlook
For the six months ended May 31, 1999, Class A shares of the Fund
provided a total return of -0.38%, Class B shares -1.03%, and Class I
shares -0.50%. These returns assume the reinvestment of distributions
but exclude the effects of any sales charges.
During the same period, the average short-term world multimarket income
fund tracked by Lipper Analytical Services, Inc., an independent firm
that reports mutual fund performance, returned 0.73%. The Fund's results
also compare to a -0.23% 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 1.39% return for the Lehman Brothers Mortgage Index (which
includes maturities of both 15 and 30 years), and a -4.55% 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).
Q. What factors have contributed to the Fund's performance?
A. After experiencing some volatility last fall, the Fund recently has
benefited from its higher-than-average weighting in government-agency,
mortgage-backed, and corporate securities. Thanks to renewed global
growth and several interest-rate cuts in 1998 by the U.S. Federal
Reserve Board (the Fed) and central banks in several other countries,
these markets generally have recovered from the turmoil that followed
last August's Russian bond default. As a result, yields on non-Treasury
securities have declined and their prices have increased, which helped
performance. (Principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.)
Q. How does the Fund reflect your outlook on interest rates?
A. In the near term, we think the bond markets will continue to adjust
to the growing possibility of an interest-rate increase by the Fed. We
think this outlook should keep yields on two-year Treasury securities
between 4.85% and 5.37%. We believe yields on Treasuries with longer
maturities, meanwhile, should reflect investor perception about economic
growth. We feel that interest rates may increase to rein in a surging
economy and quell inflation fears if investors believe growth is too
strong. However, since we believe inflation should remain in check, we
think any rate increase should be limited and will present us with an
opportunity to buy select higher-yielding securities. With the strong
economy, we believe that corporate securities continue to offer good
value and additional yield.
Q. How is this outlook reflected in the Fund's sensitivity to changes in
interest rates?
A. The portfolio's interest-rate sensitivity is about the same as that
of the Lehman Brothers Intermediate Government Bond Index, which tends
to have limited price volatility when interest rates change. We want to
avoid holding too many bonds with maturities longer than 10 years
because their prices would decline if interest rates went up. By the
same token, we don't want to hold too many bonds with maturities shorter
than two years because they produce relatively low yields. However, if
interest rates do rise enough to slow the economy over the next few
months, we will consider slightly increasing our long-term bond position
in an effort to gain additional yield.
Q. How are the international markets performing?
A. Over the first four months of 1999, most of the developed Western
European bond markets outperformed U.S. Treasuries. During this period,
the newly formed European Central Bank lowered interest rates by 50
basis points (0.50%) to stimulate demand, which had been sluggish. By
the beginning of May, the lagging German economy began to grow, and
interest rates of most European countries began to rise.
Q. How were the Fund's foreign assets invested during this period?
A. Approximately 9% of the Fund's assets were allocated to developed
international markets. Roughly half of the allocation was invested in
the United Kingdom, Denmark, and Greece -- countries that are not
presently in the European monetary union (EMU) but are likely to join in
the next couple of years. As these countries join the EMU, we think
interest rates on their bonds should decline, giving them good price
performance. The balance of the international assets was invested in
Australia and New Zealand, both of which have offered higher interest
rates than the United States.
Q. What's your outlook for the international markets?
A. We believe the possibility of additional interest-rate cuts in Europe
is small. As Western European inflation remains low, we believe interest
rates within the EMU should remain stable. We think the improving
economic strength of countries such as Greece, Denmark, and the United
Kingdom should help their bonds perform well. Over time, we believe
Australia and New Zealand should do better than the United States,
partly because of increasing demand for commodities. Therefore, we do
not anticipate much change in our international holdings.
/S/STEPHEN C. BRYANT /S/ STEVEN E. NOTHERN
Stephen C. Bryant Steven E. Nothern
Portfolio Manager Portfolio Manager
The opinions expressed in this report are those of the portfolio
managers and are current 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.
It is not possible to invest directly in an index.
PORTFOLIO MANAGERS' PROFILES
Stephen C. Bryant is Senior Vice President of MFS Investment
Management(registered trademark) and portfolio manager of MFS(registered
trademark) Institutional Global Fixed Income Fund, the Global
Governments Series offered through MFS(registered trademark)/Sun Life
annuity products, and MFS(registered trademark) Government Markets
Income Trust, a closed-end fund. He joined MFS in 1987 as Assistant Vice
President. He was named Vice President in 1989, portfolio manager in
1992, and Senior Vice President in 1993. Mr. Bryant is a graduate of
Wesleyan University.
Steven E. Nothern is Senior Vice President and a member of the Fixed
Income Management Group of MFS Investment Management(registered
trademark). He is portfolio manager of MFS(registered trademark)
Government Securities Fund, the Government Securities Series offered
through MFS(registered trademark)/Sun Life annuity products,
MFS(registered trademark) Intermediate Income Trust, and MFS(registered
trademark) Government Markets Income Trust. Mr. Nothern joined MFS in
1986 in the Fixed Income Department and was named Vice President in
1989, portfolio manager in 1991, 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.
All portfolio managers at MFS Investment Management(registered
trademark) are supported by an investment staff of over 100
professionals utilizing MFS(registered trademark) Original ResearchSM, a
company-oriented, bottom-up process of selecting securities.
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.
Fund Facts
Strategy: 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: $121.4 million net assets as of May 31, 1999
Performance Summary
Because mutual funds are designed for investors with long-term goals, we
have provided cumulative results as well as the average annual total
returns for the applicable time periods. Investment results reflect the
percentage change in net asset value, including reinvestment of
dividends. (See Notes to Performance Summary for more information.)
Average Annual and Cumulative Total Rates of Return
through May 31, 1999
Class A
6 Months 1 Year 3 Years 5 Years 10 Years/Life
- -----------------------------------------------------------------------
Cumulative Total
Return -0.38% +2.08% +17.79% +35.28% +80.61%
- -----------------------------------------------------------------------
Average Annual
Total Return -- +2.08% + 5.61% + 6.23% + 6.09%
- -----------------------------------------------------------------------
SEC Results -- -2.77% + 3.91% + 5.20% + 5.58%
- -----------------------------------------------------------------------
Class B
6 Months 1 Year 3 Years 5 Years 10 Years/Life
- -----------------------------------------------------------------------
Cumulative Total
Return -1.03% +0.93% +14.25% +28.42% +70.01%
- -----------------------------------------------------------------------
Average Annual
Total Return -- +0.93% + 4.54% + 5.13% + 5.45%
- -----------------------------------------------------------------------
SEC Results -- -2.89% + 3.65% + 4.81% + 5.45%
- -----------------------------------------------------------------------
Class I
6 Months 1 Year 3 Years 5 Years 10 Years/Life
- -----------------------------------------------------------------------
Cumulative Total
Return -0.50% +1.95% +16.62% +31.13% +73.59%
- -----------------------------------------------------------------------
Average Annual
Total Return -- +1.95% + 5.26% + 5.57% + 5.67%
- -----------------------------------------------------------------------
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. These results represent the percentage change in net
asset value.
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.
[GRAPHIC OMITTED: pie chart PORTFOLIO CONCENTRATION AS OF MAY 31, 1999]
Portfolio Concentration as of May 31, 1999
Portfolio Structure
U.S. Treasuries 3.1%
Emerging Markets 3.2%
Yankee 5.6%
Other Government Agencies 6.2%
International 9.2%
Mortgage Backed 16.1%
Asset Backed 22.2%
High-Grade Corporates 34.4%
Footnote reads:
The portfolio is actively managed, and holdings are subject to change.
<TABLE>
<CAPTION>
Portfolio of Investments (Unaudited) - May 31, 1999
Bonds - 99.1%
- ------------------------------------------------------------------------------------------------
Principal Amount
Issuer (000 Omitted) Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Bonds - 81.4%
Airlines - 1.0%
Delta Air Lines, 6.65s, 2004 $ 1,228 $ 1,216,862
- ------------------------------------------------------------------------------------------------
Automotive - 3.2%
Ford Motor Credit Co., 5.75s, 2004 $ 2,000 $ 1,942,360
General Motors Acceptance Corp., 7s, 2002 1,898 1,933,682
--------------
$ 3,876,042
- ------------------------------------------------------------------------------------------------
Banks and Credit Companies - 3.7%
Aristar, Inc., 5.85s, 2004 $ 1,264 $ 1,223,476
Great Western Financial Corp., 6.375s, 2000 1,664 1,670,839
Providian National Bank, 6.75s, 2002 1,587 1,581,922
--------------
$ 4,476,237
- ------------------------------------------------------------------------------------------------
Consumer Goods and Services - 1.0%
RJR Nabisco, Inc., 7.75s, 2006## $ 1,239 $ 1,257,783
- ------------------------------------------------------------------------------------------------
Corporate Asset Backed - 22.2%
American Express Credit Account Trust, 5.6s, 2006 $ 620 $ 602,175
Amresco Residential Securities Mortgage Loan, 5.94s, 2015 2,750 2,731,953
BankBoston Home Equity Loan Trust, 5.89s, 2013 1,331 1,319,042
Carco Auto Loan Master Trust, 5.65s, 2003 2,000 1,991,875
Case Equipment Receivables Trust, 5.285s, 2002 1,460 1,455,894
Commonwealth Edison Transition Funding Trust, 5.29s, 2003 1,331 1,320,179
Discover Card Master Trust I, 5.85s, 2006 2,100 2,050,125
Ford Credit Auto Owner Trust, 5.31s, 2001 620 619,417
GE Capital Mortgage Services, Inc., 6.035s, 2020 2,400 2,396,250
Green Tree Financial Corp., 6.39s, 2029 1,305 1,311,107
Green Tree Financial Corp., 6.91s, 2028 2,305 2,323,002
Merrill Lynch Mortgage Investors, Inc., 5.65s, 2030 1,281 1,237,610
Partners First Credit Card Master Trust, 5.003s, 2027 1,650 1,650,000
Peco Energy Transition Trust, 5.48s, 2003 1,292 1,287,530
Pemex Finance Ltd., 5.72s, 2003## 2,700 2,599,857
Premier Auto Trust, 5.88s, 2001 1,470 1,473,675
Providian Home Equity Loan Trust, 5.196s, 2025 560 558,774
--------------
$ 26,928,465
- ------------------------------------------------------------------------------------------------
Financial Institutions - 2.5%
Lehman Brothers Holdings, 6.375s, 2001 $ 1,373 $ 1,371,861
Merrill Lynch & Co., 6.06s, 2001 1,665 1,659,905
--------------
$ 3,031,766
- ------------------------------------------------------------------------------------------------
Food and Beverage Products - 2.4%
Whitman Corp., 6s, 2004 $ 1,477 $ 1,448,641
J Seagram & Sons, Inc., 5.79s, 2001 1,483 1,460,251
--------------
$ 2,908,892
- ------------------------------------------------------------------------------------------------
Government National Mortgage Association - 13.3%
GNMA, 7s, 2023 $ 1,444 $ 1,447,102
GNMA, 7.5s, 2023 1,013 1,038,004
GNMA, 8.5s, 2009 3,368 3,526,752
GNMA TBA, 7s, 2008 - 2012 5,421 5,521,284
GNMA TBA, 7.5s, 2025 - 2027 4,301 4,397,623
GNMA TBA, 8.5s, 2001 - 2008 208 220,452
--------------
$ 16,151,217
- ------------------------------------------------------------------------------------------------
Insurance - 1.5%
Conseco, Inc., 6.4s, 2001 $ 1,253 $ 1,232,100
Conseco, Inc., 7.875s, 2000 580 589,048
--------------
$ 1,821,148
- ------------------------------------------------------------------------------------------------
Oils - 2.4%
Conoco, Inc., 5.9s, 2004 $ 1,440 $ 1,411,257
Occidental Petroleum Corp., 10.125s, 2001 1,360 1,464,217
--------------
$ 2,875,474
- ------------------------------------------------------------------------------------------------
Stores - 1.0%
Rite Aid Corp., 6.7s, 2001 $ 1,250 $ 1,246,950
- ------------------------------------------------------------------------------------------------
Telecommunications and Cable - 6.6%
Comcast Corp., 9.125s, 2006 $ 1,591 $ 1,696,467
Sprint Capital Corp., 5.875s, 2004 1,465 1,425,049
Sprint Spectrum LP, 11s, 2006 2,000 2,238,100
Telecomunicaiones De Peurto, 6.15s, 2002## 1,596 1,581,046
Time Warner Pass-Through Asset Trust, 6.1s, 2001## 1,000 997,080
--------------
$ 7,937,742
- ------------------------------------------------------------------------------------------------
U.S. Federal Agencies - 9.3%
Federal Home Loan Mortgage Corp., 5.83s, 2013 $ 1,787 $ 1,780,463
Federal National Mortgage Assn., 6.13s, 2011 1,000 990,000
Federal National Mortgage Assn., 6.75s, 2003 1,439 1,454,931
Federal National Mortgage Assn. TBA, 6s, 2013 832 811,875
State of Israel AID, 6.625s, 2003 5,000 5,099,300
Student Loan Trust, 5.017s, 2004 1,170 1,166,329
--------------
$ 11,302,898
- ------------------------------------------------------------------------------------------------
U.S. Government Guaranteed - 0.5%
Government Trust Certificates, 9.25s, 2001 $ 561 $ 588,405
- ------------------------------------------------------------------------------------------------
U.S. Treasury Obligations - 3.2%
United States Treasury Bonds, 10.75s, 2003 $ 1,500 $ 1,746,795
United States Treasury Notes, 5.25s, 2004 1,205 1,187,672
United States Treasury Notes, 5.5s, 2009 1,000 990,620
--------------
$ 3,925,087
- ------------------------------------------------------------------------------------------------
Utilities - Electric - 5.5%
Boston Edison Co., 6.8s, 2000 $ 2,215 $ 2,233,163
California Infrastructure, 6.17s, 2003 1,000 1,004,060
Entergy Mississippi, Inc., 6.2s, 2004 1,500 1,468,350
Midamerican Funding LLC, 5.85s, 2001## 1,964 1,955,215
--------------
$ 6,660,788
- ------------------------------------------------------------------------------------------------
Utilities - Gas - 2.1%
CMS Panhandle Holding Co., 6.125s, 2004## $ 1,161 $ 1,137,780
Columbia Gas Systems, Inc., 6.39s, 2000 1,417 1,422,852
--------------
$ 2,560,632
- ------------------------------------------------------------------------------------------------
Total U.S. Bonds $ 98,766,388
- ------------------------------------------------------------------------------------------------
Foreign Bonds - 17.7%
Australia - 2.1%
Commonwealth of Australia, 7.5s, 2009 AUD 3,485 $ 2,523,348
- ------------------------------------------------------------------------------------------------
Brazil - 0.5%
Republic of Brazil, 11.625s, 2004 $ 630 $ 571,725
- ------------------------------------------------------------------------------------------------
Costa Rica - 0.3%
Republic of Costa Rica, 9.335s, 2009## $ 433 $ 410,268
- ------------------------------------------------------------------------------------------------
Denmark - 0.3%
Kingdom of Denmark, 7s, 2007 DKK 2,447 $ 405,041
- ------------------------------------------------------------------------------------------------
Germany - 1.7%
Bayerische Landesbank Girozent (Banks and Credit Cos.),
5.625s, 2001 $ 465 $ 462,452
Landesbank Baden Wurttemberg (Banks and Credit Cos.),
7.875s, 2004 1,500 1,588,800
--------------
$ 2,051,252
- ------------------------------------------------------------------------------------------------
Greece - 1.0%
Hellenic Republic, 5.75s, 2008 EUR 151 $ 168,893
Republic of Greece, 8.01s, 2003 GRD 300,000 1,046,948
--------------
$ 1,215,841
- ------------------------------------------------------------------------------------------------
Iceland - 0.5%
Republic of Iceland, 6.125s, 2004 $ 635 $ 624,770
- ------------------------------------------------------------------------------------------------
Mexico - 0.1%
Petrolos Mexicanos (Oils), 9.5s, 2027## $ 100 $ 92,625
- ------------------------------------------------------------------------------------------------
New Zealand - 3.4%
Government of New Zealand, 8s, 2004 NZD 7,100 $ 4,182,345
- ------------------------------------------------------------------------------------------------
Norway - 1.2%
Union Bank Norway (Banks and Credit Cos.), 7.35s,
2049## $ 1,500 $ 1,492,020
- ------------------------------------------------------------------------------------------------
Panama - 0.1%
Republic of Panama, 4s, 2014 $ 230 $ 165,025
- ------------------------------------------------------------------------------------------------
Peru - 0.3%
Republic of Peru, 4.5s, 2017 $ 500 $ 302,500
- ------------------------------------------------------------------------------------------------
Philippines - 0.4%
Republic Of Philippines, 9.875s, 2019 $ 535 $ 516,275
- ------------------------------------------------------------------------------------------------
South Korea - 1.0%
Export-Import Bank Korea (Banks and Credit Cos.), 7.1s,
2007 $ 530 $ 519,347
Korea Development Bank (Banks and Credit Cos.), 10.172s,
2003## 750 727,500
--------------
$ 1,246,847
- ------------------------------------------------------------------------------------------------
Spain - 2.1%
Kingdom of Spain, 9.125s, 2000 $ 2,400 $ 2,491,968
- ------------------------------------------------------------------------------------------------
United Kingdom - 2.3%
United Kingdom Treasury, 6.5s, 2003 GBP 662 $ 1,122,034
United Kingdom Treasury, 6.75s, 2004 929 1,611,038
--------------
$ 2,733,072
- ------------------------------------------------------------------------------------------------
Uruguay - 0.4%
Banco Comercial S. A. (Banks and Credit Cos.), 8.875s,
2009## $ 450 $ 439,695
- ------------------------------------------------------------------------------------------------
Total Foreign Bonds $ 21,464,617
- ------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $121,746,605) $120,231,005
- ------------------------------------------------------------------------------------------------
Other Assets, Less Liabilities - 0.9% 1,126,702
- ------------------------------------------------------------------------------------------------
Net Assets - 100.0% $121,357,707
- ------------------------------------------------------------------------------------------------
##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
DKK = Danish Kroner JPY = Japanese Yen
EUR = Euro NZD = New Zealand Dollars
GBP = British Pounds
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Statements
Statement of Assets and Liabilities (Unaudited)
- ------------------------------------------------------------------------------------------------
May 31, 1999
- ------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments, at value (identified cost, $121,746,605) $120,231,005
Foreign currency, at value (identified cost, $146,215) 142,431
Net receivable for forward foreign currency exchange contracts to purchase 43,268
Receivable for Fund shares sold 147,446
Receivable for investments sold 1,320,552
Interest receivable 1,380,170
Other assets 1,849
------------
Total assets $123,266,721
------------
Liabilities:
Payable to custodian $ 70,396
Payable for daily variation margin on open futures contacts 2,031
Payable for Fund shares reacquired 132,943
Payable for investments purchased 1,202,569
Net payable for forward foreign currency exchange contracts to sell 127,743
Net payable for forward foreign currency exchange contracts closed or subject to
master netting agreements 169,669
Payable to affiliates -
Management fee 7,310
Shareholder servicing agent fee 1,329
Distribution and service fee 39,494
Administrative fee 199
Accrued expenses and other liabilities 155,331
------------
Total liabilities $ 1,909,014
------------
Net assets $121,357,707
------------
Net assets consist of:
Paid-in capital $131,067,904
Unrealized depreciation on investments and translation of assets and liabilities
in foreign currencies (2,041,175)
Accumulated net realized loss on investments and foreign
currency transactions (7,597,044)
Accumulated distributions in excess of net investment income (71,978)
------------
Total $121,357,707
------------
Shares of beneficial interest outstanding 15,122,784
------------
Class A shares:
Net asset value per share
(net assets of $46,107,265 (divided by) 5,756,572 shares of beneficial interest
outstanding) $8.01
----
Offering price per share (100 (divided by) 95.25) $8.41
----
Class B shares:
Net asset value and offering price per share
(net assets of $75,240,089 (divided by) 9,364,921 shares of beneficial interest
outstanding) $8.03
----
Class I shares:
Net asset value and offering price per share
(net assets of $10,353 (divided by) 1,291 shares of beneficial interest
outstanding) $8.02
----
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
</TABLE>
<TABLE>
<CAPTION>
Statement of Operations (Unaudited)
- ------------------------------------------------------------------------------------------------
Six Months Ended May 31, 1999
- ------------------------------------------------------------------------------------------------
<S> <C>
Net investment income:
Interest income $ 4,352,204
-----------
Expenses -
Management fee $ 444,216
Trustees' compensation 20,858
Shareholder servicing agent fee 69,160
Distribution and service fee (Class B) 412,904
Administrative fee 7,888
Auditing fees 29,250
Custodian fee 29,143
Printing 16,512
Postage 11,988
Legal fees 1,468
Miscellaneous 77,325
-----------
Total expenses $ 1,120,712
Fees paid indirectly (10,655)
Preliminary reduction of expenses by investment adviser (93,427)
-----------
Net expenses $ 1,016,630
-----------
Net investment income $ 3,335,574
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ (403,043)
Written option transactions 130,136
Foreign currency transactions (259,214)
-----------
Net realized loss on investments and foreign currency transactions $ (532,121)
-----------
Change in unrealized depreciation -
Investments $(3,403,601)
Written options (46,880)
Translation of assets and liabilities in foreign currencies (19,396)
Futures contracts (265,438)
-----------
Net unrealized loss on investments and foreign currency translation $(3,735,315)
-----------
Net realized and unrealized loss on investments and foreign currency $(4,267,436)
-----------
Decrease in net assets from operations $ (931,862)
-----------
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------
Six Months Ended Year Ended
May 31, 1999 November 30, 1998
(Unaudited)
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 3,335,574 $ 7,795,666
Net realized loss on investments and foreign currency
transactions (532,121) (2,272,438)
Net unrealized gain (loss) on investments and foreign
currency translation (3,735,315) 1,509,991
------------ ------------
Increase (decrease) in net assets from operations $ (931,862) $ 7,033,219
------------ ------------
Distributions declared to shareholders -
From net investment income (Class A) $ (1,342,167) $ (2,360,988)
From net investment income (Class B) (2,067,178) (5,169,854)
From net investment income (Class I) (278) (350)
In excess of net investment income (Class A) (28,333) --
In excess of net investment income (Class B) (43,639) --
In excess of net investment income (Class I) (6) --
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 $ (3,481,601) $ (8,449,632)
------------ ------------
Decrease in net assets from Fund share transactions $ (7,698,077) $(15,385,822)
------------ ------------
Total decrease in net assets $(12,111,540) $(16,802,235)
Net assets:
At beginning of period 133,469,247 150,271,482
------------ ------------
At end of period (including accumulated distributions
in excess of net investment income (accumulated
undistributed net investment income) of ($71,978)
and $74,049, respectively) $121,357,707 $133,469,247
------------ ------------
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
- ---------------------------------------------------------------------------------------------------------
Year Ended November 30,
Six Months Ended ----------------------------------------
May 31, 1999 1998 1997 1996 1995 1994
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Class A
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.29 $ 8.39 $ 8.57 $ 8.59 $ 7.96 $ 8.94
------ ------ ------ ------ ------ ------
Income from investment operations # -
Net investment income [SECTION MARK] $ 0.24 $ 0.53 $ 0.55 $ 0.55 $ 0.57 $ 0.59
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.23) (0.05) (0.18) (0.01) 0.61 (0.95)
------ ------ ------ ------ ------ ------
Total from investment operations $ 0.01 $ 0.48 $ 0.37 $ 0.54 $ 1.18 $(0.36)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.28) $(0.52) $(0.55) $(0.56) $(0.55) $ --
In excess of net investment income+++ (0.01) -- -- (0.00) -- --
From paid-in capital -- (0.06) -- -- -- (0.62)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.29) $(0.58) $(0.55) $(0.56) $(0.55) $(0.62)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.01 $ 8.29 $ 8.39 $ 8.57 $ 8.59 $ 7.96
------ ------ ------ ------ ------ ------
Total return [DBL. DAGGER] (0.38%)++ 5.86% 4.59% 6.61% 15.40% (4.27%)
Ratios (to average net assets)/
Supplemental data [SECTION MARK]
Expenses ## 0.97%+ 1.12% 1.17% 1.17% 1.14% 1.18%
Net investment income 5.89%+ 6.33% 6.63% 6.58% 6.81% 7.10%
Portfolio turnover 116% 173% 226% 288% 275% 211%
Net assets at end of period (000 omitted) $46,107 $44,116 $30,833 $21,291 $12,659 $3,432
+ Annualized.
++ Not annualized.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment
income was less than $0.01.
# Per share data is based on average shares outstanding.
## The Fund had 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.
[DBL. DAGGER] 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.
[SECTION MARK] The investment adviser voluntarily waived a portion of its 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 these:
Net investment income $ 0.23 $ 0.52 -- -- -- --
Ratios (to average net assets)
Expenses## 1.12%+ 1.15% -- -- -- --
Net investment income 5.74%+ 6.30% -- -- -- --
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ---------------------------------------------------------------------------------------------------------
Year Ended November 30,
Six Months Ended ----------------------------------------
May 31, 1999 1998 1997 1996 1995 1994
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Class B
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.32 $ 8.40 $ 8.57 $ 8.58 $ 7.96 $ 8.93
------ ------ ------ ------ ------ ------
Income from investment operations # -
Net investment income [SECTION MARK] $ 0.20 $ 0.44 $ 0.47 $ 0.46 $ 0.48 $ 0.47
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions (0.25) (0.04) (0.18) (0.01) 0.61 (0.92)
------ ------ ------ ------ ------ ------
Total from investment operations $(0.05) $ 0.40 $ 0.29 $ 0.45 $ 1.09 $(0.45)
------ ------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.23) $(0.43) $(0.46) $(0.46) $(0.47) $ --
In excess of net investment income+++ (0.01) -- -- (0.00) -- --
From paid-in capital -- (0.05) -- -- -- (0.52)
------ ------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.24) $(0.48) $(0.46) $(0.46) $(0.47) $(0.52)
------ ------ ------ ------ ------ ------
Net asset value - end of period $ 8.03 $ 8.32 $ 8.40 $ 8.57 $ 8.58 $ 7.96
------ ------ ------ ------ ------ ------
Total return (1.03%)++ 4.86% 3.57% 5.52% 14.12% (5.24%)
Ratios (to average net assets)/
Supplemental data [SECTION MARK]
Expenses ## 1.96%+ 2.12% 2.19% 2.24% 2.23% 2.22%
Net investment income 4.87%+ 5.30% 5.61% 5.47% 5.79% 5.60%
Portfolio turnover 116% 173% 226% 288% 275% 211%
Net assets at end of period (000 omitted) $75,240 $89,345 $119,436 $171,148 $232,312 $292,619
+ Annualized.
++ Not annualized.
+++ For the year ended November 30, 1996, the per share distribution in excess of net investment income
was less than $0.01.
# Per share data is based on average shares outstanding.
## The Fund had 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.
[SECTION MARK] The investment adviser voluntarily waived a portion of its 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 these:
Net investment income $ 0.19 $ 0.44 -- -- -- --
Ratios (to average net assets)
Expenses## 2.11%+ 2.15% -- -- -- --
Net investment income 4.72%+ 5.27% -- -- -- --
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights (continued)
- ------------------------------------------------------------------------------------------------------------
Year Ended
November 30,
Six Months Ended --------------------------
May 31, 1999 1998 1997*
(Unaudited)
- ------------------------------------------------------------------------------------------------------------
Class I
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding
throughout each period):
Net asset value - beginning of period $ 8.31 $ 8.41 $ 8.43
------ ------ ------
Income from investment operations # -
Net investment income [SECTION MARK] $ 0.24 $ 0.55 $ 0.61
Net realized and unrealized loss on
investments and foreign currency
transactions (0.24) (0.07) (0.17)
------ ------ ------
Total from investment operations $ 0.00 $ 0.48 $ 0.44
------ ------ ------
Less distributions declared to shareholders
From net investment income $(0.28) $(0.52) $(0.46)
In excess of net investment income (0.01) -- --
From paid-in capital -- (0.06) --
------ ------ ------
Total distributions declared to shareholders $(0.29) $(0.58) $(0.46)
------ ------ ------
Net asset value - end of period $ 8.02 $ 8.31 $ 8.41
------ ------ ------
Total return (0.50%)++ 5.97% 5.07%++
Ratios (to average net assets)/Supplemental data [SECTION MARK]
Expenses ## 0.97%+ 1.10% 1.03%+
Net investment income 5.89%+ 6.36% 6.52%+
Portfolio turnover 116% 173% 226%
Net assets at end of period (000 omitted) $10 $8 $3
* For the period from the inception of Class I, January 2, 1997, through November 30, 1997.
+ Annualized.
++ Not annualized.
# Per share data is based on average shares outstanding.
## The Fund had 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.
[SECTION MARK] The investment adviser voluntarily waived a portion of its 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 these:
Net investment income $ 0.23 $ 0.55 --
Ratios (to average net assets)
Expenses## 1.12%+ 1.13% --
Net investment income 5.74%+ 6.33% --
See notes to financial statements
</TABLE>
Notes to Financial Statements (Unaudited)
(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.
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 [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
distributions from paid-in 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.
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. Class B shares will convert to Class A shares
approximately eight years after purchase.
(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. The investment adviser has voluntarily agreed to
waive a portion of its fee, which is reflected as a preliminary
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 $5,712 for the six months ended May 31,
1999.
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 $15,405 for the six months ended May 31, 1999, 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 the 0.25% per annum service fee may be imposed with the next
prospectus update (April 1, 2000), at the discretion of MFD. Payments of
the 0.10% per annum distribution fee will commence on such date as the
trustees of the Fund may determine.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of 0.75% per annum, and a service fee of up to 0.25%
per annum, of the Fund's average daily net assets attributable to Class
B shares. MFD will pay to securities dealers that enter into a sales
agreement with MFD all or a portion of the service fee attributable to
Class B shares. The service fee is intended to be 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 $14,989 for Class B for the six months ended
May 31, 1999. Fees incurred under the distribution plan during the six
months ended May 31, 1999, 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 six months
ended May 31, 1999, were $465 and $27,569 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 0.10%. Prior to April 1, 1999, the fee was
calculated as a percentage of the Fund's average daily net assets at an
effective annual rate of 0.1125%.
(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 $ 39,152,942 $ 110,252,166
-------------- --------------
Investments (non-U.S.
government securities) $107,062,622 $ 36,576,141
-------------- --------------
The cost and unrealized appreciation and depreciation in the value of
the investments owned by the Fund, as computed on a federal income tax
basis, are as follows:
Aggregate cost $ 121,913,272
----------------
Gross unrealized depreciation $ (2,069,438)
Gross unrealized appreciation 387,171
----------------
Net unrealized depreciation $ (1,682,267)
----------------
<TABLE>
<CAPTION>
(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:
Class A Shares
Six Months Ended May 31, 1999 Year Ended November 30, 1998
----------------------------- ----------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 1,388,794 $ 11,349,046 3,557,110 $ 29,662,076
Shares issued to shareholders in
reinvestment of distributions 114,716 937,721 216,409 1,800,509
Shares reacquired (1,065,402) (8,705,353) (2,129,785) (17,689,458)
---------- -------------- ---------- --------------
Net increase 438,108 $ 3,581,414 1,643,734 $ 13,773,127
---------- -------------- ---------- --------------
Class B Shares
Six Months Ended May 31, 1999 Year Ended November 30, 1998
----------------------------- ----------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 589,278 $ 4,836,144 1,345,750 $ 11,221,642
Shares issued to shareholders in
reinvestment of distributions 143,833 1,180,751 380,682 3,178,360
Shares reacquired (2,110,243) (17,298,874) (5,204,805) (43,564,370)
---------- -------------- ---------- --------------
Net decrease (1,377,132) $ (11,281,979) (3,478,373) $ (29,164,368)
---------- -------------- ---------- --------------
Class I Shares
Six Months Ended May 31, 1999 Year Ended November 30, 1998
----------------------------- ----------------------------
Shares Amount Shares Amount
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 333 $ 2,739 715 $ 6,023
Shares issued to shareholders in
reinvestment of distributions 34 282 47 390
Shares reacquired (64) (533) (117) (994)
---------- -------------- ---------- --------------
Net increase 303 $ 2,488 645 $ 5,419
---------- -------------- ---------- --------------
(6) Line of Credit
The Fund and other affiliated funds participate in a $720 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 six months ended
May 31, 1999, was $452.
(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, 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.
<CAPTION>
Written Option Transactions
1999 Calls 1999 Puts
-------------------------- --------------------------
Principal Amounts Principal Amounts
of Contracts of Contracts
(000 Omitted) Premiums (000 Omitted) Premiums
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period
Japanese Yen 518,277 $ 59,837 -- $ --
Options written
Australian Dollar 4,465 37,092 1,914 15,733
Euro Currency 5,164 48,411 -- --
Euro Currency/British Pounds 2,298 26,603 2,211 12,207
Japanese Yen 518,277 80,804 588,951 65,727
Options terminated in closing
transactions
Australian Dollar (2,680) (26,797) (1,914) (15,733)
Euro Currency (5,164) (48,411) -- --
Euro Currency/British Pounds (2,298) (26,603) (2,211) (12,207)
Japanese Yen (518,277) (59,837) -- --
Options exercised -- -- -- --
Options expired
Australian Dollar (1,785) (10,295) -- --
Japanese Yen (518,277) (80,804) (588,951) (65,727)
-------- --------
Outstanding, end of period $ -- $ --
-------- --------
At May 31, 1999, the Fund had sufficient cash and/or securities at least equal to the value of
the written options.
<CAPTION>
Forward Foreign Currency Exchange Contracts
Net Unrealized
Contracts to Contracts Appreciation
Settlement Date Deliver/Receive In Exchange For at Value (Depreciation)
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 6/16/99 AUD 6,441,462 $ 4,102,221 $ 4,203,762 $ (101,541)
6/16/99 DKK 2,806,849 412,584 394,146 18,438
6/16/99 JPY 360,992,960 2,955,035 2,993,929 (38,894)
6/16/99 NZD 7,414,165 3,966,578 3,972,324 (5,746)
-------------- -------------- ------------
$ 11,436,418 $ 11,564,161 $ (127,743)
-------------- -------------- ------------
Purchases 6/16/99 AUD 6,154,476 $ 3,909,143 $ 4,016,472 $ 107,329
6/16/99 GBP 868,320 1,412,670 1,390,810 (21,860)
6/16/99 JPY 203,064,279 1,726,334 1,684,133 (42,201)
-------------- -------------- ------------
$ 7,048,147 $ 7,091,415 $ 43,268
-------------- -------------- ------------
Forward foreign currency purchases and sales under master netting agreements excluded above
amounted to a net payable of $81,577 with C.S. First Boston, $54,466 with Deutschebank, and
$33,626 with Merrill Lynch at May 31, 1999.
At May 31, 1999, the Fund had sufficient cash and/or securities to cover any commitments under
these contracts.
<CAPTION>
Futures Contracts
Unrealized
Description Expiration Contracts Position Depreciation
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes June 1999 65 Long $ (203,554)
U.S. Treasury Notes September 1999 25 Long (61,884)
----------
$ (265,438)
----------
At May 31, 1999, the Fund had sufficient cash and/or securities to cover any margin
requirements under these contracts.
</TABLE>
MFS' Year 2000 Readiness Disclosure
MFS Investment Management(registered trademark), as an investment
adviser and on behalf of the MFS funds, is committed to the effective
use of technology in managing our portfolio investments, delivering
high-quality service to MFS fund shareholders, retirement plan
participants and MFS' institutional clients, and supporting the
financial advisers who sell our products. With that in mind, we created
a separately funded Year 2000 Program Management Office in 1996
comprised of a specialized staff reporting directly to MFS senior
management.
The Year 2000 (Y2K) problem arises because calendar-year fields in
computers and software applications traditionally have used two-digit
codes so that, for example, the year 1998 is coded as "98," with the
"19" being implied. In the year 2000, unless necessary corrections have
been made, computer applications may assume "00" refers to 1900 rather
than 2000, thus resulting in systems failures or miscalculations. To
address this issue, our team of dedicated business and technology
managers, working with outside experts, is taking steps to ascertain the
Y2K readiness of MFS' internal systems and is working with our external
systems vendors to determine whether they expect their systems to be
ready.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS(registered
trademark) Original Research SM process of evaluating portfolio
investments, one of the many relevant factors that MFS' portfolio
managers and research analysts may consider is a company's Y2K
readiness. Each year, MFS' research analysts and portfolio managers
conduct more than 1,000 on-site meetings with companies whose securities
are, or may be, held in fund and client portfolios, and host an
additional 1,500 meetings at MFS' headquarters. When assessing the Y2K
readiness of these companies, MFS' research analysts and portfolio
managers may rely upon discussions at these meetings as well as SEC
disclosure documents and third-party reports.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue.
While MFS is taking significant steps to protect the integrity of its
internal systems, there can be no assurance that these steps will be
sufficient to avoid any adverse impact on MFS, shareholders of MFS
funds, participants in retirement plans administered by MFS, or MFS'
institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness
Program, please visit our Web site at www.mfs.com or contact the MFS
Year 2000 Program Management Office by e-mail at [email protected] or by
letter at 500 Boylston Street, Boston, MA 02116-3741.
[GRAPHIC OMITTED: ILLUSTRATION OF WOMAN AND THREE NEST EGGS]
Diversifying Your Investment Portfolio
Most experts agree that it's wise to diversify your investments, no
matter what your age or financial situation. Diversification - spreading
your assets among a variety of investment types - can help spread your
risk as well.
No one type of investment performs well all the time. In fact, each type
of investment tends to follow its own cycle, so that when the price of
one is rising, the price of another may be declining. By including a
range of investments in your portfolio, the overall volatility - or
change in value - of that portfolio should be less than if you put
everything in one type of investment.
MFS offers a wide variety of investments to suit a wide range of needs.
For more information, talk to your financial adviser or request our
MFS(registered trademark) Update. For details about a specific MFS fund,
ask for a prospectus including charges and expenses. Read the prospectus
carefully before you invest or send money.
For more information, call MFS at 1-800-225-2606 any business day from 8
a.m. to 8 p.m. Eastern time or visit our Web site at www.mfs.com.
MFS (registered trademark)
Heritage Planning SM
Helping Yourself (bullet) Helping Your Parents (bullet) Helping Your
Children SM
[GRAPHIC OMITTED: ILLUSTRATION OF MAN BEHIND A DESK AND A WOMAN AND A
MAN SITTING ON CHAIRS ACROSS FROM HIM]
You, Your Adviser, and MFS:
A Powerful Partnership
In today's complex world, financial needs go beyond putting aside money,
choosing investment products, and understanding the markets. What you
really need is an overall plan to address the complex lifestyle issues
facing you, your parents, and your children. And that's where your
financial adviser and MFS can help.
MFS(registered trademark) Heritage Planning SM is our program to help you
and your adviser develop strategies to meet your long-term financial
needs. Your financial adviser can offer you MFS Heritage Planning
educational materials on topics such as:
[bullet] retirement planning
[bullet] college funding
[bullet] estate planning
[bullet] eldercare
Talk with your financial adviser today or order the MFS Heritage
Planning kit from our Web site at www.mfs.com or by calling 1-800-225-
2606 any business day from 8 a.m. to 8 p.m. Eastern time.
This material is not intended to replace the advice of a qualified
attorney, tax adviser, financial adviser, or insurance agent. Before
making any financial commitment, consult with the appropriate financial
adviser.
MFS Family of Funds(registered trademark)
MFS offers a range of mutual funds to meet investors' varying financial
needs and goals. The funds are placed below in descending order of the
level of risk and reward each one offers in relation to the others in
that asset class1. The objective of the fund you choose should
correspond to your financial needs and goals.
HIGHER RISK/HIGHER REWARD POTENTIAL
B MFS(registered trademark) Global Governments Fund2
O MFS(registered trademark) High Yield Opportunities Fund
N MFS(registered trademark) High Income Fund
D MFS(registered trademark) Municipal High Income Fund
MFS(registered trademark) Strategic Income Fund
MFS(registered trademark) Municipal State Funds
F AL, AR, CA, FL, GA, MD, MA, MS,
U NY, NC, PA, SC, TN, VA, WV
N MFS(registered trademark) Municipal Income Fund
D MFS(registered trademark) Bond Fund
S MFS(registered trademark) Municipal Bond Fund
MFS(registered trademark) Government Securities Fund
MFS(registered trademark) Government Mortgage Fund
MFS(registered trademark) Intermediate Income Fund
MFS(registered trademark) Municipal Limited
Maturity Fund
MFS(registered trademark) Limited Maturity Fund
MFS(registered trademark) Government Limited
Maturity Fund
S MFS(registered trademark)/Foreign & Colonial Emerging
T Markets Equity Fund
O MFS(registered trademark) Managed Sectors Fund
C MFS(registered trademark) New Discovery Fund
K MFS(registered trademark) Emerging Growth Fund
MFS(registered trademark) Mid Cap Growth Fund
F MFS(registered trademark) International Growth Fund
U MFS(registered trademark) Research International Fund
N MFS(registered trademark) Global Growth Fund2
D MFS(registered trademark) Strategic Growth Fund
S MFS(registered trademark) Research Fund
MFS(registered trademark) International Growth
and Income Fund
MFS(registered trademark) Global Equity Fund2
MFS(registered trademark) Capital Opportunities Fund
Massachusetts Investors Growth
Stock Fund
MFS(registered trademark) Growth Opportunities Fund
MFS(registered trademark) Large Cap Growth Fund
MFS(registered trademark) Union Standard(registered trademark)
Equity Fund
MFS(registered trademark) Research Growth
and Income Fund
Massachusetts Investors Trust
MFS(registered trademark) Equity Income Fund
MFS(registered trademark) Utilities Fund
MFS(registered trademark) Global Total Return Fund2
MFS(registered trademark) Total Return Fund
MFS(registered trademark) Global Asset
Allocation Fund2
LOWER RISK/LOWER REWARD POTENTIAL
1For information on the specific risks, charges, and expenses associated
with any MFS fund, refer to the prospectus. Read it carefully before
investing or sending money.
2MFS "global" funds were formerly "world" funds. As of August 24, 1998,
their names changed but their objectives remain the same.
MFS(registered trademark) Intermediate Income Fund
Trustees
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991), MFS Investment Management
Marshall N. Cohan - Private Investor
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, Brigham and Women's
Hospital; Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief Executive Officer, Edmund
Gibbons Ltd.; Chairman, Colonial Insurance Company, Ltd.
Abby M. O'Neill - Private Investor
Walter E. Robb, III - President and Treasurer, Benchmark Advisors, Inc.
(corporate financial consultants); President, Benchmark Consulting
Group, Inc. (office services)
Arnold D. Scott* - Senior Executive Vice President, Director, and
Secretary, MFS Investment Management
Jeffrey L. Shames* - Chairman, Chief Executive Officer, and Director,
MFS Investment Management
J. Dale Sherratt - President, Insight Resources, Inc. (acquisition
planning specialists)
Ward Smith - Former Chairman (until 1994), NACCO Industries (holding
company)
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Managers
Stephen C. Bryant*
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds, call your financial adviser or, for
an information kit, call toll free: 1-800-637-2929 any
business day from 9 a.m. to 5 p.m. Eastern time (or leave a message
anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free: 1-800-225-2606 any business day
from 8 a.m. to 8 p.m. Eastern time.
For service to speech-orhearing-impaired, call toll free: 1-800-637-6576
any business day from 9 a.m. to 5 p.m. Eastern time. (To use this
service, your phone must be equipped with a Telecommunications Device
for the Deaf.)
For share prices, account balances, and exchanges, call toll free: 1-
800-MFS-TALK (1-800-637-8255) anytime from a touch-tone telephone.
World Wide Web
www.mfs.com
MFS (registered trademark) Intermediate Income Fund
MFS(registered trademark) Investment Management
We invented the mutual fund (registered trademark)
500 Boylston Street
Boston, MA 02116-3741
MII-3 7/99 13M 05/205/805
(copyright)1999 MFS Fund Distributors, Inc., 500 Boylston Street,
Boston, MA 02116-3741
Bulk Rate
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