Dear Shareholders:
During the past six months, continued signs of slowing economic momentum and
the prospect that the Federal Reserve Board may refrain from further
monetary-tightening actions have created a more favorable environment for
fixed-income investors. Over this period, the net asset value of the Trust
rose from $7.33 on October 31, 1994 to $7.59 on April 30, 1995, while the
market price of the Trust on the New York Stock Exchange rose from $6.125 to
$6.75. For the period from October 31, 1994 through April 30, 1995, the Trust
achieved a total return of +14.73%. This return is based on the closing stock
market prices in effect on those dates and assumes the reinvestment of all
distributions paid during the period.
The share repurchase program which the Trustees approved last year remains an
active program and one which we believe has enhanced shareholder value.
U.S. Government Sector
As the economy enters its fifth year of expansion, it is evidencing a
decidedly decelerating trend from its robust pace of 1994, when gross
domestic product expanded by 4.1%. Estimated growth in this year's first
quarter diminished to an annual rate of 2.8%. As evidence of a slowdown has
continued to mount, the fixed-income markets have become increasingly
convinced that the Federal Reserve has concluded its monetary-tightening
initiatives. As a result, yields on 10-year U.S. Treasury securities, which
were 7.91% at the end of October 1994, declined to 7.20% by April 30, 1995.
Yields on two-year Treasuries fell slightly over this period, from 6.92% to
6.78%.
Our overall strategy during the first six months of this fiscal year has been
to increase our holdings in this sector of the portfolio, and to increase
modestly the average maturity and interest rate sensitivity of those
securities in order to benefit from the opportunities for capital
appreciation here in the U.S. Tactically, the Trust's U.S. holdings have
remained positioned for a narrowing of the differentials between short- and
long-maturity interest rates. In early November 1994 the difference in yield
between two-year and 10-year Treasury securities was approximately 1.00%. By
the end of March 1995 this spread had narrowed by 58 basis points, to 0.42%.
The Trust has been positioned in both short- and long-term maturities (as
opposed to intermediate-range securities) and as the spread has narrowed,
this strategy has helped the Trust to outperform intermediate-maturity notes.
The Trust also continued to benefit from its allocation among the Treasury,
agency and mortgage sectors. During the past six months we have maintained
approximately 55% of our U.S. allocation in the mortgage and agency sectors,
both of which have made a positive contribution to performance. Additionally,
we avoided any allocation to the more volatile mortgage-derivative
securities, which we believe helped the Trust avoid the pitfalls of investing
in those securities which were revealed so dramatically in 1994.
International Sector
The decline of the U.S. dollar and the improvement in major world bond
markets have benefited the Trust during the past six months. On the currency
side, the Trust's largest exposures have been to the yen and the deutsche
mark, the primary benefi-
ciaries of dollar weakness. The large Japanese current-account surplus is a
constant support to the yen, especially when a weak domestic economy is
preventing Japanese savings from venturing into riskier assets offshore. The
deutsche mark has strengthened against the dollar, but also, as a safe haven,
against the weaker European currencies. Given the large moves of the last
several months, the dollar may recover somewhat. Until the U.S. can finance
more of its investment needs internally, however, the dollar will likely
remain in a long-term downward trend. The portfolio weightings may therefore
reflect near-term expectations of a bounce in the U.S. dollar, but, on
average, the dollar over the next several months will most likely remain
underweighted.
The deflationary environment in Japan, where goods prices are actually
falling, has created a very suppor-
1
<PAGE>
tive environment for fixed-income holdings. As a result, the Japanese bond
market was the best performer during the first quarter of 1995. Deflation is
expected to persist and thus, despite already low yields, the Trust's
holdings should remain good
performers.
In the European bond sector, the Trust has concentrated on core markets such
as Germany and the Netherlands. These markets have led the rally in Europe,
supported by declining inflation and credible economic policies. Other
holdings have included countries such as France, the United Kingdom and
Denmark, where the higher yields offer attractive alternatives without
assuming significant fundamental risk. Concerns about increasing inflation
and/or budget deficits in the high-yielding markets of Europe have caused
them to underperform, and the Trust's lack of exposure has proved
appropriate. Recently, these markets have recovered, but continue to lag the
performance of the less risky European markets, where the majority of our
exposure is likely to remain.
The strength of the U.S. bond rally also has been reflected in the other
dollar-bloc markets. Our holdings in Australia and New Zealand benefited
from this trend. In addition, the Trust was hedged against the decline of the
Australian dollar, but benefited fully from the rise of the New Zealand
dollar. Given our expectation for a stable or improving U.S. market, we
believe that these markets, along with the Canadian bond market, should
continue to perform well.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
/s/ Steven E. Nothern
Steven E. Nothern
Portfolio Manager
May 17, 1995
2
<PAGE>
Number of Shareholders
As of April 30, 1995, our records indicate that there are 22,978 registered
shareholders and approximately 101,000 shareholders owning Trust shares in
"street" name, such as through brokers, banks and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our
reports, which contain important information about the Trust, please write or
call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
Number of Employees
The Trust is organized as a Massachusetts business trust and is registered
under the Investment Company Act of 1940, as amended, as a closed-end,
non-diversified, management investment company and has no employees.
New York Stock Exchange Symbol
The New York Stock Exchange symbol is MIN.
Performance Summary
(For the period ended April 30, 1995)
Net Asset Value Per Share
October 31, 1994 $ 7.33
April 30, 1995 $ 7.59
New York Stock Exchange Price
October 31, 1994 $6.125
April 24, 1995 (high)* $6.750
November 1, 1994 (low)* $6.000
April 30, 1995 $6.750
*For the period November 1, 1994 through April 30, 1995.
In accordance with Section 23(c) of the Investment Company Act of 1940, the
Trust hereby gives notice that it may from time to time repurchase shares of
the Trust in the open market at the option of the Board of Trustees and on
such terms as the Trustees shall determine.
3
<PAGE>
Dividend Reinvestment and
Cash Purchase Plan
The Trust offers a Dividend Reinvestment and Cash Purchase Plan which allows
you to reinvest either all of the distributions or only the long-term capital
gains paid by the Trust. Unless the shares are trading at a premium
(exceeding net asset value), purchases are made at the market price.
Otherwise, purchases will be made at a discounted price of either the net
asset value or 95% of the market price, whichever is greater. You can also
buy shares of the Trust. Investments from $100 to $500 can be made in January
and July on the 15th of the month or shortly thereafter.
If your shares are in the name of a brokerage firm, bank or other nominee,
you can ask the firm or nominee to participate in the Plan on your behalf. If
the nominee does not offer the Plan, you may wish to request that your shares
be re-registered in your own name so that you can participate.
There is no service charge to reinvest distributions, nor are there brokerage
charges for shares issued directly by the Trust. However, when shares are
bought on the New York Stock Exchange or otherwise on the open market, each
participant pays a pro rata share of the commissions. A service fee of $0.75
is charged for each cash purchase as well as a pro rata share of the
brokerage commissions, if any. The automatic reinvestment of distributions
does not relieve you of any income tax that may be payable (or required to be
withheld) on the distributions.
To enroll in or withdraw from the Plan or to receive a brochure providing a
complete description of the Plan, please contact the Plan agent at the
address and telephone number located on the back cover of this report. Please
have available the name of the Trust and your account and Social Security
numbers. For certain types of registrations, such as corporate accounts,
instructions must be submitted in writing. When you withdraw from the Plan,
you can receive the value of the reinvested shares in one of two ways: a
check for the value of the full and fractional shares, or a certificate for
the full shares and a check for the fractional shares.
4
<PAGE>
Portfolio of Investments -- April 30, 1995
Bonds -- 98.9%
Principal
Amount
Issuer (000 Omitted) Value
U.S. Dollar Denominated -- 64.6%
U.S. Federal Agencies -- 20.7%
AID Israel, 6.625s, 2004 $14,600 $ 13,906,500
Farm Credit Systems Financial
Assistance Co., 9.375s, 2003 19,550 22,024,248
Federal Home Loan Mortgage Corp.,
7s, 1997 - 2000 19,205 19,145,338
Federal National Mortgage Assn.,
6.72s, 2004 20,000 18,804,000
Federal National Mortgage Assn.,
7.5s, 2001 - 2002 27,625 27,719,496
Federal National Mortgage Assn.,
7.7s, 2004 20,000 19,850,000
Federal National Mortgage Assn.,
7.8s, 2002 21,000 21,160,860
Federal National Mortgage Assn.,
7.9s, 2002 30,000 30,285,900
Federal National Mortgage Assn.,
8.33s, 2005 20,000 20,525,000
Federal National Mortgage Assn.,
8.5s, 2002 - 2009 13,956 14,330,645
Federal National Mortgage Assn.,
8.71s, 2005 18,000 18,567,000
Federal National Mortgage Assn.,
9s, 2007 - 2017 6,166 6,403,230
Federal National Mortgage Assn.,
9.5s, 2007 24,514 25,640,263
Private Export Funding Corp., 9.1s,
1998 9,000 9,524,070
------------
$267,886,550
------------
U.S. Government Guaranteed -- 43.9%
Government National Mortgage
Association -- 15.1%
GNMA, 7.5s, 2022 - 2024 $75,793 $ 73,922,149
GNMA, 8s, 2004 - 2009 8,306 8,433,077
GNMA, 8.5s, 2001 - 2024 45,321 46,712,377
GNMA, 9s, 2005 - 2025 29,163 30,247,431
GNMA, 9.5s, 2024 10,000 10,518,700
GNMA, 10.5s, 2020 24,019 26,150,349
------------
$195,984,083
------------
U.S. Treasury Obligations -- 28.8%
U.S. Treasury Notes, 8.625s, 1997 $64,500 $ 67,170,945
U.S. Treasury Notes, 8.75s, 1997 45,000 47,074,050
U.S. Treasury Notes, 8.25s, 1998 41,000 42,735,940
U.S. Treasury Notes, 7.75s, 1999 35,000 36,181,250
U.S. Treasury Notes, 6.875s, 2000 20,000 19,984,400
U.S. Treasury Notes, 7.5s, 2005 40,000 41,231,200
U.S. Treasury Bonds, 10.75s, 2005 94,250 118,652,268
------------
$373,030,053
------------
Total U.S. Government Guaranteed $569,014,136
------------
Total U.S. Dollar Denominated $836,900,686
------------
Foreign -- Non-U.S. Dollar
Denominated -- 34.3%
Australian Dollars -- 6.1%
Commonwealth of Australia, 12.5s,
1998 AUD 11,750 $ 9,244,643
Commonwealth of Australia, 6.25s,
1999 6,450 4,242,990
Commonwealth of Australia, 12s,
1999 15,500 12,335,816
New South Wales Treasury Corp.,
11.5s, 1999 25,000 19,460,589
Treasury Corp. of Victoria, 10.25s,
1999 44,825 33,459,998
------------
$ 78,744,036
------------
British Pounds -- 3.2%
United Kingdom Gilts, 9s, 2000 GBP 25,040 $ 41,388,010
------------
Canadian Dollars -- 1.4%
Government of Canada, 8.5s, 2000 CAD 25,000 $ 18,802,945
------------
5
<PAGE>
Portfolio of Investments -- continued
Bonds -- continued
Issuer
Foreign -- Non-U.S. Dollar Denominated -- continued
Danish Kroner -- 5.1%
Kingdom of Denmark, 9s, 1998 DKK 156,930 $ 29,717,422
Kingdom of Denmark, 6s, 1999 88,000 14,951,354
Kingdom of Denmark, 9s, 2000 111,520 21,118,249
-------------
$ 65,787,025
-------------
Deutsche Marks -- 2.2%
Republic of Germany, 8.5s, 2000 DEM 23,220 $ 18,207,828
Republic of Germany, 8.5s, 2001 7,740 6,066,487
Republic of Germany, 6.5s, 2003 5,780 4,030,378
-------------
$ 28,304,693
-------------
Dutch Guilders -- 3.3%
Dutch State Loan, 6.25s, 1998 NLG 5,730 $ 3,709,860
Dutch State Loan, 7s, 1999 17,940 11,857,626
Dutch State Loan, 7.5s, 1999 16,010 10,782,897
Dutch State Loan, 7.75s, 2005 25,230 16,960,184
-------------
$ 43,310,567
-------------
French Francs -- 3.4%
Government of France, 8s, 1998 FRF 95,340 $ 19,792,297
Government of France, 7s, 1999 79,180 15,858,517
Government of France, 7.75s, 2000 40,320 8,300,695
-------------
$ 43,951,509
-------------
Irish Punts -- 3.2%
Republic of Ireland, 8.75s, 1997 IEP 10,000 $ 16,427,289
Republic of Ireland, 9s, 2001 14,800 24,457,320
-------------
$ 40,884,609
-------------
Italian Lire -- 0.4%
Republic of Italy, 9.5s, 1999 ITL 10,430,000 $ 5,580,670
-------------
New Zealand Dollars -- 4.5%
Government of New Zealand, 8s, 1995 NZD 61,060 $ 40,806,510
Government of New Zealand, 9s, 1996 25,000 16,942,745
-------------
$ 57,749,255
-------------
Spanish Pesetas -- 1.5%
Government of Spain, 10.25s, 1998 ESP 2,567,600 $ 20,014,380
-------------
Total Foreign -- Non-U.S. Dollar Denominated $ 444,517,699
-------------
Total Bonds (Identified Cost, $1,268,600,713) $1,281,418,385
-------------
Repurchase Agreement -- 0.8%
Lehman Brothers, dated 4/28/95, due
5/01/95, total to be received
$10,551,185
(secured by $10,470,000 U.S.
Treasury Bonds, 7.625s, due
2/15/07, market
value $10,760,069), at Cost $ 10,546 $ 10,546,000
-------------
6
<PAGE>
Call Option Purchased
Principal Amount
of Contracts
Expiration Month/Strike Price (000 Omitted) Value
Canadian Dollars/July/1.375 (Premium
Paid, $39,898) CAD 8,572 $ 98,594
-------------
Put Option Purchased
Deutsche Marks/British Pounds/July/2.29
(Premium Paid, $228,820) DEM 38,172 $ 191,625
-------------
Total Investments (Identified Cost, $1,279,415,431) $1,292,254,604
-------------
Call Options Written -- (0.1)%
British Pounds/September/1.64 GBP 21,356 $ (401,527)
Deutsche Marks/May/1.34 DEM 49,380 (13,431)
Deutsche Marks/July/1.42 47,743 (1,191,096)
Deutsche Marks/British
Pounds/July/2.1139 35,237 (68,605)
-------------
Total Call Options Written (Premiums Received, $1,269,381) $ (1,674,659)
-------------
Put Option Written
British Pounds/September/1.53 (Premium
Received, $368,514) GBP 19,923 $ (213,900)
-------------
Other Assets, Less Liabilities -- 0.4% $ 4,545,106
-------------
Net Assets -- 100.0% $1,294,911,151
=============
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
CAD = Canadian Dollars
CHF = Swiss Francs
DEM = Deutsche Marks
DKK = Danish Kroner
ESP = Spanish Pesetas
FRF = French Francs
GBP = British Pounds
IEP = Irish Punts
ITL = Italian Lire
JPY = Japanese Yen
NLG = Dutch Guilders
NZD = New Zealand Dollars
See notes to financial statements
7
<PAGE>
Statement of Assets and Liabilities -- April 30, 1995
Assets:
Investments, at value (identified cost,
$1,279,415,431) $1,292,254,604
Cash 315,397
Foreign currency, at value (identified cost,
$338,257) 331,353
Net receivable for forward foreign currency exchange
contracts purchased 6,079,923
Net receivable for closed forward foreign currency
exchange contracts 6,745,438
Receivable for investments sold 39,229,399
Interest receivable 25,713,342
Other assets 20,748
-------------
Total assets $1,370,690,204
-------------
Liabilities:
Payable to dividend disbursing agent $ 579,829
Payable for investments purchased 34,535,617
Payable for Treasury shares reacquired 11,785,645
Written options outstanding, at value (premiums
received, $1,637,895) 1,888,559
Net payable for forward foreign currency exchange
contracts sold 26,338,259
Payable to affiliates --
Management fee 84,027
Transfer and dividend disbursing agent fee 32,272
Accrued expenses and other liabilities 534,845
-------------
Total liabilities $ 75,779,053
-------------
Net assets $1,294,911,151
=============
Net assets consist of:
Paid-in capital $1,330,481,165
Unrealized depreciation on investments and
translation of assets and liabilities in foreign
currencies (226,540)
Accumulated net realized loss on investments and
foreign currency transactions (35,055,796)
Accumulated distributions in excess of net investment
income (287,678)
-------------
Total $1,294,911,151
=============
Shares of beneficial interest outstanding 170,505,316
=============
Net asset value (net assets / shares of beneficial
interest outstanding) $7.59
====
See notes to financial statements
8
<PAGE>
Statement of Operations -- Six Months Ended April 30, 1995
Net investment income:
Interest income $ 55,288,450
-----------
Expenses --
Management fee $
5,217,775
Trustees' compensation 94,757
Transfer and dividend disbursing agent fee 205,453
Custodian fee 412,251
Printing 59,849
Auditing fees 35,850
Legal fees 15,777
Miscellaneous 767,715
-----------
Total expenses $ 6,809,427
-----------
Net investment income $ 48,479,023
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) --
Investment transactions $(13,227,910)
Written option transactions 1,828,101
Foreign currency transactions 2,323,948
-----------
Net realized loss on investments $ (9,075,861)
-----------
Change in unrealized appreciation (depreciation) --
Investments $ 42,770,866
Written options (342,290)
Translation of assets and liabilities in foreign
currencies (4,727,742)
-----------
Net unrealized gain on investments $ 37,700,834
-----------
Net realized and unrealized gain on investments
and foreign currency $ 28,624,973
-----------
Increase in net assets from operations $ 77,103,996
===========
See notes to financial statements
9
<PAGE>
Statement of Changes in Net Assets
Six Months Year Ended
Ended October
April 30, 31,
1995 1994
---------- ----------
Increase (decrease) in net assets:
From operations --
Net investment income $ 48,479,023 $ 97,995,738
Net realized loss on investments and
foreign currency transactions (9,075,861) (114,394,007)
Net unrealized gain (loss) on
investments and foreign
currency transactions 37,700,834 (38,221,909)
------------- -------------
Increase (decrease) in net assets
from operations $ 77,103,996 $ (54,620,178)
------------- -------------
Distributions declared to shareholders --
From net investment income $ (48,479,023) $ (6,637,524)
In excess of net investment income (188,016) (24,264,396)
Tax return of capital -- (80,325,117)
------------- -------------
Total distributions declared
to shareholders $ (48,667,039) $ (111,227,037)
------------- -------------
Trust share (principal) transactions --
Cost of Treasury shares reacquired $ (144,798,782) $ (19,471,321)
------------- -------------
Total decrease in net assets $ (116,361,825) $ (185,318,536)
Net assets:
At beginning of period 1,411,272,976 1,596,591,512
------------- -------------
At end of period (including accumulated
distributions in excess of
net investment income of $287,678 and
$99,662, respectively) $1,294,911,151 $1,411,272,976
============= =============
See notes to financial statements
10
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
Per share data (for a Six Months
share outstanding Ended Year Ended October 31,
throughout each April 30, -------------------------------------------------------------
period): 1995 1994 1993 1992 1991 1990 1989 1988*
---- ---- ---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value --
beginning of period $ 7.33 $ 8.18 $ 8.07 $ 8.24 $ 8.45 $ 8.87 $ 9.16 $ 9.30
------- ------- ------ ------ ------ ------ ------ ------
Income from investment
operations++++ --
Net investment income## $ 0.27 $ 0.51 $ 0.58 $ 0.66 $ 0.67 $ 0.75 $ 0.83 $ 0.48
Net realized and
unrealized gain (loss)
on investments and
foreign currency
transactions 0.26 (0.78) 0.21 (0.02) 0.17 (0.12) (0.07) (0.10)
------- ------- ------ ------ ------ ------ ------ ------
Total from investment
operations $ 0.53 $ (0.27) $ 0.79 $ 0.64 $ 0.84 $ 0.63 $ 0.76 $ 0.38
------- ------- ------ ------ ------ ------ ------ ------
Less distributions
declared to
shareholders --
From net investment income $ (0.27) $ (0.03) $(0.52) $(0.60) $(0.62) $(0.63) $(0.92) $(0.39)
From net realized gain on
investments and foreign
currency transactions -- -- (0.16) -- -- -- -- --
In excess of net
investment income# -- (0.13) -- -- -- -- -- --
From paid-in capital -- -- -- (0.21) (0.43) (0.42) (0.13) (0.13)
Tax return of capital -- (0.42) -- -- -- -- -- --
Total distributions
declared to shareholders $ (0.27) $ (0.58) $(0.68) $(0.81) $(1.05) $(1.05) $(1.05) $(0.52)
------- ------- ------ ------ ------ ------ ------ ------
Net asset value -- end of
period $ 7.59 $ 7.33 $ 8.18 $ 8.07 $ 8.24 $ 8.45 $ 8.87 $ 9.16
======= ======= ====== ====== ====== ====== ====== ======
Per share market value --
end of period $ 6.750 $ 6.125 $ 7.625 $ 8.000 $ 8.000 $ 7.625 $ 8.750 $ 9.375
======== ======== ======= ======= ======= ======= ======= =======
Total return 14.73%+++ (12.58)% 4.14% 10.35% 19.55% (0.94)% 4.94% (1.17)%+
Ratios (to average net
assets)/Supplemental dataS.:
Expenses 1.03%+ 0.91% 0.95% 1.01% 1.00% 1.01%## 1.10% 0.99%+
Net investment income 7.35%+ 6.61% 7.13% 7.96% 8.10% 8.74%## 9.34% 8.39%+
Portfolio turnover 115% 213% 270% 401% 1,004% 554% 546% 206%
Net assets at end of
period
(000,000 omitted) $ 1,295 $ 1,411 $1,597 $1,615 $1,644 $1,695 $1,791 $1,837
</TABLE>
* For the period from the commencement of investment operations, March 17,
1988 to October 31, 1988.
+ Annualized.
+++ Not annualized.
++++ Per share data for the periods subsequent to October 31, 1993 are based
on average shares outstanding.
# Distributions in excess of net investment income were $0.001 per share
for the six months ended April 30, 1995.
## The investment adviser did not impose a portion of its advisory fee
amounting to $0.0018 per share for the year ended October 31, 1990. If
this fee had been incurred by the Trust, the ratio of expenses and net
investment income to average net assets for the period would have been
1.03% and 8.72%, respectively.
See notes to financial statements
11
<PAGE>
Notes to Financial Statements
(1) Business and Organization
MFS Intermediate Income Trust (the Trust) is organized as a Massachusetts
business trust and is registered under the Investment Company Act of 1940, as
amended, as a non-diversified, closed-end, management investment company.
(2) Significant Accounting Policies
Investment Valuations -- Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates value. Non-U.S. dollar denominated
short-term obligations are valued at amortized cost as calculated in the base
currency and translated into U.S. dollars at the closing daily exchange rate.
Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Repurchase Agreements -- The Trust may enter into repurchase agreements with
institutions that the Trust's investment adviser has determined are
creditworthy. Each repurchase agreement is recorded at cost. The Trust
requires that the securities purchased in a repurchase transaction be
transferred to the custodian in a manner sufficient to enable the Trust to
obtain those securities in the event of a default under the repurchase
agreement. The Trust monitors, on a daily basis, the value of the securities
transferred to ensure that the value, including accrued interest, of the
securities under each repurchase agreement is greater than amounts owed to
the Trust under each such repurchase agreement.
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 non-U.S. dollar denominated investments and 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 Trust may write covered call or put options for which
premiums are received and are recorded as liabilities, and are subsequently
adjusted to the current value of the options written. Premiums received from
writing options which expire are treated as realized gains. Premiums received
from writing options which are exercised or are closed are offset against the
proceeds or amount paid on the transaction to determine the realized gain or
loss. If a put option is exercised, the premium reduces the cost basis of the
security purchased by the Trust. The Trust, 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
12
<PAGE>
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
Trust's management on the direction of interest rates.
Futures Contracts -- The Trust may enter into futures contracts for the
delayed delivery of securities, currency or contracts based on financial
indices at a fixed price on a future date. In entering such contracts, the
Trust is required to deposit either in cash or securities an amount equal to
a certain percentage of the contract amount. Subsequent payments are made or
received by the Trust each day, depending on the daily fluctuations in the
value of the underlying security, and are recorded for financial statement
purposes as unrealized gains or losses by the Trust. The Trust's investment
in futures contracts is designed to hedge against anticipated future changes
in interest or exchange rates or securities prices. For example, interest
rate futures may be used in modifying the duration of the portfolio without
incurring the additional transaction costs involved in buying and selling the
underlying securities. Should interest or exchange rates or securities prices
move unexpectedly, the Trust may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss.
Security Loans -- The Trust may lend its securities to member banks of the
Federal Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by cash or
securities with a market value at least equal to the market value of
securities loaned. As with other extensions of credit, the Trust may bear the
risk of delay in recovery or even loss of rights in the collateral should the
borrower of the securities fail financially. The Trust receives compensation
for lending its securities in the form of fees or from all or a portion of
the income from investment of the collateral. The Trust would also continue
to earn income on the securities loaned. At April 30, 1995, the Trust had no
securities on loan.
Forward Foreign Currency Exchange Contracts -- The Trust 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 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 Trust will enter
into forward contracts for hedging purposes as well as for non-hedging
purposes. For hedging purposes, the Trust may enter into contracts to deliver
or receive foreign currency it will receive from or require for its normal
investment activities. It may also use contracts in a manner intended to
protect foreign currency-denominated securities from declines in value due to
unfavorable exchange rate movements. For non-hedging purposes, the Trust may
enter into contracts with the intent of changing the relative exposure of the
Trust's portfolio of securities to different currencies to take advantage of
anticipated changes. The forward foreign currency exchange contracts are
adjusted by the daily exchange rate of the underlying currency and any gains
or losses are recorded for financial statement purposes as unrealized until
the contract settlement date.
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for both 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.
13
<PAGE>
Notes to Financial Statements -- continued
Tax Matters and Distributions -- The Trust'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 Trust 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 Trust's tax return
and, consequently, the character of distributions to shareholders reported in
the financial highlights may differ from that reported to shareholders on
Form 1099-DIV. Foreign taxes have been provided for on interest and dividend
income earned on foreign investments in accordance with the applicable
country's tax rates and to the extent unrecoverable are recorded as a
reduction of investment income. Distributions to shareholders are recorded on
the ex-dividend date. Certain reclassifications have been made to the 1994
Financial Statements to reflect $2,708,172 ($0.0014 per share) of
distributions previously declared to shareholders from net investment income
subsequently redesignated as distributions from long-term capital gains. Such
reclassifications have no effect on the Trust's net assets or net asset value
per share. The Trust 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
return of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains.
(3) Transactions with Affiliates
Investment Adviser -- The Trust 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, computed daily and paid monthly at an effective annual rate
of 0.32% of average daily net assets and 5.65% of investment income, amounted
to $5,217,775. The Trust pays no compensation directly to its Trustees who
are officers of the investment adviser, or to officers of the Trust, all of
whom receive remuneration for their services to the Trust from MFS. Certain
of the officers and Trustees of the Trust are officers or directors of MFS,
MFS Fund Distributors, Inc. (MFD) and MFS Service Center, Inc. (MFSC). The
Trust has an unfunded defined benefit plan for all its independent Trustees.
Included in Trustees' compensation is a net periodic pension expense of
$22,957 for the six months ended April 30, 1995.
Transfer Agent -- The Trust has entered into an agreement with MFSC to act as
registrar and dividend disbursing agent for the Trust. The agreement provides
that the Trust will pay MFSC an account maintenance fee and a dividend
services fee and will reimburse MFSC for reasonable out-of-pocket expenses.
The account maintenance fee is computed as follows:
Total Number of Accounts Annual Account Fee
- ------------------------ ------------------
Less than 75,000 $9.00
75,000 and over $8.00
The dividend services fee is $0.75 per dividend reinvestment and $0.75 per
cash infusion. Fees incurred under the agreement for the six months ended
April 30, 1995 amounted to $205,453.
14
<PAGE>
(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 $593,178,227 $785,951,998
============ ============
Investments (non-U.S.
government securities) $881,999,031 $745,460,520
============ ============
The cost and unrealized appreciation or depreciation in value of the
investments owned by the Trust, as
computed on a federal income tax basis, are as follows:
Aggregate cost $1,279,443,556
==============
Gross unrealized appreciation $ 29,453,307
Gross unrealized depreciation (16,642,259)
--------------
Net unrealized appreciation $ 12,811,048
==============
At October 31, 1994, the Trust, for federal income tax purposes, had a
capital loss carryforward of $16,500,119, which may be applied against any
net taxable realized gains of each succeeding year until the earlier of its
utilization or expiration on October 31, 2002.
(5) Shares of Beneficial Interest
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares of
beneficial interest (without par value). Transactions in Trust shares were as
follows:
Six Months Ended Year Ended
April 30, 1995 October 31, 1994
- ------------------------------------------------------------------------
Treasury shares reacquired 21,987,500 2,585,700
========== =========
The Trust repurchased 21,495,500 shares of beneficial interest during the six
months ended April 30, 1995 at an average price per share of $6.510 and a
weighted average discount of 11.10% per share. The Trust repurchased
2,585,700 shares of beneficial interest during the year ended October 31,
1994 at an average price per share of $7.530 and a weighted average discount
of 10.30% per share.
(6) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Net Realized and
Unrealized Gain Net Increase (Decrease)
Quarterly Period Net Investment (Loss) in Net Assets Resulting
Ended Investment Income Income on Investments from Operations
- ---------------- --------------------------------------------------------------------------------------------
Per Per Per Per
Fiscal 1995 Amount Share Amount Share Amount Share Amount Share
- ---------------- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 31, 1995 $ 28,725,198 $0.16 $25,410,754 $0.14 $ (21,600,785) $(0.07) $ 3,809,969 $ 0.07
April 30, 1995 26,563,252 0.15 23,068,269 0.13 50,225,758 0.33 73,294,027 0.46
----------- ---- ---------- ---- ------------ ---- ---------- ----
$ 55,288,450 $0.31 $48,479,023 $0.27 $ 28,624,973 $ 0.26 $ 77,103,996 $ 0.53
=========== ==== ========== ==== ============ ==== ========== ====
Fiscal 1994
- ----------------
January 31, 1994 $ 24,425,057 $0.13 $21,043,965 $0.11 $ (5,223,558) $(0.03) $ 15,820,407 $ 0.08
April 30, 1994 28,481,160 0.15 25,180,774 0.13 (92,491,965) (0.46) (67,311,191) (0.33)
July 31, 1994 29,213,793 0.15 25,768,272 0.13 3,078,915 0.01 28,847,187 0.14
October 31, 1994 29,364,352 0.15 26,002,727 0.14 (57,979,308) (0.30) (31,976,581) (0.16)
----------- ---- ---------- ---- ------------ ---- ---------- ----
$111,484,362 $0.58 $97,995,738 $0.51 $(152,615,916) $(0.78) $(54,620,178) $(0.27)
=========== ==== ========== ==== ============ ==== ========== ====
</TABLE>
15
<PAGE>
Notes to Financial Statements -- continued
<TABLE>
<CAPTION>
Net Realized and
Unrealized Gain Net Increase (Decrease)
Quarterly Net Investment (Loss) in Net Assets Resulting
Period Investment Income Income on Investments from Operations
- --------- ---------------------------------------------------------------------------------------------------
Per Per Per Per
Fiscal 1993 Amount Share Amount Share Amount Share Amount Share
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 31, 1993 $ 34,965,760 $0.17 $ 30,993,698 $0.15 $30,946,884 $ 0.15 $ 61,940,582 $0.31
April 30, 1993 30,158,227 0.15 26,543,092 0.13 (7,789,461) (0.03) 18,753,631 0.09
July 31, 1993 31,941,038 0.16 28,180,901 0.14 16,461,656 0.08 44,642,557 0.23
October 31, 1993 33,037,321 0.18 29,153,863 0.16 1,910,082 0.01 31,063,945 0.16
------------ ---- ------------ ---- ---------- ---- ----------- ----
$130,102,346 $0.66 $114,871,554 $0.58 $41,529,161 $ 0.21 $156,400,715 $0.79
============ ==== ============ ==== ========== ==== =========== ====
</TABLE>
(7) Line of Credit
The Trust entered into an agreement which enables it to participate with
other funds managed by MFS, or an affiliate of MFS, in an unsecured line of
credit with a bank which permits borrowings up to $350 million, collectively.
Borrowings may be made to temporarily finance the repurchase of Trust 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 Trust for the six months ended April 30, 1995 was $10,083.
16
<PAGE>
(8) Financial Instruments
The Trust trades financial instruments with off-balance sheet risk in the
normal course of its investing activities in order to manage exposure to
market risks such as interest rates and foreign currency exchange rates.
These financial instruments include written options, forward foreign currency
exchange contracts, futures contracts and indexed securities.
The notional or contractual amounts of these instruments represent the
investment the Trust 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. A summary of
obligations under these financial instruments at April 30, 1995, is as
follows:
Written Option Transactions
1995 Calls 1995 Puts
--------------------------------------------------------
Principal
Amounts of Principal
Contracts Amounts of
(000 Contracts
Omitted) Premiums (000 Omitted) Premiums
- -----------------------------------------------------------------------------
Outstanding,
beginning of
period --
Australian
Dollars 19,645 $ 137,518 -- $ --
Options written
--
Australian
Dollars 13,608 103,803 30,446 351,652
British Pounds 21,356 368,514 19,923 368,514
Canadian
Dollars -- -- 41,250 168,702
Deutsche Marks 227,887 1,729,678 161,671 1,207,808
Deutsche
Marks/British
Pounds 35,237 228,820 -- --
Finnish
Markkaa/Deutsche
Marks -- -- 65,848 48,164
Japanese Yen -- -- 12,100,877 317,805
Japanese
Yen/Deutsche
Marks -- -- 7,119,247 857,342
Spanish
Pesetas/Deutsche
Marks -- -- 1,954,583 128,092
Swiss
Francs/Deutsche
Marks 28,354 119,386 -- --
U.S. Dollars 25,000 128,906 -- --
Options
terminated in
closing
transactions --
Australian
Dollars (33,253) (241,321) (30,446) (351,652)
Canadian
Dollars -- -- (41,250) (168,702)
Deutsche Marks (130,764) (1,057,631) (161,671) (1,207,808)
Japanese Yen -- -- (12,100,877) (317,805)
Japanese
Yen/Deutsche
Marks -- -- (7,119,247) (857,342)
Spanish
Pesetas/Deutsche
Marks -- -- (1,954,583) (128,092)
Options
exercised --
Swiss
Francs/Deutsche
Marks (28,354) (119,386) -- --
U.S. Dollars (25,000) (128,906) -- --
Options
expired --
Finnish
Markkaa/Deutsche
Marks -- -- (65,848) (48,164)
------- ----------- ---------- -----------
Outstanding, end
of period 153,716 $ 1,269,381 19,923 $ 368,514
======= =========== ========== ==========
Options
outstanding at
end of period
consist of --
British Pounds 21,356 $ 368,514 19,923 $ 368,514
======= =========== ========== ==========
Deutsche Marks 97,123 $ 672,047 -- --
======= =========== ========== ==========
Deutsche
Marks/British
Pounds 35,237 $ 228,820 -- --
======= =========== ========== ==========
At April 30, 1995, the Trust had sufficient cash and/or securities at least
equal to the value of the written options.
17
<PAGE>
Notes to Financial Statements -- continued
Forward Foreign Currency Exchange Contracts
<TABLE>
<CAPTION>
Net Unrealized
Settlement Contracts to In Exchange Contracts at Appreciation
Date Deliver/Receive for Value (Depreciation)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 6/09/95 -
6/27/95 AUD 124,132,112 $ 91,199,279 $ 89,984,989 $ 1,214,290
6/09/95 -
7/21/95 CAD 29,163,787 21,139,985 21,425,869 (285,884)
7/12/95 -
7/19/95 CHF 26,398,988 22,968,477 23,098,623 (130,146)
6/06/95 -
8/16/95 DEM 203,580,840 144,157,770 147,129,242 (2,971,472)
5/08/95 DKK 339,006,709 61,802,765 62,247,395 (444,630)
6/21/95 -
7/10/95 ESP 5,217,165,627 39,758,075 42,072,624 (2,314,549)
5/02/95 -
8/02/95 FRF 563,594,930 111,954,101 114,221,738 (2,267,637)
6/09/95 -
7/07/95 GBP 12,523,324 19,937,273 20,151,832 (214,559)
8/04/95 IEP 25,222,949 41,113,408 41,088,134 25,274
5/02/95 -
7/10/95 JPY 10,847,054,828 114,545,595 129,995,044 (15,449,449)
5/04/95 -
6/26/95 NLG 131,639,880 82,772,794 84,879,143 (2,106,349)
6/09/95 NZD 44,085,262 28,148,696 29,541,844 (1,393,148)
----------- ----------- -----------
$779,498,218 $805,836,477 $(26,338,259)
=========== =========== ===========
Purchases 7/05/95 AUD 19,044,383 $ 14,471,192 $ 13,792,533 $ (678,659)
7/07/95 CAD 12,427,195 8,813,176 9,125,811 312,635
7/12/95 CHF 26,773,118 23,836,041 23,413,922 (422,119)
5/12/95 -
8/16/95 DEM 530,754,324 381,162,680 383,723,466 2,560,786
6/21/95 -
7/05/95 ESP 1,950,794,800 15,186,565 15,727,447 540,882
5/02/95 -
5/04/95 FRF 290,787,774 59,775,867 59,062,272 (713,595)
6/21/95 GBP 10,841,369 17,261,192 17,448,707 187,515
6/9/95 ITL 3,735,838,394 2,243,343 2,215,352 (27,991)
6/16/95 -
8/01/95 JPY 8,977,829,663 103,655,398 107,778,485 4,123,087
5/04/95 -
6/26/95 NLG 65,543,582 42,034,643 42,232,025 197,382
----------- ----------- -----------
$668,440,097 $674,520,020 $ 6,079,923
=========== =========== ===========
</TABLE>
Forward foreign currency purchases and sales under master netting
arrangements and closed forward foreign currency exchange contracts excluded
above amounted to a net receivable of $6,745,438 at April 30, 1995.
At April 30, 1995, the Trust had sufficient cash and/or securities to cover
any commitments under these contracts.
18
<PAGE>
Independent Auditors' Report
To the Trustees and Shareholders of MFS Intermediate Income Trust:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Intermediate Income Trust as
of April 30, 1995, the related statement of operations for the six months
then ended, the statement of changes in net assets for the six months then
ended and the year ended October 31, 1994, and the financial highlights for
the six months ended April 30, 1995 and for each of the years in the
seven-year period ended October 31, 1994. These financial statements and
financial highlights are the responsibility of the Trust's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. Our procedures included confirmation of the
securities owned at April 30, 1995 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 Trust at April 30, 1995, 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
June 2, 1995
19
<PAGE>
MFS(R) Intermediate Income Trust
Trustees
A. Keith Brodkin*
Chairman and President
Richard B. Bailey*(2)
Private Investor; Former Chairman and
Director (until 1991),
Massachusetts Financial
Services Company
Marshall N. Cohan(1)
Private Investor
Lawrence H. Cohn, M.D.(2)
Chief of Cardiac Surgery,
Brigham and Women's Hospital;
Professor of Surgery, Harvard
Medical School
The Hon. Sir J. David
Gibbons, KBE(2)
Chief Executive Officer,
Edmund Gibbons Ltd.;
Chairman, Bank of N.T.
Butterfield & Son Ltd.
Abby M. O'Neill(2)
Private Investor; Director,
Rockefeller Financial Services, Inc.
(Investment Advisers)
Walter E. Robb, III(1)
President and Treasurer,
Benchmark Advisors, Inc.
(Corporate Financial Consultants)
Arnold D. Scott*
Senior Executive Vice President
and Secretary,
Massachusetts Financial
Services Company
Jeffrey L. Shames*
President,
Massachusetts Financial
Services Company
J. Dale Sherratt(1)
President, Insight Resources,
Inc. (Acquisition Planning Specialists)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries;
Director, Sundstrand Corporation
Portfolio Manager
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
Assistant Secretary
James R. Bordewick, Jr.*
Transfer Agent,
Registrar and Dividend
Disbursing Agent State Street Bank and
Trust Company
c/o MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Auditors
Deloitte & Touche LLP
Investment Adviser
Massachusetts
Financial
Services Company
500 Boylston Street
Boston, MA 02116-3741
*Affiliated with the Investment Adviser
(1)Member of Audit Committee
(2)Member of Portfolio Trading Committee MINCE-3 6/95 136M
20
