[MFS LOGO]
75 YEARS
WE INVENTED THE MUTUAL FUND[RegTM]
MFS(R) Intermediate
Income Trust
Semiannual Report o April 30, 1999
<PAGE>
Dear Shareholders,
It has been almost two years since financial turmoil began to rock Asian and
other financial markets, including markets in Russia and Latin America. Even
developed markets such as Europe and the United States were not immune.
Investors in U.S. bond markets, for example, became increasingly risk conscious,
shifting money into U.S. Treasury securities and away from corporate and
municipal bonds and mortgage-backed securities.
Today, the bond market environment in the United States has become much more
favorable. In fact, we think it is approaching the level of relative stability
it enjoyed before the Asian turmoil began.
This May, the Federal Reserve Board (the Fed) indicated a bias toward raising
short-term interest rates. Despite six months of strong economic growth and a
surprisingly high 0.7% increase in the Consumer Price Index in April, the Fed
did not actually raise rates. This is not the first time the Fed has used such a
strategy. Since 1995, the Fed has indicated a bias toward higher interest rates
more than 15 times but has raised rates only twice.
We believe the Fed's bias statement will be good for the bond markets for two
reasons. First, it reassures investors that the Fed will act if economic growth
results in higher inflation and reduced purchasing power. Second, the Fed's
signal, combined with several months of strong growth, has already resulted in
higher interest rates, which could slow the economy enough to dampen inflation
without a need for further Fed action. Although the Fed has not changed
short-term interest rates since October 1998, bond market investors have pushed
up the rate on the 30-year Treasury bond close to 6%, almost a full percentage
point higher than it was a year ago. The effect of this increase can be seen in
the mortgage market, in which interest rates have risen slightly since the
summer of 1998.
April's increase in the Consumer Price Index was higher than analysts had
forecast, but we do not believe it is cause for concern. Most of April's
increase seems to have resulted from a decision by oil-exporting countries to
limit production following more than a year of declining oil prices. If the
increase in oil prices is nothing more than a small reversal of the earlier
decline, April's inflation report may be an aberration rather than the beginning
of a trend toward higher prices. Also, thanks in part to global competition and
the growing use of technology to increase global production, companies followed
by our portfolio managers and analysts report very little margin to raise
prices. As a result, we expect 1999's inflation rate to be around 2%, which is
slightly higher than 1998's but still moderate.
One of the most positive results of the moderate growth and inflation
environment has been a rebound in the major non-Treasury bond markets:
corporate, municipal, and mortgage. Once people saw that the overseas turmoil
had little, if any, effect on the financial strength of most domestic bond
issuers, these markets began to rebound and to present our portfolio managers
with opportunities to find attractive yields.
We will, of course, closely follow domestic and overseas economic growth,
inflation, Fed policy, and government spending in an effort to monitor their
impact on the bond markets. On a more fundamental level, we will continue to use
extensive research and credit analysis to find attractive investment
opportunities. For example, we believe the strong U.S. economy and low inflation
have helped select corporate bond issuers maintain strong balance sheets and
meet their debt payments. And, despite their recent increases, mortgage rates
have not risen enough to slow the housing market significantly, which has
benefited issuers of mortgage-backed securities. We believe the well-defined
strategies and active portfolio management of our fixed-income funds position
them to benefit from opportunities in these and other bond markets.
1
<PAGE>
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
May 21, 1999
Management Review and Outlook
Dear Shareholders,
The Trust's stock market price, which stood at $6.94 on October 31, 1998,
decreased to $6.56 as of April 30, 1999, while its net asset value (NAV) price
declined from $7.75 to $7.56, representing a total return of -1.97% based on
market price and 1.09% based on NAV.
During the same period, the Salomon Brothers Medium Term (1- to 10-year)
Treasury Government Sponsored Index (the Salomon Index), an unmanaged index of
medium-term U.S. Treasury and agency securities, returned 0.85%. The J.P. Morgan
Non-Dollar Government Bond Index, an unmanaged index of actively traded
government bonds issued by 12 countries (excluding the United States) with
remaining maturities of at least one year, returned -4.17%.
The Trust has maintained a higher-than-average weighting in U.S. government,
government-agency, and mortgage-backed securities. As a result of the bond
market turmoil following last August's Russian bond default, interest-rate
spreads of mortgage-backed securities over comparable-maturity Treasuries
reached their widest point since the late 1980s. (Principal value and interest
on Treasury securities are guaranteed by the U.S. government if held to
maturity.) Prices on these securities, which move in the opposite direction of
interest rates, fell. However, as we expected, the bond market steadied by the
end of 1998 and into 1999, with yields on these securities declining to more
normal levels.
We also correctly believed that the increase in mortgage rates since October
would take some of the steam out of the refinancing wave generated by last
summer's low interest-rate environment. As the bond market recovered from last
fall's turmoil, mortgage-backed securities performed well. Prices of Government
National Mortgage Association securities increased as their yields declined from
182 basis points (1.82%) over 10-year Treasuries in October 1998 to 126 basis
points (1.26%) as of April 30, 1999. The reduction in the number of prepayments,
which removes higher-yielding bonds from the portfolio, made mortgage-backed
securities even more attractive. We saw this environment as an opportunity to
try to add additional yield and increased the Trust's allocation to
mortgage-backed securities.
The current level of interest rates and our view that Treasury yields will stay
within a narrow range seem favorable for mortgages. Mortgages generally perform
very well when interest rates are stable. Rates have not risen enough recently
to brake a healthy housing market or to prevent homeowners with low-rate
mortgages from buying new homes. However, interest rates have increased enough
from their historically low levels to ease the refinancing pressure on
higher-rate loans.
The portfolio's sensitivity to changes in interest rates is about the same as
that of the Salomon Index. We want to avoid holding too many long-maturity bonds
because their prices would decline more than short-maturity bond prices if
interest rates went up. By the same token, we don't want to hold too many
short-maturity bonds because they produce relatively low yields. However, if the
economy shows signs of weakness over the next few months, we will consider
slightly increasing our long-term bond position in an effort to gain additional
yield.
In the near term, we think the bond markets will continue to adjust to the
growing ambivalence regarding the need for the Federal Reserve Board
2
<PAGE>
(the Fed) to raise interest rates. This outlook should keep yields on two-year
Treasury securities around 5.00% to 5.85%. Yields on longer-term Treasuries,
meanwhile, will reflect the bond markets' perception about economic growth. If
bond investors believe growth is too strong, they may push up interest rates to
reign in a surging economy and quell inflation fears. However, because we
believe inflation should remain in check, we think any rate increase will be
limited and will present us with an opportunity to selectively buy
higher-yielding securities.
International Sector
International credit markets have been much more stable since the volatile third
quarter of 1998. Helped by interest-rate cuts by the Fed and by many European
central banks, along with a funding increase for the International Monetary
Fund, lower quality bonds started to perform better.
While the continued strength of U.S. economic growth resulted in higher Treasury
yields during the first four months of 1999, the newly formed European Central
Bank lowered interest rates by 50 basis points (0.50%) to stimulate domestic
demand. Currently, most European markets continue to outperform U.S. bonds.
Within the dollar bloc, Australian bonds continued to perform well relative to
U.S. bonds because inflation rates remained at or below expected levels.
Approximately 11% of the Trust's assets were allocated to developed
international markets during the past six months. In Europe, positions in Greece
and Denmark, two countries not presently in the European monetary union (EMU)
but likely to join in the next few years, helped performance. In addition,
government-bond holdings in New Zealand and Australia, where rates are higher
than in Europe, continued to add incremental income to the Trust. While bonds
from the United Kingdom were stellar performers in 1998, they barely have
outperformed U.S. Treasuries in 1999. Regarding the currency impact on the
portfolio, the euro has depreciated approximately 9% versus the U.S. dollar
since its creation in January 1999, but the majority of the Trust's foreign
assets has been hedged into dollars. Therefore, there has not been much currency
impact resulting from a stronger dollar.
Looking forward, we do not anticipate much change in our international holdings.
We believe the possibility of additional interest-rate cuts in Europe is small.
Interest rates within the EMU should remain stable as inflation stays low, while
bonds from countries such as Greece and Denmark should continue to perform well
relative to core Europe. Although the performance of holdings in New Zealand and
Australia will depend on the direction of U.S. interest rates, we believe
inflation-adjusted returns in these two countries should remain relatively
attractive.
Respectfully,
/s/ Stephen C. Bryant
Stephen C. Bryant
Portfolio Manager
/s/ Steven E. Nothern
Steven E. Nothern
Portfolio Manager
The opinions expressed in this report are those of the portfolio managers and
are current only through the end of the period of the report as stated on the
cover. The managers' views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
Performance Summary
(For the period ended April 30, 1999)
<TABLE>
<S> <C>
Net Asset Value Per Share
October 30, 1998 $ 7.75
April 30, 1999 $ 7.56
New York Stock Exchange Price
October 30, 1998 $ 6.9375
December 4, 1998 (high)* $ 7.0625
April 30, 1999 (low)* $ 6.5625
April 30, 1999 $ 6.5625
</TABLE>
*For the period November 1, 1998, through April 30, 1999.
- --------------------------------------------------------------------------------
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, nondiversified,
management investment company and has no employees.
Number of Shareholders
As of April 30, 1999, our records indicate that there are 13,292 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
New York Stock Exchange
Symbol The New York Stock Exchange symbol is MIN.
Investment Objective and Policies
The investment objective of the 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.
Dividend Reinvestment and
Cash Purchase Plan
MFS offers a Dividend Reinvestment and Cash Purchase Plan which allows you to
reinvest either all of the distributions paid by the Trust or only the long-term
capital gains. Purchases are made at the market price unless that price exceeds
the net asset value (the shares are trading at a premium). If the shares are
trading at a premium, purchases will be made at a discounted price of either the
net asset value or 95% of the market price, whichever is greater. Twice each
year you can also buy shares. 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. 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, call 1-800-637-2304 any business day
from 8 a.m. to 8 p.m. Eastern time. Please have available the name of
4
<PAGE>
the Trust and your account and Social Security numbers. For certain types of
registrations, such as corporate accounts, instructions must be submitted in
writing. Please call for additional details. When you withdraw, 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.
If you have any questions or would like a brochure providing a complete
description of the Plan, please call 1-800-637-2304 any business day from 8 a.m.
to 8 p.m. Eastern time.
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
5
<PAGE>
Portfolio of Investments (Unaudited) - April 30, 1999
Bonds - 99.8%
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
U.S. Bonds - 83.1%
U.S. Federal Agencies - 13.3%
Agency for International
Development, 6.625s, 2004 ........... $14,600 $ 15,060,338
FHLB, 5.125s, 2001 .................... 26,250 26,151,563
FHLM, 5s, 2004 ........................ 25,000 24,320,250
FHLM, 5.83s, 2013 ..................... 5,210 5,200,329
FNMA, 5.25s, 2009 ..................... 6,000 5,725,320
FNMA, 6s, 2013 TBA .................... 21,612 21,409,387
FNMA, 6.959s, 2007 .................... 5,625 5,751,339
FNMA, 8.33s, 2005 ..................... 20,000 20,456,200
FNMA, 9s, 2008 TBA .................... 9 9,599
State of Israel, 6.625s, 2003 ......... 15,000 15,486,300
------------
$139,570,625
------------
Government National Mortgage
Association - 26.4%
GNMA, 6.5s, 2027 TBA .................. $77,375 $ 76,867,129
GNMA, 7s, 2012 - 2025 TBA ............. 79,058 80,664,458
GNMA, 7s, 2023 - 2024 ................. 79,058 33,742,576
GNMA, 7.5s, 2022 - 2023 ............... 3,917 4,044,588
GNMA, 7.5s, 2026 TBA .................. 47,245 48,691,734
GNMA, 8s, 2026 TBA .................... 11,749 12,241,439
GNMA, 8.5s, 2006 TBA .................. 3,242 3,430,346
GNMA, 8.5s, 2009 ...................... 12,298 12,884,007
GNMA, 9.25s, 2001 ..................... 4,541 4,754,509
------------
$277,320,786
------------
U.S. Treasury Obligations - 43.4%
U.S. Treasury Notes, 8.5s, 2000 ....... $45,000 $ 46,230,300
U.S. Treasury Bonds, 14.25s, 2002 ..... 5,000 6,153,100
U.S. Treasury Bonds, 10.75s, 2003 .... 26,000 30,773,340
U.S. Treasury Bonds, 11.875s, 2003 .... 43,000 54,159,790
U.S. Treasury Bonds, 12.375s, 2004 .... 34,500 45,049,410
U.S. Treasury Bonds, 10.375s, 2009 .... 18,350 22,550,498
U.S. Treasury Bonds, 13.875s, 2011 .... 25,500 37,708,125
U.S. Treasury Bonds, 10.375s, 2012 .... 84,600 111,420,738
U.S. Treasury Bonds, 12s, 2013 ........ 31,500 45,793,125
U.S. Treasury Bonds, 3.875s, 2029 ..... 55,000 55,154,550
------------
$454,992,976
------------
Total U.S. Bonds .................................. $871,884,387
------------
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds - 16.7%
Argentina - 0.2%
Republic of Argentina,
11.447s, 2005 .................. $ 1,050 $ 1,023,750
Republic of Argentina,
11.75s, 2009 ................... 1,400 1,449,000
------------
$ 2,472,750
------------
Australia - 2.3%
Commonwealth of
Australia, 7.5s, 2009 .......... AUD 31,608 $ 24,055,447
------------
Brazil - 1.2%
Republic of Brazil, 11.625s,
2004 ........................... $ 13,000 $ 12,675,000
------------
Colombia - 0.2%
Republic of Colombia,
9.75s, 2009 .................... $ 2,750 $ 2,674,650
------------
Denmark - 0.5%
Kingdom of Denmark, 7s,
2007 ........................... DKK 28,905 $ 4,940,502
------------
Germany - 0.3%
Depfa Pfandbriefbank,
5.5s, 2013 ..................... EUR 2,700 $ 3,117,493
------------
Greece - 2.1%
Hellenic Republic, 5.75s,
2008 ........................... EUR 1,566 $ 1,800,705
Hellenic Republic, 8.9s,
2003 ........................... GRD 5,650,000 19,802,971
------------
$ 21,603,676
------------
Mexico - 1.2%
Petroleos Mexicanos,
9.026s, 2005 (Oil)## ........... $ 640 $ 611,200
United Mexican States,
6.25s, 2019 .................... 2,750 2,176,075
United Mexican States,
9.75s, 2005 .................... 1,750 1,815,625
United Mexican States,
9.875s, 2007 ................... 1,915 2,008,452
United Mexican States,
10.375s, 2009 .................. 2,950 3,156,500
United Mexican States,
11.5s, 2026 .................... 2,870 3,408,125
------------
$ 13,175,977
------------
New Zealand - 3.9%
Government of New
Zealand, 8s, 2004 .............. NZD 29,010 $ 18,019,733
Government of New
Zealand, 8s, 2006 .............. 35,390 22,606,541
------------
$ 40,626,274
------------
</TABLE>
6
<PAGE>
Portfolio of Investments (Unaudited) - continued
<TABLE>
<CAPTION>
Principal Amount
Issuer (000 Omitted) Value
<S> <C> <C>
Foreign Bonds - continued
Panama - 0.2%
Republic of Panama, 4s,
2014 ............................ $ 2,000 $ 1,567,600
Republic of Panama, 8.25s,
2008 ............................ 580 548,100
--------------
$ 2,115,700
--------------
Peru - 0.3%
Republic of Peru, 3.75s, 2017...... $ 4,000 $ 2,700,000
--------------
Philippines - 0.5%
Republic of Philippines,
9.875s, 2019 .................... $ 4,900 $ 5,047,000
--------------
Poland - 0.6%
Telkomunikacja Polska SA
Finance BV, 7.75s, 2008
(Finance)## ..................... $ 6,000 $ 6,072,000
--------------
South Korea - 0.5%
Korea Development Bank,
10.172s, 2003 (Bank)## .......... $ 5,800 $ 5,655,000
--------------
United Kingdom - 2.7%
Halifax Building Society Plc,
6.083s, 2012 (Mortgage
Banks) ..........................GBP 2,300 $ 3,617,856
Lloyds Bank Plc, 7.375s, 2004
(Bank) .......................... 2,580 4,423,002
United Kingdom Treasury,
6.5s, 2003 ...................... 8,158 14,024,959
United Kingdom Treasury,
6.75s, 2004 ..................... 1,520 2,676,689
Woolwich Building Society Plc,
5.819s, 2012 (Mortgage
Banks) .......................... 2,280 3,555,230
--------------
$ 28,297,736
--------------
Total Foreign Bonds ............................... $ 175,229,205
--------------
Total Bonds (Identified Cost,
$1,051,380,582) ................................. $1,047,113,592
--------------
Shares
Warrants
Republic of Venezuela*,
Expiration Date 4/18/20
(Identified Cost, $0) ........... 37,500 $ --
--------------
Principal Amount
Issuer (000 Omitted) Value
Repurchase Agreement - 1.2%
Goldman Sachs, dated 4/30/99,
due 05/03/99, total to be
received $12,668,160
(secured by various U.S.
Treasury and Federal
Agency obligations in a
jointly traded account),
at cost, ........................ $12,663 $ 12,663,000
--------------
Total Investments
(Identified Cost,
$1,064,043,582) ................................. $1,059,776,592
--------------
Call Options Written
Principal Amount
of Contracts
Issuer/Expiration Month/Strike Price (000 Omitted)
Australian Dollars/May/0.6245 AUD 7,962 $ --
--------------
(Premiums Received,
$64,388) ........................................ $ --
--------------
Other Assets,
Less Liabilities - (1.0)% ......................... (10,086,873)
--------------
Net Assets - 100.0% ................................. $1,049,689,719
--------------
</TABLE>
*Non-income producing security.
##SEC Rule 144A restriction.
Abbreviations have been used throughout this report to indicate amounts shown in
currencies other than the U.S. dollar. A list of abbreviations is shown below.
AUD = Australian Dollars GRD = Greek Drachma
DKK = Danish Kroner JPY = Japanese Yen
EUR = Euro NZD = New Zealand Dollars
GBP = British Pounds SEK = Swedish Kronar
See notes to financial statements
7
<PAGE>
Statement of Assets and Liabilities (Unaudited) - April 30, 1999
<TABLE>
<S> <C>
Assets:
Investments, at value (identified cost, $1,064,043,582) ................................ $1,059,776,592
Cash ................................................................................... 470,690
Foreign currency, at value (identified cost, $55,793) .................................. 55,485
Net receivable for forward foreign currency exchange contracts to purchase ............. 1,062,384
Interest receivable .................................................................... 19,350,218
Other assets ........................................................................... 14,404
--------------
Total assets ....................................................................... $1,080,729,773
--------------
Liabilities:
Payable to dividend disbursing agent ................................................... $ 460,578
Payable for investments purchased ...................................................... 26,255,903
Payable for Treasury shares reacquired ................................................. 657,392
Payable for swap agreements ............................................................ 11,717
Net payable for forward foreign currency exchange contracts to sell .................... 2,851,098
Net payable for forward foreign currency exchange contracts subject to master netting
agreements ............................................................................. 302,216
Written options outstanding, at value (premiums received $64,388) ...................... --
Payable to affiliates -
Management fee ....................................................................... 5,790
Administrative fee ................................................................... 705
Transfer and dividend disbursing agent fee ........................................... 20,847
Accrued expenses and other liabilities ................................................. 473,808
--------------
Total liabilities .................................................................. $ 31,040,054
--------------
Net assets ............................................................................... $1,049,689,719
==============
Net assets consist of:
Paid-in capital ........................................................................ $1,103,263,683
Unrealized depreciation on investments and translation of assets and liabilities in
foreign currencies ..................................................................... (6,288,056)
Accumulated net realized loss on investments and foreign currency transactions ......... (42,731,315)
Accumulated distributions in excess of net investment income ........................... (4,554,593)
--------------
Total .............................................................................. $1,049,689,719
==============
Shares of beneficial interest outstanding (202,648,016 issued less 63,800,100 treasury
shares) ................................................................................ 138,847,916
==============
Net asset value (net assets [divided by] shares of beneficial interest outstanding) ...... $7.56
=====
</TABLE>
See notes to financial statements
8
<PAGE>
Statement of Operations (Unaudited) - Six Months Ended April 30, 1999
<TABLE>
<S> <C>
Net investment income:
Interest income ............................................................... $ 39,450,881
-------------
Expenses -
Management fee .............................................................. $ 3,922,841
Trustees' compensation ...................................................... 93,233
Transfer and dividend disbursing agent fee .................................. 123,580
Administrative fee .......................................................... 52,692
Custodian fee ............................................................... 224,862
Auditing fees ............................................................... 22,050
Postage ..................................................................... 20,498
Printing .................................................................... 11,077
Legal fees .................................................................. 235
Miscellaneous ............................................................... 496,994
-------------
Total expenses ............................................................ $ 4,968,062
Fees paid indirectly ........................................................ (60,909)
-------------
Net expenses .............................................................. $ 4,907,153
-------------
Net investment income ................................................... $ 34,543,728
-------------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions ..................................................... $ (4,588,444)
Written option transactions ................................................. 995,037
Foreign currency transactions ............................................... (1,475,490)
-------------
Net realized loss on investments and foreign currency transactions ........ $ (5,068,897)
-------------
Change in unrealized appreciation (depreciation) -
Investments ................................................................. $ (20,169,856)
Written options ............................................................. 64,388
Translation of assets and liabilities in foreign currencies ................. (3,074,539)
Swap transactions ........................................................... (11,717)
-------------
Net unrealized loss on investments and foreign currency ................... $ (23,191,724)
-------------
Net realized and unrealized loss on investments and foreign currency .... $ (28,260,621)
-------------
Increase in net assets from operations ................................ $ 6,283,107
=============
</TABLE>
See notes to financial statements
9
<PAGE>
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Six Months Ended
April 30, 1999 Year Ended
(Unaudited) October 31, 1998
---------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment income ............................................................... $ 34,543,728 $ 71,914,594
Net realized loss on investments and foreign currency transactions .................. (5,068,897) (17,652,797)
Net unrealized gain (loss) on investments and foreign currency translation .......... (23,191,724) 16,203,966
-------------- --------------
Increase in net assets from operations ............................................ $ 6,283,107 $ 70,465,763
-------------- --------------
Distributions declared to shareholders -
From net investment income .......................................................... $ (34,370,310) $ (65,821,545)
From paid-in capital ................................................................ -- (6,636,586)
-------------- --------------
Total distributions declared to shareholders ...................................... $ (34,370,310) $ (72,458,131)
-------------- --------------
Trust share (principal) transactions -
Cost of shares reacquired ........................................................... $ (12,857,475) $ (5,740,891)
-------------- --------------
Total decrease in net assets .................................................... $ (40,944,678) $ (7,733,259)
Net assets:
At beginning of period .............................................................. 1,090,634,397 1,098,367,656
-------------- --------------
At end of period (including accumulated distributions in excess of net investment
income of $4,554,593 and $4,728,011 respectively).................................... $1,049,689,719 $1,090,634,397
============== ==============
</TABLE>
See notes to financial statements
10
<PAGE>
Financial Highlights
<TABLE>
<CAPTION>
Six Months
Ended
April 30, 1999
Per share data (for a share outstanding (Unaudited)
throughout each period): ---------------
<S> <C>
Net asset value - beginning of period .............. $ 7.75
--------
Income from investment operations# -
Net investment income ............................ $ 0.25
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions .................................... (0.28)
---------
Total from investment operations ............... $ (0.03)
---------
Less distributions declared to shareholders -
From net investment income ....................... $ (0.25)
In excess of net investment income and foreign
currency transactions ........................... -
From paid-in capital ............................. -
---------
Total distributions declared to shareholders ... $ (0.25)
---------
Net increase from repurchase of capital shares ..... $ 0.09
---------
Net asset value - end of period .................... $ 7.56
---------
Per share market value - end of period ............. $ 6.563
=========
Total return at market value ....................... (1.97)%++
Ratios (to average net assets)/Supplemental data:
Expenses## ........................................ 0.93%+
Net investment income ............................. 6.49%+
Portfolio turnover ................................. 51%
Net assets at end of period (000,000 omitted) ...... $ 1,050
<CAPTION>
Year Ended October 31,
----------------------------------------------------------------------
Per share data (for a share outstanding 1998 1997 1996 1995 1994
throughout each period): ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net asset value - beginning of period .............. $ 7.76 $ 7.82 $ 7.83 $ 7.33 $ 8.18
-------- -------- -------- -------- ---------
Income from investment operations# -
Net investment income ............................ $ 0.51 $ 0.54 $ 0.53 $ 0.55 $ 0.51
Net realized and unrealized gain (loss) on
investments and foreign currency
transactions .................................... (0.01) (0.05) (0.03) 0.32 ( 0.78)
--------- --------- --------- -------- ---------
Total from investment operations ............... $ 0.50 $ 0.49 $ 0.50 $ 0.87 $ (0.27)
--------- --------- --------- -------- ---------
Less distributions declared to shareholders -
From net investment income ....................... $ (0.46) $ (0.54) $ (0.53) $ (0.53) $ (0.03)
In excess of net investment income and foreign
currency transactions ........................... - (0.04) (0.04) - (0.13)
From paid-in capital ............................. (0.05) - - - (0.42)
--------- --------- --------- --------- ---------
Total distributions declared to shareholders ... $ (0.51) $ (0.58) $ (0.57) $ (0.53) $ (0.58)
--------- --------- --------- --------- ---------
Net increase from repurchase of capital shares ..... $ - * $ 0.03 $ 0.06 $ 0.16 $ -
--------- --------- --------- --------- ---------
Net asset value - end of period .................... $ 7.75 $ 7.76 $ 7.82 $ 7.83 $ 7.33
--------- --------- --------- --------- ---------
Per share market value - end of period ............. $ 6.938 $ 7.000 $ 7.125 $ 6.625 $ 6.125
========= ========= ========= ========= =========
Total return at market value ....................... 6.56% 6.46% 17.40% 17.08% (12.58)%
Ratios (to average net assets)/Supplemental data:
Expenses## ........................................ 0.91% 0.91% 0.97% 1.02% 0.91%
Net investment income ............................. 6.59% 6.92% 6.75% 7.13% 6.61%
Portfolio turnover ................................. 184% 213% 257% 242% 213%
Net assets at end of period (000,000 omitted) ...... $ 1,091 $ 1,098 $ 1,160 $ 1,247 $ 1,411
</TABLE>
+Annualized.
++Not annualized.
#Per share data are based on average shares outstanding.
##For fiscal years ending after September 1, 1995, the Trust has an expense
offset arrangement which reduces the Trust's custodian fee based upon the
amount of cash maintained by the Trust with its custodian and dividend
disbursing agent. The Trust's expenses are calculated without reduction for
this expense offset arrangement.
*For the year ended October 31, 1998, the net increase from repurchase of
capital shares was less than $0.01 per share.
See notes to financial statements
11
<PAGE>
Notes to Financial Statements (Unaudited)
(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, forward contracts, and swap
agreements, are valued on the basis of valuations furnished by dealers or by a
pricing service with consideration to factors such as institutional-size trading
in similar groups of securities, yield, quality, coupon rate, maturity, type of
issue, trading characteristics, and other market data, without exclusive
reliance upon exchange or over-the-counter prices. Short-term obligations, which
mature in 60 days or less, are valued at amortized cost, which approximates
market value. Options contracts listed on commodities exchanges are reported at
market value using closing settlement prices. Over-the-counter options on
securities are valued by brokers. Over-the-counter currency options are valued
through the use of a pricing model which takes into account foreign currency
exchange spot and forward rates, implied volatility, and short-term repurchase
rates.
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 collateral 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 collateral to ensure that its value, including
accrued interest, is greater than amounts owed to the Trust under each such
repurchase agreement. The Trust, along with other affiliated entities of
Massachusetts Financial Services Company (MFS), may utilize a joint trading
account for the purpose of entering into one or more repurchase agreements.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases and
sales of foreign investments, income, and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates of
such transactions. Gains and losses attributable to foreign currency exchange
rates on sales of securities are recorded for financial statement purposes as
net realized gains and losses on investments. Gains and losses attributable to
foreign exchange rate movements on income and expenses are recorded for
financial statement purposes as foreign currency transaction gains and losses.
That portion of both realized and unrealized gains and losses on investments
that results from fluctuations in foreign currency exchange rates is not
separately disclosed.
Written Options - The Trust may write call or put options in exchange for a
premium. The premium is initially recorded as a liability which is subsequently
adjusted to the current value of the options contract. When a written option
expires, the Trust realizes a gain equal to the amount of the premium received.
When a written
12
<PAGE>
call option is exercised or closed, the premium received is offset against the
proceeds to determine the realized gain or loss. When a written put option is
exercised, the premium reduces the cost basis of the security purchased by the
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.
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 as unrealized until the contract settlement date. On
contract settlement date, the gains or losses are recorded as realized gains or
losses on foreign currency transactions.
Swap Agreements - The 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 depreciation. Risks may arise upon entering into these
agreements from the potential inability of counterparties to meet the terms of
their contract and from unanticipated changes in the value of the financial
index on which the swap agreement is based. The 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
discount is amortized for financial statement and tax reporting purposes as
required by federal income tax regulations. Interest payments received in
additional securities are recorded on the ex-interest date in an amount equal to
the value of the security on such date. Some securities may be purchased on a
"when-issued" or "forward delivery" basis, which means that the securities will
be delivered to the Trust at a future date, usually beyond customary settlement
time.
Fees Paid Indirectly - The Trust's custody fee is calculated as a percentage of
the Trust's month end net assets. The fee is reduced according to an arrangement
that measures the value of cash deposited with the custodian by the 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
13
<PAGE>
Notes to Financial Statements (Unaudited) - continued
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.
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 distributions from paid-in
capital. Differences in the recognition or classification of income between the
financial statements and tax earnings and profits, which result in temporary
over-distributions for financial statement purposes, are classified as
distributions in excess of net investment income or net realized gains.
At October 31, 1998, the Trust, for federal income tax purposes, had a capital
loss carryforward of $37,081,141, 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, 2006, $13,745,485, October 31, 2005, $645,525, and
October 31, 2003, $6,526,984, and October 31, 2002, $16,163,147.
(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 is computed daily and paid monthly at an effective annual rate of
0.32% of the Trust's average daily net assets and 5.65% of investment income.
Administrator - The Trust has an administrative services agreement with MFS to
provide the Trust with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Trust pays MFS an administrative fee
at the following annual percentages of the Trust's average daily net assets:
<TABLE>
<S> <C>
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
</TABLE>
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 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 of its
independent Trustees and Mr. Bailey. Included in Trustees' compensation is a net
periodic pension expense of $26,595 for the period ended April 30, 1999.
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 of no more than $9.00 and a dividend services fee of $0.75 per
reinvestment and will reimburse MFSC for reasonable out-of-pocket expenses.
14
<PAGE>
(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 ............................ $385,620,909 $373,527,160
============ ============
Investments (non-U.S. government securities) .......... $159,515,467 $158,890,549
============ ============
</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:
<TABLE>
<S> <C>
Aggregate cost ........................ $1,065,537,382
==============
Gross unrealized depreciation ......... $ (16,182,674)
Gross unrealized appreciation ......... 10,421,884
--------------
Net unrealized depreciation ........... $ (5,760,790)
==============
</TABLE>
(5) Shares of Beneficial Interest
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares of beneficial interest (without par value).
Transactions in Trust shares were as follows:
<TABLE>
<CAPTION>
Six Months Ended April 30, Year Ended October 31,
1999 1998
---------------------------- -------------------------
Shares Amount Shares Amount
----------- -------------- --------- -------------
<S> <C> <C> <C> <C>
Treasury shares acquired ......... 1,899,000 $12,857,475 807,000 $5,740,891
========= =========== ======= ==========
</TABLE>
In accordance with the provisions of the Trust's prospectus, 1,899,000 shares of
beneficial interest were purchased by the Trust during the period ended April
30, 1999, at an average price per share of $6.71 and a weighted average discount
of 11.35% per share. The Trust repurchased 807,000 shares of beneficial interest
during the year ended October 31, 1998, at an average price per share of $7.11
and a weighted average discount of 8.84% per share.
(6) Line of Credit
The Trust and other affiliated trusts participate in a $720 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made to temporarily finance the repurchase of Trust
shares. Interest is charged to each trust, 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 period ended April 30, 1999, was $3,747. The Trust had no
borrowings during the period.
(7) 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, swap agreements, and futures contracts. 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.
15
<PAGE>
Notes to Financial Statements (Unaudited) - continued
Written Option Transactions
<TABLE>
<CAPTION>
1999 Calls 1999 Puts
-------------------------------------- ---------------------------------------
Principal Amounts of Principal Amounts of
Contracts (000 Omitted) Premiums Contracts (000 Omitted) Premiums
------------------------- ------------ ------------------------- -------------
<S> <C> <C> <C> <C>
Outstanding, beginning of period - - $ - - $ -
Options written -
Australian Dollars ............................ 37,834 311,980 16,831 138,338
Euro .......................................... 42,614 399,505 - -
Euro/British Pounds ........................... 18,922 218,998 18,201 100,489
Japanese Yen .................................. 8,417,984 1,142,167 4,782,945 533,777
Options terminated in closing transactions -
Australian Dollars ............................ (22,145) (221,454) (16,831) (138,338)
Euro .......................................... (42,614) (399,505) - -
Euro/British Pounds ........................... (18,922) (218,998) (18,201) (100,489)
Japanese Yen .................................. (4,208,992) (485,947) - -
Options terminated in expired transactions -
Australian Dollars ............................ (7,727) (26,138) - -
Japanese Yen .................................. (4,208,992) (656,220) (4,782,945) (533,777)
----------- ---------
Outstanding, end of period ...................... $ 64,388 $ -
----------- ---------
Options outstanding at end of period consists of:
Australian Dollars ............................. 7,962 $ 64,388 - $ -
----------- ---------
Outstanding, end of period ...................... $ 64,388 $ -
----------- ---------
</TABLE>
At April 30, 1999, the Trust had sufficient cash and/or securities at least
equal to the value of the written options.
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 06/16/99 .......... AUD 56,087,607 $35,722,441 $37,104,639 $ (1,382,198)
06/16/99 .......... DKK 33,817,014 4,970,824 4,818,188 152,636
06/16/99 .......... EUR 1,657,946 1,817,109 1,755,459 61,650
06/16/99 .......... NZD 67,784,866 36,264,903 37,948,089 (1,683,186)
---------- ---------- ----------
$78,775,277 $81,626,375 $ (2,851,098)
----------- ----------- ------------
Purchases 06/16/99 .......... AUD 50,573,655 $32,122,661 $33,456,896 $ 1,334,235
06/16/99 .......... GBP 7,286,282 11,854,052 11,712,545 (141,507)
06/16/99 .......... JPY 1,707,985,751 14,520,293 14,389,949 (130,344)
----------- ----------- ------------
$58,497,006 $59,559,390 $ 1,062,384
----------- ----------- ------------
</TABLE>
Forward foreign currency purchases and sales under master netting agreements
excluded above amounted to a net receivable of $232,244 with Deutsche Bank and
$42,057 with Merrill Lynch, and a net payable of $576,517 with First Boston, at
April 30, 1999.
At April 30, 1999, the Trust had sufficient cash and/or securities to cover any
commitments under these contracts.
16
<PAGE>
Interest Rate Swaps
<TABLE>
<CAPTION>
Cash Flows Unrealized
Notional Principal Cash Flows Paid Received by the Appreciation
Expiration Amount of Contract by the Fund Fund (Depreciation)
- ------------ -------------------- ---------------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
3/22/2003 SEK .......... 167,900,000 Fixed--4.38% Floating--3M STIBOR $ 57,187.95
(68,904.59)
3/22/2003 EUR .......... 18,180,000 Floating--6M EURIBOR Fixed--3.76% ------------
$(11,716.64)
</TABLE>
17
<PAGE>
MFS[RegTM] Intermediate Income Trust
Trustees
Richard B. Bailey* (2)
Private Investor; Former Chairman and
Director (until 1991), MFS Investment
Management
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, Colonial Insurance
Company, Ltd.
Abby M. O'Neill(2)
Private Investor
Walter E. Robb, III(1)
President and Treasurer,
Benchmark Advisors, Inc.
(corporate financial consultants);
President, Benchmark Consulting
Group, Inc. (office services)
Arnold D. Scott*
Senior Executive Vice President,
Director, and Secretary,
MFS Investment Management
Jeffrey L. Shames*
Chairman, Chief Executive Officer,
and Director, MFS Investment
Management
J. Dale Sherratt(1)
President, Insight Resources, Inc.
(acquisition planning specialist)
Ward Smith(1)
Former Chairman (until 1994),
NACCO Industries (holding company)
Portfolio Managers
Stephen C. Bryant*
Steven E. Nothern*
Treasurer
W. Thomas London*
Assistant Treasurers
Mark E. Bradley*
Ellen Moynihan*
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
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.
[recycle symbol] This report is printed on recycled paper. MINCE-3 6/99 107 M
