Dear Shareholders:
While the United States enjoyed a firm employment and growth environment
during the past 12 months, many of our major trading partners experienced
generally weak economic conditions. Weak economic performance, coupled with
favorable fiscal and political developments, particularly in Europe, led to
declining interest rates and created attractive opportunities in many of the
international fixed-income markets in which the Trust has the flexibility to
invest. Whereas U.S. interest rates rose during the past year, interest rates
in many foreign economies declined sharply. In the United States, for
example, two-year U.S. Treasury bond yields, which were at 5.52% on November
1, 1995, increased to 5.74% by the end of October 1996, while yields on
10-year Treasuries rose from 5.98% to 6.35%. Yields on 10-year government
bonds in Italy, by way of comparison, declined from 10.31% to 7.03% over the
same period. The Trust's ability to allocate up to 50% into international
fixed-income markets helped diversify the risk experienced in U.S. Treasuries
and added to its strong performance.
The Trust's stock market price, which stood at $6.625 on November 1, 1995,
increased to $7.125 on October 31, 1996, while the net asset value (NAV)
price decreased from $7.84 to $7.82, representing a total return of 17.40%
based on market price and 8.40% based on NAV. For comparative purposes, the
Salomon Brothers Medium Term (1- to 10-year) Treasury Government Sponsored
Index, an unmanaged index of medium-term Treasuries and agency securities,
appreciated by 5.73% over this period, and the J.P. Morgan Nondollar
Government Bond Index, an unmanaged index of actively traded government bonds
issued from 12 countries (excluding the United States) with remaining
maturities of at least one year, appreciated by 6.67%.
Primarily the difference in the Trust's strong market price total return
relative to its NAV return resulted from its innovative share repurchase
program. This program, which was implemented in April 1996, authorizes the
Trust to repurchase annually up to 10% of its outstanding shares. With its
regular monthly distribution, the Trust pays its shareholders the difference
between the NAV and the market price of the shares repurchased. The extra
distribution paid to shareholders has added approximately 60 basis points
(0.60%) to the Trust's distribution rate at both NAV and market price. We
believe this higher distribution rate has helped to attract new investors to
the Trust and also contributed to the favorable price appreciation of its
market price.
U.S. Government Sector
Our overall portfolio strategy in the past 12 months has been to maintain
reduced exposure to U.S. securities in favor of the international markets and
to actively hedge our foreign currency exposures. The portion of the
portfolio allocated to international securities was increased from
approximately 34% to about 46%. Our strategy has also been to shift the
emphasis within the funds allocated to the U.S. market away from Treasuries
in favor of agency and mortgage-backed securities, as we feel we are able to
add attractive incremental yield to the portfolio with these sectors.
Within the U.S. portion of the portfolio, the allocation to government agency
mortgage-backed pass-through securities was increased to 44%. Over the past
year, mortgage-backed securities have returned 6.93%, approximately 1.20%
greater than the relevant Treasury/government-sponsored universe. There are
several factors which have helped this sector's performance. First, issues
held in the portfolio yield approximately 1.0% to 1.4% more than their
Treasury counterparts (although principal value and interest on Treasury
securities are guaranteed by the U.S. government if held to maturity). Given
that yield spreads have remained somewhat constant over the past year, the
yield advantage has flowed through to portfolio returns. Second, the mortgage
universe is less price-sensitive than the Treasury universe. This helped
maintain value during the bond market sell-off that occurred in the early
part of the year. Finally, mortgage refinancings have remained quite low
despite the strong housing market. Low refinancings give investors confidence
that
1
<PAGE>
expected yields will be realized for their portfolios. Going forward, we
remain optimistic about the mortgage sector. Yield spreads versus U.S.
Treasuries are attractive relative to other sectors. Foreign buyers have
emerged, and the U.S. agencies continue to be aggressive and opportunistic
buyers. The one factor to monitor closely is a new and vigorous refinancing
wave. This possibility exists in an environment which brings 10-year Treasury
yields significantly through 6.0%.
Our ability to invest in both Treasuries and mortgage-backed securities
within a range of maturities has proven helpful in this rapidly changing
environment. The Trust will, however, continue to adhere to its policy of
avoiding any exposure to the more volatile mortgage-derivative securities.
International Sector
Foreign bond markets turned in a very strong performance over the past year.
Each of the 15 developed foreign markets tracked by J.P. Morgan indices
outperformed the U.S. market by a substantial margin in local currency terms.
The high-yielding European markets -- Italy (+25.25%), Spain (+22.62%), and
Sweden (+18.16%) -- led the pack, with Australia and Canada close behind.
Most yield curves steepened over the year, reflecting official rate cuts
induced by slow growth and benign inflation. The U.S. dollar appreciated
sharply against the German mark and the Japanese yen but lost ground against
the Australian, Canadian, and New Zealand dollars, as well as against the
Italian lira.
The Trust's ability to invest up to half its assets in foreign markets
allowed it to reap substantial benefit from their strength. The allocation to
foreign bonds was maintained near the 50% maximum level for virtually the
entire year, with emphasis on four of the five best performing markets:
Italy, Spain, Australia, and Canada. The Trust also benefited from our
decision to limit exposure to foreign currencies other than the Canadian,
Australian, and New Zealand dollars.
We anticipate that European markets will continue to offer the best
opportunities for capital appreciation. However, this view is becoming more
balanced as growth in Europe picks up and U.S. growth appears to be slowing
somewhat. Efforts to meet the fiscal austerity criteria of the proposed
European Monetary Union (EMU) imply that continental central banks could
retain a bias toward accommodative monetary policy. In this environment, the
higher-yielding markets could continue to outperform as long as the prospect
of membership in the EMU remains alive. The dollar should also remain well
supported versus European currencies. Canada and Australia remain attractive
by virtue of their high real (inflation-adjusted) yields and improving
fundamentals. Firmer growth in the Japanese economy makes Japanese bonds
unattractive at present yield levels.
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
/s/ Christopher D. Piros
- ------------------------
Christopher D. Piros
Portfolio Manager
November 12, 1996
2
<PAGE>
Performance Summary
(For the year ended October 31, 1996)
Net Asset Value Per Share
October 31, 1995 $ 7.83
October 31, 1996 $ 7.82
New York Stock Exchange Price
October 31, 1995 $6.625
October 31, 1996 (high)* $7.125
April 9, 1996 (low)* $6.500
October 31, 1996 $7.125
*For the period November 1, 1995 through October 31, 1996.
Federal Income Tax Information
on Distributions
(For the year ended October 31, 1996)
Tax Form Summary
In January 1997*, shareholders will be mailed a tax form summary reporting
the federal tax status of all distributions paid during the calendar year
1996.
*Estimated at time of report.
Number of Shareholders
As of October 31, 1996, our records indicate that there are 18,687 registered
shareholders and approximately 85,000 shareholders owning Trust shares in
"street" name, such as through brokers, banks and other financial
intermediaries.
Results of Shareholder Meeting
At the annual meeting of shareholders of MFS Intermediate Income Trust, which
was held on October 23, 1996, the following actions were taken:
Item 1. The election of Marshall N. Cohan and The Hon. Sir J. David Gibbons
as Trustees of the Trust.
Withhold
Nominee For Authority
- ------- --------------- -------------
Marshall N. Cohan 137,854,801.609 2,773,093.951
Hon. Sir J. David Gibbons 137,902,241.836 2,725,653.724
Trustees continuing in office who were not subject to re-election at this
meeting are A. Keith Brodkin, Richard B. Bailey, Lawrence H. Cohn, M.D., Abby
M. O'Neil, Walter E. Robb, III, Arnold D. Scott, Jeffrey L. Shames, J. Dale
Sherratt, and Ward Smith.
Item 2. The ratification of the selection of Deloitte & Touche LLP as the
independent public accountants to be employed by the Trust for the
fiscal year ending October 31, 1997.
Number of Shares
-----------------
For 137,906,974.459
Against 875,584.633
Abstain 1,845,336.468
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.
Investment Objective and Policies
The investment objective of MFS Intermediate Income Trust is to preserve
capital and provide high current income.
The Trust will attempt to achieve this objective by investing in obligations
issued or guaranteed by the U.S. government, its agencies, authorities or
instrumentalities and in obligations issued or guaranteed by a foreign
government or any of its political subdivisions, authorities, agencies or
instrumentalities. The Trust will maintain an average-weighted portfolio
maturity of approximately seven years or less and will invest substantially
all of its assets in securities with remaining maturities less than or equal
to 10 years. Under normal market conditions, the Trust's average-weighted
portfolio maturity will not be less than three years. The Trust may enter
into options and futures transactions and forward foreign currency exchange
contracts and purchase securities on a "when-issued" basis.
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.
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.
4
<PAGE>
Portfolio of Investments - October 31, 1996
Bonds - 89.8%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - 49.9%
U.S. Federal Agencies - 13.3%
Agency for International Development, 6.625s, 2004 $ 14,600 $ 14,555,178
Farm Credit Systems Financial Assistance Co., 9.375s, 2003 19,550 22,656,690
Federal National Mortgage Assn., 7.8s, 2002 21,000 21,193,620
Federal National Mortgage Assn., 8.33s, 2005 20,000 21,103,200
Federal National Mortgage Assn., 9s, 2008 44 45,916
Federal National Mortgage Assn., 9s, 2017 25 25,787
Federal National Mortgage Assn., 7s, 2026 66,435 65,168,228
Private Export Funding Corp., 9.1s, 1998 9,000 9,527,940
------------
$154,276,559
------------
U.S. Government Guaranteed - 36.6%
Government National Mortgage Association - 18.1%
GNMA, 7s, 2023 - 2026 $ 88,231 $ 86,520,751
GNMA, 7.5s, 2022 - 2026 55,087 55,258,506
GNMA, 8s, 2025 - 2026 33,984 34,748,796
GNMA, 8.5s, 2001 - 2009 31,874 33,318,594
------------
$209,846,647
------------
U.S. Treasury Obligations - 18.5%
U.S. Treasury Notes, 8.75s, 1997 $ 10,000 $ 10,296,900
U.S. Treasury Notes, 6.375s, 1999 17,000 17,204,510
U.S. Treasury Notes, 9.125s, 1999 35,000 37,657,900
U.S. Treasury Notes, 6.25s, 2001 19,000 19,124,640
U.S. Treasury Bonds, 12.375s, 2004*** 34,500 46,941,390
U.S. Treasury Bonds, 10.375s, 2012 64,400 83,428,268
------------
$214,653,608
------------
Total U.S. Government Guaranteed $424,500,255
------------
Total U.S. Bonds $578,776,814
------------
Foreign Bonds - 39.9%
Australia - 9.4%
Commonwealth of Australia, 8.75s, 2001 AUD 11,750 $ 9,910,892
Commonwealth of Australia, 10s, 2002 35,000 31,476,068
Commonwealth of Australia, 9.5s, 2003 76,450 67,783,946
------------
$109,170,906
------------
Canada - 4.7%
Government of Canada, 7.5s, 2003 CAD 54,800 $ 44,260,594
Government of Canada, 9s, 2004 11,500 10,098,776
------------
$ 54,359,370
------------
Denmark - 9.5%
Kingdom of Denmark, 6s, 1999 DKK 100,249 $ 17,713,964
Kingdom of Denmark, 9s, 2000 112,170 21,706,226
Kingdom of Denmark, 8s, 2001 328,977 61,742,095
Kingdom of Denmark, 7s, 2007 48,691 8,329,702
------------
$109,491,987
------------
Ireland - 2.5%
Republic of Ireland, 8s, 2000 IEP 16,700 $ 28,832,433
------------
5
<PAGE>
Portfolio of Investments - continued
Bonds - continued
Principal Amount
Issuer (000 Omitted) Value
Foreign Bonds - continued
Mexico - 1.3%
United Mexican States, 7.688s, 2001## $ 15,500 $ 15,504,650
--------------
Spain - 5.6%
Government of Spain, 8.4s, 2001 ESP 3,098,070 $ 25,474,903
Government of Spain, 10.1s, 2001 2,567,600 22,323,465
Government of Spain, 10.9s, 2003 1,828,100 16,813,088
--------------
$ 64,611,456
--------------
Sweden - 1.5%
Kingdom of Sweden, 10.25s, 2000 SEK 100,400 $ 17,240,435
--------------
United Kingdom - 5.4%
United Kingdom Treasury, 9s, 2000 6,410 $ 11,035,154
United Kingdom Treasury, 7s, 2001 GBP 25,100 40,461,559
United Kingdom Treasury, 9.75s, 2002 6,410 11,575,944
--------------
$ 63,072,657
--------------
Total Foreign Bonds $ 462,283,894
--------------
Total Bonds (Identified Cost, $1,028,331,667) $1,041,060,708
--------------
Short-Term Obligations - 4.7%
Eurolira Time Deposit, due 11/01/96### ITL 41,790,000 $ 27,529,645
Eurolira Time Deposit, due 4/21/97 41,580,000 27,435,130
--------------
Total Short-Term Obligations (Identified Cost, $53,758,484) $ 54,964,775
--------------
Repurchase Agreement - 2.6%
Goldman Sachs, dated 10/31/96, due 11/01/96, total to be received $31,904,153 (secured by
various U.S. Treasury and Federal Agency obligations in a jointly traded account), at
Cost $ 30,255 $ 30,255,000
--------------
Total Investments (Identified Cost, $1,112,345,151) $1,126,280,483
Other Assets, Less Liabilities - 2.9% 33,398,716
--------------
Net Assets - 100.0% $1,159,679,199
--------------
</TABLE>
##SEC Rule 144A restriction.
###Security segregated as collateral for interest rate swaps.
Abbreviations have been used throughout this report to indicate amounts shown
in currencies other than the U.S. Dollar. A list of abbreviations is shown
below.
AUD = Australian Dollars
CAD = Canadian Dollars
CHF = Swiss Francs
DEM = Deutsche Marks
DKK = Danish Kroner
ESP = Spanish Pesetas
GBP = British Pounds
IEP = Irish Punts
ITL = Italian Lire
JPY = Japanese Yen
SEK = Swedish Kronor
THB = Thai Baht
See notes to financial statements
6
<PAGE>
Statement of Assets and Liabilities - October 31, 1996
<TABLE>
<CAPTION>
<S> <C>
Assets:
Investments, at value (identified cost, $1,112,345,151) $1,126,280,483
Cash 398
Receivable for interest rate swaps 1,089,364
Net receivable for forward foreign currency exchange contracts sold 242,475
Receivable for investments sold 93,695,809
Interest receivable 27,888,152
Other assets 13,707
--------------
Total assets $1,249,210,388
--------------
Liabilities:
Payable to dividend disbursing agent $ 7,439,762
Payable for investments purchased 71,978,464
Payable for Treasury shares reacquired 3,577,500
Net payable for forward foreign currency exchange contracts purchased 470,659
Net payable for forward foreign currency exchange contracts sold 5,010,327
Payable to affiliates -
Management fee 23,955
Transfer and dividend disbursing agent fee 25,000
Accrued expenses and other liabilities 1,005,522
--------------
Total liabilities $ 89,531,189
--------------
Net assets $1,159,679,199
==============
Net assets consist of:
Paid-in capital $1,176,458,553
Unrealized appreciation on investments and translation of assets and liabilities in foreign currencies 9,914,549
Accumulated net realized loss on investments and foreign currency transactions (22,690,246)
Accumulated distributions in excess of net investment income (4,003,657)
--------------
Total $1,159,679,199
==============
Shares of beneficial interest outstanding 148,282,016
==============
Net asset value (net assets / shares of beneficial interest outstanding) $7.82
=====
</TABLE>
See notes to financial statements
7
<PAGE>
Statement of Operations - Year Ended October 31, 1996
<TABLE>
<S> <C>
Net investment income:
Interest income $ 93,502,129
------------
Expenses -
Management fee $ 9,140,530
Investor communication expense 932,916
Trustees' compensation 206,813
Transfer and dividend disbursing agent fee 315,671
Custodian fee 698,179
Auditing fees 74,162
Postage 59,287
Printing 40,191
Legal fees 5,667
Miscellaneous 314,895
------------
Total expenses $ 11,788,311
Fees paid indirectly (61,433)
------------
Net expenses $ 11,726,878
------------
Net investment income $ 81,775,251
------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment and interest rate swaps transactions $ 12,252,136
Written option transactions 599,355
Foreign currency transactions 389,525
Futures contracts (2,892,594)
------------
Net realized gain on investments and foreign currency transactions $ 10,348,422
------------
Change in unrealized appreciation/depreciation -
Investments $(15,241,127)
Written options (300,449)
Translation of assets and liabilities in foreign currencies 203,589
Interest rate swaps 1,089,364
------------
Net unrealized loss on investments and foreign currency translation $(14,248,623)
------------
Net realized and unrealized loss on investments and foreign currency $ (3,900,201)
------------
Increase in net assets from operations $ 77,875,050
============
</TABLE>
See notes to financial statements
8
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
-------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income $ 81,775,251 $ 92,280,420
Net realized gain (loss) on investments and foreign currency transactions 10,348,422 (4,977,753)
Net unrealized gain (loss) on investments and foreign currency translation (14,248,623) 62,090,546
-------------- --------------
Increase in net assets from operations $ 77,875,050 $ 149,393,213
-------------- --------------
Distributions declared to shareholders -
From net investment income $ (81,775,251) $ (91,816,226)
In excess of net investment income (6,449,169) --
-------------- --------------
Total distributions declared to shareholders $ (88,224,420) $ (91,816,226)
-------------- --------------
Trust share (principal) transactions -
Cost of shares reacquired $ (77,327,726) $ (221,493,668)
-------------- --------------
Total decrease in net assets $ (87,677,096) $ (163,916,681)
Net assets:
At beginning of period 1,247,356,295 1,411,272,976
-------------- --------------
At end of period (including accumulated distributions in excess of net investment
income of $4,003,657 and $12,127,213, respectively) $1,159,679,199 $1,247,356,295
============== ==============
</TABLE>
See notes to financial statements
9
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Per share data (for a share outstanding Year Ended October 31,
throughout each period): --------------------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value - beginning of period $ 7.83 $ 7.33 $ 8.18 $ 8.07 $ 8.24 $ 8.45
------ ------ ------- ------ ------ ------
Income from investment operations# -
Net investment income $ 0.53 $ 0.55 $ 0.51 $ 0.58 $ 0.66 $ 0.67
Net realized and unrealized gain (loss) on
investments and foreign currency transactions (0.03) 0.32 (0.78) 0.21 (0.02) 0.17
------ ------ ------- ------ ------ ------
Total from investment operations $ 0.50 $ 0.87 $ (0.27) $ 0.79 $ 0.64 $ 0.84
------ ------ ------- ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.53) $(0.53) $ (0.03) $(0.52) $(0.60) $(0.62)
From net realized gain on investments and foreign
currency transactions -- -- -- (0.16) -- --
In excess of net investment income (0.04) -- (0.13) -- -- --
From paid-in capital -- -- -- -- (0.21) (0.43)
Tax return of capital -- -- (0.42) -- -- --
------ ------ ------- ------ ------ ------
Total distributions declared to shareholders $(0.57) $(0.53) $ (0.58) $(0.68) $(0.81) $(1.05)
------ ------ ------- ------ ------ ------
Net increase from repurchase of capital shares $ 0.06 $ 0.16 $ -- $ -- $ -- $ --
------ ------ ------- ------ ------ ------
Net asset value - end of period $ 7.82 $ 7.83 $ 7.33 $ 8.18 $ 8.07 $ 8.24
====== ====== ======= ====== ====== ======
Per share market value - end of period $7.125 $6.625 $ 6.125 $7.625 $8.000 $8.000
====== ====== ======= ====== ====== ======
Total return 17.40% 17.08% (12.58)% 4.14% 10.35% 19.55%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.97% 1.02% 0.91% 0.95% 1.01% 1.00%
Net investment income 6.75% 7.13% 6.61% 7.13% 7.96% 8.10%
Portfolio turnover 257% 242% 213% 270% 401% 1,004%
Net assets at end of period
(000,000 omitted) $1,160 $1,247 $ 1,411 $1,597 $1,615 $1,644
</TABLE>
#Per share data for the periods subsequent to October 31, 1993 is based on
average shares outstanding.
##For fiscal years ending after September 1, 1995, the Trust's expenses are
calculated without reduction for fees paid indirectly.
See notes to financial statements
10
<PAGE>
Financial Highlights - continued
<TABLE>
<CAPTION>
Per share data (for a share outstanding Year Ended October 31,
throughout each period): ----------------------------
1990 1989 1988*
------ ------ ------
<S> <C> <C> <C>
Net asset value - beginning of period $ 8.87 $ 9.16 $ 9.30
------ ------ ------
Income from investment operations -
Net investment income(ss). $ 0.75 $ 0.83 $ 0.48
Net realized and unrealized loss on investments and
foreign currency transactions (0.12) (0.07) (0.10)
------ ------ ------
Total from investment operations $ 0.63 $ 0.76 $ 0.38
------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.63) $(0.92) $(0.39)
From paid-in capital (0.42) (0.13) (0.13)
------ ------ ------
Total distributions declared to shareholders $(1.05) $(1.05) $(0.52)
------ ------ ------
Net asset value - end of period $ 8.45 $ 8.87 $ 9.16
====== ====== ======
Per share market value - end of period $7.625 $8.750 $9.375
====== ====== ======
Total return (0.94)% 4.94% (1.17)%+
Ratios (to average net assets)/Supplemental data(ss).:
Expenses 1.01% 1.10% 0.99%+
Net investment income 8.74% 9.34% 8.39%+
Portfolio turnover 554% 546% 206%
Net assets at end of period (000,000 omitted) $1,695 $1,791 $1,837
</TABLE>
* For the period from the commencement of investment operations, March 17,
1988 to October 31, 1988.
+ Annualized.
ss The investment adviser did not impose a portion of its management 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 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
General -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Investments in foreign securities are vulnerable to the effects of
changes in the relative values of the local currency and the U.S. dollar and
to the effects of changes in each country's legal, political and economic
environment.
Investment Valuations -- Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues and forward
contracts, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate,
maturity, type of issue, trading characteristics and other market data,
without exclusive reliance upon exchange or over-the-counter prices.
Short-term obligations, which mature in 60 days or less, are valued at
amortized cost, which approximates market value. Non-U.S. dollar-denominated
short- term obligations are valued at amortized cost as calculated in the
base currency and translated into U.S. dollars at the closing daily exchange
rate. Futures contracts, options and options on futures contracts listed on
commodities exchanges are valued at closing settlement prices.
Over-the-counter options are valued by brokers through the use of a pricing
model which takes into account closing bond valuations, implied volatility
and short-term repurchase rates. Securities for which there are no such
quotations or valuations are valued at fair value as determined in good faith
by or at the direction of the Trustees.
Repurchase Agreements -- The 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. The Trust, along with other
affiliated entities of Massachusetts Financial Service 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.
12
<PAGE>
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 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 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. Investment in interest rate futures
for purposes other than hedging may be made to modify the duration of the
portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Investments in currency futures
for purposes other than hedging may be made to change the Trust'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 Trust 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 Trust may not achieve the anticipated benefits
of the futures contracts and may realize a loss.
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 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
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. The Trust 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.
Swap Agreements -- The Trust may enter into swap agreements. A swap is an
exchange of cash payments between the Trust and another party which is based
on a specific financial index. Cash payments are exchanged at specified
intervals and the expected income or expense is recorded on the accrual
basis. The value of the swap is adjusted daily and the change in value is
recorded as unrealized appreciation or depre-
13
<PAGE>
Notes to Financial Statements - continued
ciation. Notes to Financial Statements - continuedRisks may arise upon
entering into these agreements from the potential inability of counterparties
to meet the terms of their contract and from unanticipated changes in the
value of the financial index on which the swap agreement is based. The Trust
uses swaps for both hedging and non-hedging purposes. For hedging purposes,
the Trust may use swaps to reduce its exposure to interest and foreign
exchange rate fluctuations. For non-hedging purposes, the Trust may use swaps
to take a position on anticipated changes in the underlying financial index.
Investment Transactions and Income -- Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount are amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the
ex-interest date in an amount equal to the value of the security on such
date.
Fees Paid Indirectly -- The Trust's custodian bank calculates its fee based
on the Trust's average daily net assets. The fee is reduced according to a
fee arrangement, which provides for custody fees to be reduced based on a
formula developed to measure the value of cash deposited with the custodian
by the Trust. This amount is shown as a reduction of expenses on the
Statement of Operations.
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 income earned
on foreign investments in accordance with the applicable country's tax rates
and to the extent unrecoverable are recorded as a reduction of investment
income. Distributions to shareholders are recorded on the ex-dividend date.
The 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 tax return
of capital. Differences in the recognition or classification of income
between the financial statements and tax earnings and profits which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or accumulated net
realized gains. During the year ended October 31, 1996, $14,572,725 was
reclassified from accumulated net realized loss on investments and foreign
currency transactions to accumulated distributions in excess of net
investment income due to differences between book and tax accounting for
mortgage-backed securities and currency transactions. This change had no
effect on the net assets or net asset value per share.
At October 31, 1996, the Trust, for federal income tax purposes, had a
capital loss carryforward of $22,689,428, 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, 2003 ($6,526,984) and October 31,
2002 ($16,162,444).
(3) Transactions with Affiliates
Investment Adviser -- The Trust has an investment advisory agreement with MFS
to provide overall investment advisory and administrative services, and
general office facilities. The management fee is computed daily and paid
monthly at an annual rate of 0.32% of average daily net assets and 5.65% of
investment income.
14
<PAGE>
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 and MFS
Service Center, Inc. (MFSC). The Trust has an unfunded defined benefit plan
for all its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $57,313 for the year ended
October 31, 1996.
Transfer Agent -- MFSC acts 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.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
<TABLE>
<CAPTION>
Purchases Sales
-------------- --------------
<S> <C> <C>
U.S. government securities $1,647,690,750 $1,808,065,706
============== ==============
Investments (non-U.S. government securities) $1,282,727,403 $1,253,037,043
============== ==============
</TABLE>
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 $1,112,345,151
==============
Gross unrealized appreciation $ 23,223,772
Gross unrealized depreciation (9,288,440)
--------------
Net unrealized appreciation $ 13,935,332
==============
(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:
Year Ended October 31,
--------------------------
1996 1995
---------- ----------
Treasury shares reacquired 11,114,600 33,096,200
========== ==========
In accordance with the provisions of the Trust's prospectus, 11,114,600
shares of beneficial interest were purchased by the Trust during the year
ended October 31, 1996 at an average price per share of $6.96 and a weighted
average discount of 11.05% per share. The Trust repurchased 33,096,200 shares
of beneficial interest during the year ended October 31, 1995 at an average
price per share of $6.68 and a weighted average discount of 11.40% per share.
Shares held in Treasury were repurchased in an attempt to return the market
value of the discount to shareholders in the form of higher monthly
distributions.
15
<PAGE>
Notes to Financial Statements - continued
(6) Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
Net Realized and Net Increase (Decrease)
Net Unrealized Gain (Loss) in Net Assets Resulting
Quarterly Period Ended Investment Income Investment Income on Investments from Operations
- ---------------------- --------------------- ----------- ----- ----------------------- ----------------------
Per Per Per Per
Fiscal 1996 Amount Share Amount Share Amount Share Amount Share
------------ ----- ----------- ----- ------------ ------ ------------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 31 $ 23,565,999 $0.15 $20,589,786 $0.13 $ 25,021,893 $ 0.15 $ 45,611,679 $ 0.28
April 30 23,871,208 0.15 20,924,083 0.14 (46,704,849) (0.28) (25,780,766) (0.14)
July 31 23,418,189 0.15 20,480,501 0.13 (4,874,279) (0.05) 15,606,222 0.08
October 31 22,646,733 0.15 19,780,881 0.13 22,657,034 0.15 42,437,915 0.28
------------ ----- ----------- ----- ------------ ------ ------------ ------
$ 93,502,129 $0.60 $81,775,251 $0.53 $ (3,900,201) $(0.03) $ 77,875,050 $ 0.56
============ ===== =========== ===== ============ ====== ============ ======
Fiscal 1995
- -----------
January 31 $ 28,725,198 $0.16 $25,410,754 $0.14 $(21,600,785) $(0.11) $ 3,809,969 $ 0.03
April 30 26,563,252 0.15 23,068,269 0.13 50,225,758 0.29 73,294,027 0.42
July 31 26,175,083 0.16 22,848,135 0.14 17,506,205 0.09 40,354,340 0.23
October 31 23,933,306 0.16 20,953,262 0.14 10,981,615 0.05 31,934,877 0.19
------------ ----- ----------- ----- ------------ ------ ------------ ------
$105,396,839 $0.63 $92,280,420 $0.55 $ 57,112,793 $ 0.32 $149,393,213 $ 0.87
============ ===== =========== ===== ============ ====== ============ ======
</TABLE>
(7) Line of Credit
The Trust entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of 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 year ended October
31, 1996 was $12,405.
(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 swap agreements. 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.
16
<PAGE>
Written Option Transactions
- ---------------------------
<TABLE>
<CAPTION>
1996 Calls 1996 Puts
-----------------------------------------------------------------------
Principal Amounts of Principal Amounts of
Contracts (000 Contracts (000
Omitted) Premiums Omitted) Premiums
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period -
Australian Dollars 32,454 $ 351,550 31,385 $ 371,861
Deutsche Marks -- -- 31,994 85,464
Deutsche Marks/British Pounds 38,419 233,060 -- --
Japanese Yen -- -- 774,000 84,506
Options written -
Australian Dollars 23,889 137,869 8,431 51,524
Canadian Dollars -- -- 26,757 59,889
Japanese Yen 1,259,000 174,170 948,000 116,645
Options terminated in closing transactions -
Australian Dollars (56,343) (489,419) (26,580) (253,720)
Deutsche Marks -- -- (31,994) (85,464)
Deutsche Marks/British Pounds (38,419) (233,060) -- --
Japanese Yen (1,259,000) (174,170) (1,722,000) (201,151)
Options expired -
Australian Dollars -- -- (13,236) (169,665)
Canadian Dollars -- -- (26,757) (59,889)
---------- --------- ---------- ---------
Outstanding, end of period -- $ -- -- $ --
========== ========= ========== =========
</TABLE>
Forward Foreign Currency Exchange Contracts
- -------------------------------------------
<TABLE>
<CAPTION>
Contracts to Contracts at Net Unrealized
Settlement Date Deliver/Receive In Exchange for Value Appreciation (Depreciation)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales 2/20/97 AUD 145,753,820 $113,797,534 $115,067,686 $(1,270,152)
11/01/96 - 2/20/97 CAD 209,318,994 154,838,665 156,801,381 (1,962,716)
11/04/96 - 1/31/97 DEM 231,533,327 152,876,574 152,615,060 261,514
2/03/97 DKK 655,714,332 114,952,900 113,014,988 1,937,912
11/15/96 ESP 8,331,234,335 65,359,931 65,108,596 251,335
11/06/96 - 2/24/97 GBP 105,735,407 168,262,040 171,779,593 (3,517,553)
2/24/97 IEP 18,255,283 29,346,281 29,694,555 (348,274)
11/06/96 - 12/12/96 ITL 171,136,621,446 112,304,294 112,607,897 (303,603)
1/31/97 JPY 331,890,720 2,940,000 2,944,866 (4,866)
2/03/97 SEK 108,344,835 16,453,278 16,507,202 (53,924)
------------ ------------ -----------
$931,131,497 $936,141,824 $(5,010,327)
============ ============ ===========
Purchases 2/20/97 AUD 53,094,541 $ 41,885,423 $ 41,916,335 $ 30,912
11/01/96 - 2/20/97 CAD 142,200,566 105,935,056 106,355,037 419,981
2/07/97 CHF 3,860,507 3,240,176 3,068,910 (171,266)
11/04/96 - 12/12/96 DEM 232,592,445 154,084,490 153,364,555 (719,935)
11/06/96 - 2/24/97 GBP 68,435,270 111,217,005 111,248,707 31,702
11/06/96 ITL 85,568,310,723 56,480,733 56,389,517 (91,216)
11/12/96 - 1/31/97 THB 1,267,345,000 49,302,555 49,331,718 29,163
------------ ------------ -----------
$522,145,438 $521,674,779 $ (470,659)
============ ============ ===========
</TABLE>
17
<PAGE>
Notes to Financial Statements - continued
Forward foreign currency purchases and sales under master netting
arrangements and closed forward foreign currency exchange contracts, excluded
from above, amounted to a net receivable of $56,381 with Banker's Trust and
$458,180 with Chase Manhattan Bank and a net payable of $272,086 with
Banker's Trust at October 31, 1996.
At October 31, 1996, the Trust had sufficient cash and/or securities to cover
any commitments under these contracts.
Interest Rate Swaps
- -------------------
<TABLE>
<CAPTION>
Notional Cash Flows Cash Flows
Principal Amount Paid by Received by Unrealized
Expiration of Contract the Trust the Trust Appreciation
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
4/19/97 ITL 41,580,000,000 ITL-LIBOR-BBA 8.055% Fixed $ 655,474
5/09/97 ITL 41,580,000,000 ITL-LIBOR-BBA 8.000% Fixed 433,890
----------
$1,089,364
==========
</TABLE>
At October 31, 1996, the Trust has segregated sufficient cash and/or
securities to cover margin requirements on open interest rate swaps.
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 October 31, 1996, the related statement of operations for the year then
ended, the statement of changes in net assets for the years ended October 31,
1996 and October 31, 1995, and the financial highlights for each of the years
in the nine-year period ended October 31, 1996. 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 October 31, 1996 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 October 31, 1996, the results of its operations, the changes
in its net assets, and its financial highlights for the respective stated
periods in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
November 29, 1996
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; Director,
Cambridge Bancorp; Director,
Cambridge Trust 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);
President, Benchmark Consulting
Group, Inc. (office services);
Trustee, Landmark Funds
(mutual funds)
Arnold D. Scott*
Senior Executive Vice President,
Director and Secretary,
Massachusetts Financial
Services Company
Jeffrey L. Shames*
President and Director,
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 Managers
Christopher D. Piros*
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
MFS Service Center, Inc.
P.O. Box 9024
Boston, MA 02205-9824
1-800-637-2304
Custodian
State Street Bank and
Trust Company
Independent 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-2 12/96 112M
[MFS LOGO]
Annual Report
for Year Ended
October 31, 1996
