MFS(R) LOGO
INVESTMENT MANAGEMENT
MFS INTERMEDIATE
INCOME TRUST
ANNUAL REPORT o OCTOBER 31, 2002
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 7
Results of Shareholder Meetings ........................................... 9
Portfolio of Investments .................................................. 10
Financial Statements ...................................................... 14
Notes to Financial Statements ............................................. 18
Independent Auditors' Report .............................................. 27
Trustees and Officers ..................................................... 29
MFS(R) PRIVACY POLICY
At MFS(R), we are committed to protecting your privacy.
On behalf of the MFS Family of Funds(R), the MFS(R) Institutional Trusts, the
Vertex(SM) Funds, Massachusetts Financial Services Company, and certain
affiliates(1) (collectively, "MFS," "we," "us" or "our"), this privacy policy
outlines certain of our policies designed to maintain the privacy of your
nonpublic personal information.
Nonpublic personal information includes much of the information you provide to
us and the related information about you and your transactions involving your
MFS investment product or service. Examples of nonpublic personal information
include the information you provide on new account applications for MFS
investment products or services, your share balance or transactional history,
and the fact that you are a customer of MFS.
We may collect nonpublic personal information about you from the following
sources:
o information we receive from you on applications or other forms
o information about your transactions with us, our affiliates, or
others, and
o information we receive from a consumer reporting agency
We do not disclose any nonpublic personal information about our customers or
former customers to anyone except as permitted by law. We may disclose all of
the information we collect, as described above, to companies that perform
marketing services on our behalf or to other financial institutions with whom
we have joint marketing arrangements.
We restrict access to nonpublic personal information about you to personnel
who are necessary or appropriate to provide products or services to you. We
maintain physical, electronic, and procedural safeguards that comply with
federal regulations to guard your nonpublic personal information.
Our privacy policy applies only to individual MFS investors who have a direct
relationship with us. If you own MFS products or receive MFS investment
services in the name of a third-party broker-dealer, bank, investment adviser
or other financial service provider, that third-party's privacy policies may
apply to you and our privacy policy may not.
If you have any questions with respect to MFS' privacy policy, please call
1-800-225-2606 any business day between 8 a.m. and 8 p.m. Eastern time.
(1) MFS Institutional Advisors, Inc., Vertex Investment Management, Inc., MFS
Original Research Advisors, LLC, MFS Original Research Partners, LLC,
MFS(R) Heritage Trust Company(SM), and MFS Fund Distributors, Inc.
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NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
NOT A DEPOSIT NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY
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LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
As I write this in mid-November, the Dow Jones Industrial Average has just
recorded its second-best October ever(1) -- a hopeful sign in what has been a
bad year for investors in stocks and corporate bonds. Other types of bonds
that have had a great run so far in 2002 have demonstrated the value of
diversification. In our view, signals on the future direction of the economy
and the market remain decidedly mixed.
A RELAY RACE
In mid-November, we could describe the state of the U.S. economy as a relay race
against time involving two runners: the consumer, whose spending has fueled the
beginning of a recovery, and corporate spending, which has yet to contribute
much to the recovery. The hope is that corporate spending kicks in so that the
consumer can pass the baton before running out of steam. But at this point, the
near-term direction of consumer spending or corporate spending and profits is
difficult to predict. The result is that the economy seems to us to be in a
holding pattern as we wait for clear signs that things are improving.
REASONS FOR OPTIMISM
Optimists would point out that wages, according to the U.S. Labor Department,
have been rising over the past year. This, in combination with historically
low interest rates and inflation, may enable the consumer to keep spending.
Perhaps the next good signal of consumer sentiment will be the level of retail
sales over the holiday season -- which should become clear about the time this
letter reaches your mailbox.
In the corporate arena, our research indicates that business spending overall
has at least stopped falling and that corporate earnings and spending could
trend upward in 2003. A hopeful sign is that business spending in the third
quarter of 2002 eked out its first increase in two years, according to a
preliminary report from the U.S. Commerce Department.
Pessimists, however, would counter that the outlook for corporate profits
remains very murky, that corporations could resort to further layoffs if
profits languish, and that the situation with Iraq adds to market uncertainty.
They would also point out that consumer confidence dropped to a nine-year low
in October, according to the Conference Board. (Optimists, however, would
question the value of confidence readings that have dropped while consumer
spending has remained strong.)
STAYING THE COURSE
With the economy in a holding pattern and markets extremely volatile, we think
it's important to remember the familiar investment strategies that we believe
apply in any market: Think long term. Be diversified. See crises as
opportunities. That's how we'd describe our approach to this volatile
environment -- which we think plays to our strength as research-based, bottom-
up, long-term investors. We would also point out that history has shown that
the market and the economy have been cyclical; downturns have usually been
followed by upturns.
As always, we appreciate your confidence in MFS and welcome any questions or
comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman
MFS Investment Management(R)
November 15, 2002
(1) Source: The Wall St. Journal, November 1, 2002. The Dow Jones Industrial
Average (DJIA) is a price-weighted average of 30 blue-chip stocks that are
generally the leaders in their industry. It is not possible to invest
directly in an index.
The opinions expressed in this letter are those of MFS, and no forecasts can
be guaranteed.
MANAGEMENT REVIEW AND OUTLOOK
[Photo of James J. Calmas]
James J. Calmas
Dear Shareholders,
For the 12 months ended October 31, 2002, the trust provided a total return of
5.63% based on its beginning and ending stock market prices and assuming the
reinvestment of any dividends and capital gains distributions paid during the
period. The trust's total return based on its net asset value (NAV) was 6.36%.
These returns compare with returns of -0.10% and 12.65%, respectively, for the
trust's benchmarks, the Salomon Brothers Medium Term (1- to 10-year) Treasury
Government Sponsored Index (the Salomon Index), and the J.P. Morgan Non-Dollar
Government Bond Index (the Morgan Index). The Salomon Index includes bonds
issued by the U.S. government or by government agencies with a maturity range
greater than or equal to one year, and less than 10 years. The Morgan Index is
an unmanaged aggregate index of actively traded government bonds issued from
12 countries (excluding the United States) with remaining maturities of at
least one year.
WEAKNESS IN U.S. AND EUROPEAN ECONOMIES OVERSHADOWS BOND MARKETS
In October and November of 2001, the U.S. Federal Reserve Board (the Fed)
began an aggressive campaign to cut interest rates in an attempt to stimulate
a sagging U.S. economy. Early in the first quarter of 2002, most market
participants believed the Fed's cuts were working and that the worst of the
recession was over. Many investors even expected that the Fed would raise
rates somewhat to prevent inflationary pressures from building. Those
expectations proved to be inaccurate.
Factors that normally accompany a recovery, such as increased business
spending and job growth, didn't materialize. The Fed continued to cut rates
through March so that by the end of the first quarter 2002, short-term
interest rates stood at 1.75%. The Fed then held interest rates steady, and it
appears unlikely that they will make another cut before the end of the year.
As short-term U.S. interest rates fell, yields on longer term U.S. Treasury
securities stayed the same with the 30-year Treasury bond yielding just under
5%.
European economies were also weak. European business spending across the
continent was down and so was production of new goods. As a result, many
believed that the European Central Bank (ECB) would follow the Fed's lead and
start to cut interest rates. However, the ECB hasn't cut interest rates and
yields on German and other European government bonds were higher than on
comparable U.S. Treasury bonds. (Principal value and interest on Treasury
securities are guaranteed by the U.S. Government if held to maturity.)
INVESTMENTS REPOSITIONED FOR CURRENT MARKETS
Over the past 12 months, we have trimmed the fund's U.S. Treasury holdings and
gradually moved assets into higher yielding 15-year mortgage-backed bonds and
U.S. government agency issues. At the same time, we also increased the fund's
international holdings from 10.6% at the beginning of November 2001, to just
over 21% by October 2002.
Our investments in the mortgage-backed and U.S. government agency bonds worked
well for the fund and contributed to its performance for the year. Not only
did these investments generate solid income for investors, they also added a
degree of price stability. The fund's duration ranged between 3.49 years at
the beginning of the period and 3.86 years at the end of the period. Duration
is a measure of a bond's interest rate sensitivity and its price volatility;
the lower the number, the lower the volatility.
Fund performance was hurt by the returns of our nondollar holdings that were
denominated in local currencies. The majority of our holdings are hedged back
into U.S. dollars. We could have generated some additional returns if we had
more exposure to Eurodollars.
CONTINUED OPPORTUNITIES IN MORTGAGE-BACKED SECURITIES,
INTERNATIONAL BONDS
Going forward, we believe that the best opportunities will continue to be in
mortgage-backed securities and international bonds, two areas in which we
already invested. At the end of the period there was a significant difference
between yields on U.S. Treasury securities and the yields available in those
two sectors. We expect to continue our current practice of investing in 15-
year mortgage-backed bonds that yield 6% to 6.5%, assuming they continue to be
attractive to us. At this time, we believe that most of our new investments
will be in lower coupon issues and collateralized mortgage obligations (CMOs).
These securities, in our view, offer a degree of prepayment protection. If
interest rates should rise, we would expect that our 15-year mortgage
securities and the CMOs would continue to perform well. However, we don't
foresee a significant rise in rates in the near future.
We still like international bonds, especially European bonds. We think that
the economic situation in Europe warrants lower interest rates. Europe's
economy has been weak yet interest rates have remained high. In our view, the
ECB has been too slow to lower rates. Once it starts to cut interest rates, we
think that the ECB will need to make fairly deep cuts to get the European
economies moving. If that happens, we think that European bond investments
will provide opportunities for both income and capital appreciation potential.
Because of our cautious view of the European economy, we will try to avoid
potential currency risks by hedging most of our European holdings back into
U.S. dollars. We believe that this may help to reduce the possibility of
currency losses wiping out potential gains that may result from anticipated
ECB interest rate cuts.
In our view, the Trust continues to offer investors good investment potential
from its well diversified portfolio of intermediate maturity bonds and think
that we're well-positioned for any changes the markets may bring.
Respectfully,
/s/ James J. Calmas
James J. Calmas
Portfolio Manager
Note to Shareholders: Effective March 18, 2002, James J. Calmas became
portfolio manager of the trust.
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on the
cover. These views are subject to change at any time based on market and other
conditions, and no forecasts can be guaranteed.
It is not possible to invest directly in an index.
The portfolio is actively managed, and current holdings may be different.
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PORTFOLIO MANAGER'S PROFILE
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JAMES J. CALMAS IS VICE PRESIDENT OF MFS INVESTMENT MANAGEMENT(R)
(MFS(R)) AND PORTFOLIO MANAGER OF THE LIMITED MATURITY PORTFOLIOS OF OUR
MUTUAL FUNDS, VARIABLE ANNUITIES, AND OFFSHORE INVESTMENT PRODUCTS. HE
IS A MEMBER OF THE MFS FIXED INCOME STRATEGY GROUP.
JIM JOINED MFS IN 1988 AND WAS NAMED ASSISTANT VICE PRESIDENT IN 1991,
VICE PRESIDENT IN 1993, AND PORTFOLIO MANAGER IN 1998.
HE IS A GRADUATE OF DARTMOUTH COLLEGE AND HOLDS AN M.B.A. DEGREE FROM
THE AMOS TUCK SCHOOL OF BUSINESS ADMINISTRATION OF DARTMOUTH COLLEGE.
ALL PORTFOLIO MANAGERS AT MFS ARE SUPPORTED BY AN INVESTMENT STAFF OF
OVER 160 PROFESSIONALS UTILIZING MFS ORIGINAL RESEARCH(R), A GLOBAL,
ISSUER-ORIENTED, BOTTOM-UP PROCESS OF SELECTING SECURITIES.
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ADDRESS CHANGE:
Please use our new mailing address, effective immediately.
State Street Bank and Trust Company
c/o MFS Service Center, Inc.
P.O. Box 55024
Boston, MA 02205-5024
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.
OBJECTIVE: To preserve capital and provide high current income.
NEW YORK STOCK EXCHANGE SYMBOL: MIN
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PERFORMANCE SUMMARY
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(For the year ended October 31, 2002)
NET ASSET VALUE PER SHARE
October 31, 2001$7.54
October 31, 2002$7.57
NEW YORK STOCK EXCHANGE PRICE
October 31, 2001$6.95
September 10, 2002 (high)*$7.39
December 17, 2001 (low)*$6.52
October 31, 2002$6.91
*For the period November 1, 2001, through October 31, 2002
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RISK CONSIDERATIONS
Investments in foreign and/or emerging securities may be unfavorably affected
by interest rate and currency-exchange-rate changes as well as by market,
economic, and political conditions of the countries where investments are
made. There may be greater returns but also greater risk than with U.S.
investments.
The portfolio may invest in derivative securities, which may include futures
and options. These types of instruments can increase price fluctuation.
As a nondiversified portfolio, the portfolio invests in a limited number of
companies and may have more risk because a change in one security's value may
have a more significant effect on the portfolio's net asset value. An
investment in the portfolio is not a complete investment program.
Government guarantees apply to the underlying securities only and not to the
prices and yields of the portfolio.
These risks may increase share price volatility. See the prospectus for
details.
NUMBER OF SHAREHOLDERS
As of October 31, 2002, our records indicate that there are 9,375 registered
shareholders and approximately 57,500 shareholders owning trust shares in
"street" name, such as through brokers, banks, and other financial
intermediaries.
If you are a "street" name shareholder and wish to directly receive our reports,
which contain important information about the trust, please write or call:
State Street Bank and Trust Company
P.O. Box 8200
Boston, MA 02266-8200
1-800-637-2304
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
MFS offers a Dividend Reinvestment and Cash Purchase Plan that 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 of $100 or more
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. 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 if you have any questions, call
1-800-637-2304 any business day from 8 a.m. to 8 p.m. Eastern time. 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. 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.
RESULTS OF SHAREHOLDER MEETINGS (Unaudited)
At the annual meeting of shareholders of MFS Intermediate Income Trust, which
was held on October 1, 2002, the following actions were taken:
ITEM 1. Trustees of the trust were elected as follows:
NUMBER OF SHARES
-------------------------------------
NOMINEE FOR WITHHOLD AUTHORITY
------------------------------------------------------------------
William R. Gutow 117,558,315.135 1,666,293.278
J. Atwood Ives 117,519,712.456 1,704,895.957
Abby M. O'Neill 117,462,648.296 1,761,960.117
Jeffrey L. Shames 117,537,912.875 1,686,695.538
ITEM 2. The ratification of the election of Deloitte & Touche LLP as the
independent public accountants to be employed by the trust for the
fiscal year ending October 31, 2002.
NUMBER OF SHARES
-------------------------------------------------
Affirmative 117,397,650.334
Against 759,546.332
Abstain 1,067,411.747
PORTFOLIO OF INVESTMENTS -- October 31, 2002
Bonds - 100.3%
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PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
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U.S. Bonds - 76.3%
Corporate Asset-Backed - 2.7%
Commercial Mortgage Corp., 1.065s, 2008 $ 105,746 $ 5,385,621
Commercial Mortgage Corp., 6.04s, 2030 6,000 6,594,553
DLJ Commercial Mortgage Corp., 0.906s, 2005 (interest only) 95,100 1,925,984
Falcon Auto Dealership LLC, 3.086s, 2023## 17,701 2,541,796
First Union Lehman Brothers Bank, 6.56s, 2035 5,000 5,610,575
Vendee Mortgage Trust, 6s, 2021 4,047 4,246,189
------------
$ 26,304,718
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Small Business Administration - 4.3%
SBA, 5.34s, 2021 $ 9,839 $ 10,085,664
SBA, 6.34s, 2021 4,161 4,569,352
SBA, 6.35s, 2021 6,514 7,154,050
SBA, 6.44s, 2021 3,868 4,265,313
SBA, 6.625s, 2021 4,318 4,799,595
SBA, 7.64s, 2010 8,692 9,915,267
------------
$ 40,789,241
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U.S. Government Agencies - 42.4%
FHLM, 5.75s, 2010 $ 3,650 $ 3,882,156
FHLMC, 6.875s, 2010 22,900 26,958,567
FHLMC, 5.125s, 2012 25,600 26,757,376
FHLMC, 6s, 2017 12,491 13,009,460
FNMA, 3.875s, 2005 8,450 8,801,520
FNMA, 5.5s, 2006 - 2017 27,500 29,784,314
FNMA, 5.67s, 2006 6,897 7,399,970
FNMA, 6s, 2008 - 2029 38,773 41,097,858
FNMA, 6.5s, 2031 30,809 31,933,454
FNMA, 6.956s, 2007 5,397 6,080,216
FNMA, 7.085s, 2006 2,522 2,813,340
FNMA, 7.125s, 2005 18,400 20,461,536
FNMA, 7.29s, 2006 2,810 3,139,775
GNMA, 6s, 2032 TBA 7,500 7,767,075
GNMA, 6.5s, 2028 - 2032 41,167 42,940,091
GNMA, 7s, 2023 - 2032 99,334 104,343,913
GNMA, 7.5s, 2022 - 2023 1,553 1,662,529
GNMA, 8s, 2026 - 2026 2,924 3,132,495
GNMA, 8.5s, 2003 - 2009 4,822 5,300,277
HUD, 5.53s, 2008 11,000 12,055,313
HUD, 7.198s, 2009 6,000 7,126,536
------------
$406,447,771
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U.S. Treasury Obligations - 26.9%
U.S. Treasury Bonds, 11.875s, 2003 $ 6,000 $ 6,646,170
U.S. Treasury Bonds, 12.375s, 2004 29,500 34,328,324
U.S. Treasury Bonds, 10.375s, 2012# 81,650 104,954,931
U.S. Treasury Bonds, 13.875s, 2011 25,500 35,288,608
U.S. Treasury Bonds, 12s, 2013 52,500 76,631,520
------------
$257,849,553
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Total U.S. Bonds $731,391,283
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Foreign Bonds - 24.0%
Austria - 0.3%
Republic of Austria, 5.5s, 2007 EUR 2,742 $ 2,897,787
-------------------------------------------------------------------------------------------------------------
Bulgaria - 0.4%
Republic of Bulgaria, 7.5s, 2013## EUR 2,446 $ 2,443,340
Republic of Bulgaria, 8.25s, 2015## $ 1,634 1,744,295
------------
$ 4,187,635
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Canada - 6.3%
Government of Canada, 5.75s, 2006 CAD 12,826 $ 8,744,724
Government of Canada, 5.25s, 2008 $ 20,942 23,049,121
Government of Canada, 5.5s, 2009 CAD 14,123 9,487,838
Government of Canada, 5.5s, 2010 CAD 14,555 9,717,021
Province of Ontario, 7s, 2005 $ 8,020 8,955,244
------------
$ 59,953,948
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Denmark - 0.4%
Kingdom of Denmark, 6s, 2011 DKK 23,621 $ 3,428,849
-------------------------------------------------------------------------------------------------------------
Dominican Republic - 0.1%
Republic of Dominican, 9.5s, 2006## $ 1,163 $ 1,221,150
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France - 1.0%
Republic of France, 5s, 2011 EUR 8,900 $ 9,096,462
Societe Generale Capital Trust I, 7.875s, 2049 (Banks) 375 408,319
------------
$ 9,504,781
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Germany - 8.6%
KFW International Finance, Inc., 4.25s, 2005 (Financial Institutions) $ 10,000 $ 10,447,430
Landesbank Baden Wurttemberg, 5.125s, 2007 (Banks) 7,700 8,265,534
Republic of Germany, 4s, 2009 EUR 17,650 17,224,943
Republic of Germany, 4.5s, 2009 13,000 13,110,834
Republic of Germany, 5.25s, 2011 32,144 33,597,250
------------
$ 82,645,991
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Kazakhstan
Kaztransoil Co., 8.5s, 2006 (Oil Services)## $ 137 $ 140,768
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Malaysia - 0.2%
Petroliam Nasional Berhad, 7.75s, 2015 (Oils) $ 1,681 $ 1,876,837
-------------------------------------------------------------------------------------------------------------
Mexico - 1.0%
BBVA Bancomer, 10.5s, 2011 (Banks & Credit Cos.)## $ 3,544 $ 3,862,960
Corporacion Durango S A de C.V., 13.75s, 2009 (Paper & Related
Products)## 1,005 613,050
Pemex Project Funding Master Trust, 9.125s, 2010 (Oils) 1,036 1,123,024
Petroleos Mexicanos, 9.375s, 2008 (Oil Services) 2,318 2,549,800
Petroleos Mexicanos, 9.5s, 2027 (Oil Services) 560 589,400
United Mexican States, 11.5s, 2026 678 872,247
------------
$ 9,610,481
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Netherlands - 0.8%
Kingdom of Netherlands, 5.75s, 2007 EUR 2,620 $ 2,797,151
Kingdom of Netherlands, 5s, 2012 4,403 4,482,805
------------
$ 7,279,956
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Norway - 0.4%
Kingdom of Norway, 5.5s, 2009 NOK 26,890 $ 3,497,525
-------------------------------------------------------------------------------------------------------------
Panama - 0.3%
Republic of Panama, 9.375s, 2012 $ 2,435 $ 2,572,517
Republic of Panama, 10.75s, 2020 669 715,830
------------
$ 3,288,347
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Russia - 0.4%
Ministry of Finance, 12.75s, 2028 $ 1,600 $ 2,064,000
Mobile Telesystems Fin S. A., 10.95s, 2004
(Telecom - Wireless) 1,835 1,890,050
------------
$ 3,954,050
-------------------------------------------------------------------------------------------------------------
South Korea - 0.2%
Hanvit Bank, 12.75s, 2010 (Banks & Credit Cos.)## $ 1,936 $ 2,279,483
-------------------------------------------------------------------------------------------------------------
Spain - 2.7%
Kingdom of Spain, 7s, 2005 $ 7,800 $ 8,707,117
Kingdom of Spain, 5.35s, 2011 EUR 12,650 13,197,922
Kingdom of Spain, 5.5s, 2017 4,080 4,262,420
------------
$ 26,167,459
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Sweden - 0.4%
Kingdom of Sweden, 5.25s, 2011 SEK 30,000 $ 3,327,498
-------------------------------------------------------------------------------------------------------------
United Kingdom - 0.5%
United Kingdom Treasury, 5.75s, 2009 GBP 2,814 $ 4,735,056
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Total Foreign Bonds $229,997,601
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Total Bonds (Identified Cost, $910,024,395) $961,388,884
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Rights
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ISSUER SHARES VALUE
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Republic of Venezuela* 38,000 $ 0
United Mexican States (Identified Cost, $0)* 5,057,000 12,642
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Total Investments (Identified Cost, $910,024,395) $961,401,526
Other Assets, Less Liabilities - (0.3)% (2,738,856)
-------------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $958,662,670
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# Security segregated as collateral for open futures contracts.
## SEC Rule 144A restriction.
* Non-income producing security.
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.
CAD = Canadian Dollars GBP = British Pounds
DKK = Danish Kroner NOK = Norwegian Krone
EUR = Euro SEK = Swedish Kronor
See notes to financial statements.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
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OCTOBER 31, 2002
-----------------------------------------------------------------------------------------------------
Assets:
Investments, at value (identified cost, $910,024,395) $ 961,401,526
Investments of cash collateral for securities loaned, (at identified cost and
value) 26,526,386
Foreign currency, at value (identified cost, $668,535) 668,535
Receivable for forward foreign currency exchange contracts 26,556
Receivable for forward foreign currency exchange contracts subject to
master netting agreements 19,132
Interest receivable 17,862,868
Other assets 13,354
--------------
Total assets $1,006,518,357
--------------
Liabilities:
Payable to custodian $ 832,790
Distribution payable 332,784
Collateral for securities loaned, at value 26,526,386
Payable for fund shares reacquired 20
Payable for investments purchased 18,030,697
Payable for daily variation margin on open futures contracts 18,594
Payable for forward foreign currency exchange contracts 131,438
Payable for forward foreign currency exchange contracts subject to
master netting agreements 1,329,936
Payable to affiliates -
Management fee 12,215
Transfer and dividend disbursing agent fee 13,297
Accrued expenses and other liabilities 627,530
--------------
Total liabilities $ 47,855,687
--------------
Net assets $ 958,662,670
==============
Net assets consist of:
Paid-in capital $ 986,108,412
Unrealized appreciation on investments and translation of assets and
liabilities in foreign currencies 49,848,799
Accumulated net realized loss on investments and foreign currency transactions (79,694,051)
Accumulated undistributed net investment income 2,399,510
--------------
Total $ 958,662,670
==============
Shares of beneficial interest outstanding (135,059,966 issued,
less 8,404,650 treasury shares) 126,655,316
===========
Net asset value (net assets / shares of beneficial interest outstanding) $7.57
=====
See notes to financial statements.
Financial Statements -- continued
Statement of Operations
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YEAR ENDED OCTOBER 31, 2002
-----------------------------------------------------------------------------------------------------
Net investment income:
Income -
Interest $56,111,846
Dividends 8,678
-----------
Total investment income $56,120,524
-----------
Expenses -
Management fee $ 6,623,614
Trustees' compensation 220,927
Transfer and dividend disbursing agent fee 183,014
Administrative fee 87,236
Investor communication expense 579,262
Custodian fee 433,661
Auditing fees 43,284
Postage 44,910
Printing 70,595
Registration fees 108,052
Legal fees 3,197
Miscellaneous 65,336
-----------
Total expenses $ 8,463,088
Fees paid indirectly (40,634)
-----------
Net expenses $ 8,422,454
-----------
Net investment income $47,698,070
-----------
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions $ 8,762,867
Written option transactions 238,950
Foreign currency transactions (697,147)
Futures contracts (4,839,060)
-----------
Net realized gain on investments and foreign currency transactions $ 3,465,610
-----------
Change in unrealized appreciation (depreciation) -
Investments $ 9,858,898
Written options (175,479)
Futures contracts (2,329,467)
-----------
Net unrealized gain on investments and foreign currency translation $ 7,220,514
-----------
Net realized and unrealized gain on investments and foreign currency $10,686,124
-----------
Increase in net assets from operations $58,384,194
===========
See notes to financial statements.
Financial Statements -- continued
Statement of Changes in Net Assets
-----------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2002 2001
-----------------------------------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 47,698,070 $ 61,439,320
Net realized gain on investments and foreign currency
transactions 3,465,610 5,959,378
Net unrealized gain on investments and foreign currency
translation 7,220,514 54,572,562
------------ ------------
Increase in net assets from operations $ 58,384,194 $121,971,260
------------ ------------
Distributions declared to shareholders -
From net investment income $(55,511,381) $(61,231,925)
------------ ------------
Trust share (principal) transactions -
Cost of shares reacquired $ (3,205,280) $ (7,552,898)
------------ ------------
Total increase (decrease) in net assets $ (332,467) $ 53,186,437
Net assets:
At beginning of year 958,995,137 905,808,700
At end of year (accumulated undistributed net income of
$2,399,510 and distributions in excess of $1,690,956,
respectively) $958,662,670 $958,995,137
============ ============
See notes to financial statements.
FINANCIAL STATEMENTS -- continued
Financial Highlights
------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31, 2002 2001 2000 1999 1998
------------------------------------------------------------------------------------------------------------------------------
Per share data (for a share outstanding
throughout each year):
Net asset value - beginning of year $ 7.54 $ 7.06 $ 7.25 $ 7.75 $ 7.76
------ ------ ------ ------ ------
Income from investment operations# -
Net investment income(S)(S) $ 0.38 $ 0.48 $ 0.49 $ 0.49 $ 0.51
Net realized and unrealized gain (loss) on
investments and foreign currency transactions 0.09 0.48 (0.20) (0.53) (0.01)
------ ------ ------ ------ ------
Total from investment operations $ 0.47 $ 0.96 $ 0.29 $(0.04) $ 0.50
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net investment income $(0.44) $(0.49) $(0.33) $(0.45) $(0.46)
From paid in capital -- -- (0.21) (0.05) (0.05)
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.44) $(0.49) $(0.54) $(0.50) $(0.51)
------ ------ ------ ------ ------
Net increase from repurchase of capital shares $ -- + $ 0.01 $ 0.06 $ 0.04 $ -- +
------ ------ ------ ------ ------
Net asset value - end of year $ 7.57 $ 7.54 $ 7.06 $ 7.25 $ 7.75
------ ------ ------ ------ ------
Per share market value - end of year $6.910 $6.950 $6.375 $6.250 $6.938
====== ====== ====== ====== ======
Total return at market value 5.63% 16.93% 10.95% (2.92)% 6.56%
Ratios (to average net assets)/
Supplemental data:
Expenses## 0.90% 0.93% 0.95% 0.93% 0.91%
Net investment income(S)(S) 5.09% 6.62% 6.93% 6.57% 6.59%
Portfolio turnover 115% 72% 93% 85% 184%
Net assets at end of year (000,000 Omitted) $959 $959 $906 $977 $1,091
# Per share data are based on average shares outstanding.
## Ratios do not reflect expense reductions from certain expense offset arrangements.
+ Per share amount was less than $0.01.
(S)(S) As required, effective November 1, 2001 the series has adopted the provisions of the AICPA Audit and Accounting Guide
for Investment Companies and began amortizing premium on debt securities. The effect of this change for the year ended
October 31, 2002 was to decrease net investment income per share by $0.06, and increase realized and unrealized gains
and losses per share by $0.06, and decrease the ratio of net investment income to average net assets by 0.78%. Per
share ratios and supplemental data for periods prior to November 1, 2001 have not been restated to reflect this change
in presentation.
See notes to financial statements.
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Intermediate Income Trust (the trust) is a non-diversified series of MFS
Series Trust (the trust). 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 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. The trust
can invest in foreign securities. 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 foreign
currency exchange 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. Futures contracts
and 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.
Securities for which there are no such quotations or valuations are valued in
good faith 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 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.
Deferred Trustee Compensation - Under a Deferred Compensation Plan (the Plan)
independent Trustees may elect to defer receipt of all or a portion of their
annual compensation. Deferred amounts are treated as though equivalent dollar
amounts had been invested in shares of the trust or other MFS trust selected
by the Trustee. Deferred amounts represent an unsecured obligation of the
trust until distributed in accordance with the Plan.
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 option contract. When a
written option expires, the trust realizes a gain equal to the amount of the
premium received. When a written call option is exercised or closed, the
premium received is offset against the proceeds to determine the realized gain
or loss. When a written put option is exercised, the premium reduces the cost
basis of the security purchased by the 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 or 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 with the broker either in cash or securities an amount
equal to a certain percentage of the contract amount. Subsequent payments are
made or received by the trust each day, depending on the daily fluctuations in
the value of the contract, and are recorded for financial statement purposes
as unrealized gains or losses by the trust. The trust's investment in futures
contracts is designed to hedge against anticipated future changes in interest
or exchange rates or securities prices. Investments in interest rate futures
for purposes other than hedging may be made to modify the duration of the
portfolio without incurring the additional transaction costs involved in
buying and selling the underlying securities. Investments in currency futures
for purposes other than hedging may be made to change the trust relative
position in one or more currencies without buying and selling portfolio
assets. Investments in 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.
Security Loans - State Street Bank and Trust Company ("State Street"), as
lending agent, may loan the securities of the trust to certain qualified
institutions (the "Borrowers") approved by the trust. The loans are
collateralized at all times by cash and/or U.S. Treasury securities in an
amount at least equal to the market value of the securities loaned. State
Street provides the trust with indemnification against Borrower default. The
trust bears the risk of loss with respect to the investment of cash
collateral.
Cash collateral is invested in short-term securities. A portion of the income
generated upon investment of the collateral is remitted to the Borrowers, and
the remainder is allocated between the trust and the lending agent. On loans
collateralized by U.S. Treasury securities, a fee is received from the
Borrower, and is allocated between the trust and the lending agent. Income
from securities lending is included in interest income on the Statement of
Operations. The dividend and interest income earned on the securities loaned
is accounted for in the same manner as other dividend and interest income.
At October 31, 2002, the value of securities loaned was $26,035,804. These
loans were collateralized by cash of $26,562,374 which was invested in the
following short-term obligations:
ISSUER SHARES VALUE
------------------------------------------------------------------------------
Navigator Securities Lending Prime Portfolio 26,562,374 $26,562,374
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 may enter
into forward foreign currency exchange 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.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and discount is amortized or accreted for financial statement purposes in
accordance with generally accepted accounting principles. All discount is
accreted for tax reporting purposes as required by federal income tax
regulations. Dividends received in cash are recorded on the ex-dividend date.
Dividend and interest payments received in additional securities are recorded
on the ex-dividend or 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.
The trust may enter in "TBA" (to be announced) purchase commitments to
purchase securities for a fixed unit price at a future date. Although the unit
price has been established, the principal value has not been finalized.
However, the principal amount of the commitments will not fluctuate more than
1.0%. The trust holds, and maintains until settlement date, cash or high-grade
debt obligations in an amount sufficient to meet the purchase price, or the
trust may enter into offsetting contracts for the forward sale of other
securities it owns. Income on the securities will not be earned until
settlement date. TBA purchase commitments may be considered securities in
themselves, and involve a risk of loss if the value of the security to be
purchased declines prior to settlement date, which is in addition to the risk
of decline in the value of the trusts' other assets. Unsettled TBA purchase
commitments are valued at the current market value of the underlying
securities, according to the procedures described under "Investment
Valuations" above.
The trust may enter into "TBA" (to be announced) sale commitments to hedge its
portfolio positions or to sell mortgage-backed securities it owns under
delayed delivery arrangements. Proceeds of TBA sale commitments are not
received until the contractual settlement date. During the time a TBA sale
commitment is outstanding, equivalent deliverable securities, or an offsetting
TBA purchase commitment deliverable on or before the sale commitment date, are
held as "cover" for the transaction.
Fees Paid Indirectly - The trust's custody 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 total 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 net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided.
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 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. Common
types of book and tax differences that could occur include differences in
accounting for currency transactions, mortgage-backed securities, derivatives,
real estate investment trusts, defaulted bonds, capital losses, and
amortization and accretion on debt securities.
The tax character of distributions declared for the years ended October 31,
2002 and October 31, 2001 was as follows:
OCTOBER 31, 2002 OCTOBER 31, 2001
--------------------------------------------------------------------------------
Distributions declared:
Tax-exempt income $ -- $ --
Ordinary income 55,511,381 60,238,748
Return of capital -- 993,177
----------- -----------
$55,511,381 $61,231,925
Tax return of capital -- --
----------- -----------
Total distributions declared $55,511,381 $61,231,925
=========== ===========
During the year ended October 31, 2002, accumulated undistributed net
investment income increased by $11,903,777, accumulated undistributed net
realized loss on investments and foreign currency transactions increased by
$8,241,624, and paid-in capital decreased by $3,662,153 due to differences
between book and tax accounting for capital losses, mortgage-backed securities
and currency transactions. This change had no effect on the net assets or net
asset value per share.
As of October 31, 2002, the components of distributable earnings (accumulated
losses) on a tax basis were as follows:
Undistributed ordinary income $ 3,974,205
Capital loss carryforward (45,073,920)
Unrealized gain 16,601,166
Other temporary differences (2,947,193)
For federal income tax purposes, the capital loss carryforward may be applied
against any net taxable realized gains of each succeeding year until the
earlier of its utilization or expiration on:
EXPIRATION DATE
------------------------------------------------------
October 31, 2003 $ 6,526,984
October 31, 2004 645,525
October 31, 2006 13,874,621
October 31, 2007 11,376,973
October 31, 2008 11,439,294
October 31, 2010 1,210,523
-----------
Total $45,073,920
===========
(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 annual rate of 0.32%
of the trust's average daily net assets and 5.65% of investment income.
The trust pays the compensation of the Independent Trustees in the form of
both a retainer and attendance fees and 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). On January 1, 2002, the Trustees
terminated the Independent Trustee unfunded defined benefit plan for active
Trustees and converted it to an unfunded retirement benefit deferral plan for
active Trustees. Under the new plan, the unfunded pension liability was
converted into an equivalent value of notional shares of the trust that will
fluctuate with the performance of the trust. Included in Trustees'
compensation is a one-time plan transition expense of $45,066 and a net
decrease of $3,137 as a result of the change in the trust's pension liability
under this plan for the year ended October 31, 2002.
Administrator - The trust has an administrative services agreement with MFS to
provide the trust with certain financial, legal, shareholder communications,
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:
First $2 billion 0.0175%
Next $2.5 billion 0.0130%
Next $2.5 billion 0.0005%
In excess of $7 billion 0.0000%
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.
(4) Portfolio Securities
Purchases and sales of investments, other than purchased option transactions
and short-term obligations, were as follows:
PURCHASES SALES
-----------------------------------------------------------------------------
U.S. government securities $738,946,509 $840,719,905
------------ ------------
Investments (non-U.S. government securities) $329,021,121 $217,707,426
------------ ------------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by the trust, as computed on a federal income tax basis, are
as follows:
Aggregate cost $944,777,964
------------
Gross unrealized depreciation $(13,525,784)
Gross unrealized appreciation 30,149,346
------------
Net unrealized appreciation $ 16,623,562
============
(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. The Trustees have
authorized 135,059,966 full and fractional shares of beneficial interest.
Transactions in trust shares were as follows:
YEAR ENDED OCTOBER 31, 2002 YEAR ENDED OCTOBER 31, 2001
--------------------------- ---------------------------
SHARES AMOUNT SHARES AMOUNT
------------------------------------------------------------------------------------
Treasury shares reacquired 480,000 $3,205,280 1,151,500 $7,552,898
------- ---------- --------- ----------
In accordance with the provisions of the trust's prospectus, 480,000 shares of
beneficial interest were purchased by the trust during year ended October 31,
2002 at an average price per share of $6.67 and a weighted average discount of
8.54% per share. The trust repurchased 1,151,500 shares of beneficial interest
during the year ended October 31, 2001, at an average price per shares of
$6.56 and a weighted average discount of 8.63% per share.
(6) Line of Credit
The trust and other affiliated funds participate in an $800 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. Borrowings may be made for temporary financing needs. Interest is
charged to each fund, based on its borrowings, at a rate equal to the bank's
base rate. A commitment fee of $8,030 which is based on the average daily
unused portion of the line of credit is included in miscellaneous interest
expense. The trust had no significant borrowings during the year.
(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, 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.
Written Option Transactions
NUMBER OF PREMIUMS
CONTRACTS RECEIVED
----------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of year 1 $ 238,950
Options terminated in closing transaction (1) (238,950)
-- ---------
Outstanding, end of year -- $ --
-- ---------
Forward Foreign Currency Exchange Contracts
NET
UNREALIZED
CONTRACTS TO CONTRACTS APPRECIATION
SETTLEMENT DATE DELIVER/RECEIVE IN EXCHANGE FOR AT VALUE (DEPRECIATION)
----------------------------------------------------------------------------------------------------------------------
SALES
12/16/02 DKK26,891,441 $ 3,506,512 $ 3,566,605 $ (60,093)
12/16/02 EUR21,546,034 21,176,510 21,238,420 (61,910)
12/16/02 GBP3,092,813 4,810,870 4,820,305 (9,435)
----------- ----------- ---------
$29,493,892 $29,625,330 $(131,438)
=========== =========== =========
PURCHASES
12/16/02 DKK8,082,363 $ 1,055,056 $ 1,071,962 $ 16,906
12/16/02 GBP2,303,000 3,579,691 3,589,341 9,650
----------- ----------- ---------
$ 4,634,747 $ 4,661,303 $ 26,556
=========== =========== =========
At October 31, 2002, forward foreign currency purchases and sales under master
netting agreements excluded above amounted to a net receivable of $19,132 with
CS First Boston and a net payable of $1,108,542 with Deutsche Bank and
$221,394 with Merrill Lynch.
At October 31, 2002, the trust had sufficient cash and/or securities to cover
any commitments under these contracts.
Futures Contracts
UNREALIZED
DESCRIPTION EXPIRATION CONTRACTS POSITION DEPRECIATION
---------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Notes 5 Yr. Futures December 2002 7,000 Short $(133,438)
At October 31, 2002, the trust had sufficient cash and/or securities to cover
any margin requirements under these contracts.
(8) Change in Accounting Principle
As required, effective November 1, 2001, the trust adopted the provisions of
the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium and accreting market discount on debt securities. Prior to
November 1, 2001, the trust did not amortize premium nor accrete market
discount on debt securities. The cumulative effect of this accounting change
had no impact on total net assets of the trust, but resulted in a $27,387,322
reduction in cost of securities and a corresponding $27,387,322 increase in
net unrealized appreciation, based on securities held by the fund on November
1, 2001.
The effect of this change for the year ended October 31, 2002 was to decrease
net investment income by $7,265,861, increase net unrealized appreciation by
$6,741,448, and increase net realized gains by $524,413. The Statement of
Changes in Net Assets and Financial Highlights for prior periods have not been
restated to reflect this change in presentation.
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 (the
"Trust"), as of October 31, 2002, the related statement of operations for the
year then ended, the statement of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. 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 auditing standards generally
accepted in the United States of America. 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 securities owned as of
October 31, 2002, 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 present fairly, in all material
respects, the financial position of MFS Intermediate Income Trust as of
October 31, 2002, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and its financial highlights for each of the five years in the period then
ended, in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
December 6, 2002
--------------------------------------------------------------------------------
FEDERAL TAX INFORMATION (Unaudited)
--------------------------------------------------------------------------------
IN JANUARY 2003, SHAREHOLDERS WILL BE MAILED A FORM 1099-DIV REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 2002.
--------------------------------------------------------------------------------
MFS(R) INTERMEDIATE INCOME TRUST
The following tables present certain information regarding the Trustees and
officers of the Trust, including their principal occupations, which, unless
specific dates are shown, are of more than five years' duration, although the
titles may not have been the same throughout.
NAME, AGE, POSITION WITH THE TRUST, PRINCIPAL OCCUPATION, AND OTHER DIRECTORSHIPS(1)
TRUSTEES
JEFFREY L. SHAMES* (born 06/02/55) Trustee, ABBY M. O'NEILL (born 04/27/28) Trustee
Chairman Private investor; Rockefeller Financial Services,
Massachusetts Financial Services Company, Chairman Inc. (investment advisers), Chairman and Chief
Executive Officer
JOHN W. BALLEN* (born 09/12/59) Trustee and
President LAWRENCE T. PERERA (born 06/23/35) Trustee
Massachusetts Financial Services Company, Chief Hemenway & Barnes (attorneys), Partner
Executive Officer and Director
WILLIAM J. POORVU (born 04/10/35) Trustee
KEVIN J. PARKE* (born 12/14/59) Trustee Private investor; Harvard University Graduate
Massachusetts Financial Services Company, Chief School of Business Administration, Class of 1961,
Investment Officer, President and Director Adjunct Professor in Entrepreneurship Emeritus;
CBL & Associates Properties, Inc. (real estate
LAWRENCE H. COHN, M.D. (born 03/11/37) Trustee investment trust), Director
Brigham and Women's Hospital, Chief of Cardiac
Surgery; Harvard Medical School, Professor of J. DALE SHERRATT (born 09/23/38) Trustee
Surgery Insight Resources, Inc. (acquisition planning
specialists), President; Wellfleet Investments
THE HON. SIR J. DAVID GIBBONS, KBE (born 06/15/27) (investor in health care companies), Managing
Trustee General Partner (since 1993); Cambridge
Edmund Gibbons Limited (diversified holding Nutraceuticals (professional nutritional
company), Chief Executive Officer; Colonial products), Chief Executive Officer (until May
Insurance Company Ltd., Director and Chairman; 2001); Paragon Trade Brands, Inc. (disposable
Bank of Butterfield, Chairman (until 1997) consumer products), Director
WILLIAM R. GUTOW (born 09/27/41) Trustee ELAINE R. SMITH (born 04/25/46) Trustee
Private investor and real estate consultant; Independent health care industry consultant
Capitol Entertainment Management Company (video
franchise), Vice Chairman WARD SMITH (born 09/13/30) Trustee
Private investor; Sundstrand Corporation
J. ATWOOD IVES (born 05/01/36) Trustee (manufacturer of highly engineered products for
Private investor; KeySpan Corporation (energy industrial and aerospace applications), Director
related services), Director; Eastern Enterprises (until June 1999)
(diversified services company), Chairman, Trustee
and Chief Executive Officer (until November 2000)
(1) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission
(i.e., "public companies").
* "Interested person" of MFS within the meaning of the Investment Company Act of 1940 (referred to as the 1940
Act) which is the principal federal law governing investment companies like the Trust. The address of MFS is
500 Boylston Street, Boston, Massachusetts 02116.
OFFICERS
JEFFREY L. SHAMES (born 06/02/55) Trustee, RICHARD M. HISEY (born 08/29/58) Treasurer
Chairman Massachusetts Financial Services Company, Senior
Massachusetts Financial Services Company, Chairman Vice President (since July 2002); The Bank of New
York, Senior Vice President (September 2000 to
JOHN W. BALLEN (born 9/12/59) Trustee and July 2002); Lexington Global Asset Managers, Inc.,
President Executive Vice President and General Manager
Massachusetts Financial Services Company, Chief (prior to September 2000)
Executive Officer and Director
ELLEN MOYNIHAN (born 11/13/57) Assistant Treasurer
JAMES R. BORDEWICK, JR. (born 03/06/59) Assistant Massachusetts Financial Services Company, Vice
Secretary and Assistant Clerk President
Massachusetts Financial Services Company, Senior
Vice President and Associate General Counsel JAMES O. YOST (born 06/12/60) Assistant Treasurer
Massachusetts Financial Services Company, Senior
STEPHEN E. CAVAN (born 11/06/53) Secretary and Vice President
Clerk
Massachusetts Financial Services Company, Senior
Vice President, General Counsel and Secretary
ROBERT R. FLAHERTY (born 09/18/63) Assistant
Treasurer
Massachusetts Financial Services Company, Vice
President (since August 2000); UAM Fund Services,
Senior Vice President (prior to August 2000)
The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are elected for
fixed terms. The Board of Trustees currently is divided into three classes, each having a term of three years.
Each year the term of one class expires. Each Trustee's term of office expires on the date of the third annual
meeting following the election to office of the Trustee's class. Each Trustee will serve until next elected or
his or her earlier death, resignation, retirement or removal.
Messrs. Shames, Cohn, Gibbons, Sherratt and Smith, and Ms. O'Neill have served in their capacity as Trustee of
the Trust continuously since originally elected or appointed. Messrs. Ballen, Gutow, Ives, Perera and Poorvu,
and Ms. Smith were elected by shareholders and have served as Trustees of the Trust since January 1, 2002. Mr.
Parke has served as Trustee of the Trust since January 1, 2002.
Each of the Trust's Trustees and officers holds comparable positions with certain other funds of which MFS or
a subsidiary is the investment adviser or distributor and, in the case of the officers, with certain
affiliates of MFS. Each Trustee serves as a board member of 117 funds within the MFS Family of Funds.
The Statement of Additional Information contains further information about the Trustees and is available
without charge upon request, by calling 1-800-225-2606.
INVESTMENT ADVISER AUDITORS
Massachusetts Financial Services Company Deloitte & Touche LLP
500 Boylston Street
Boston, MA 02116-3741 TRANSFER AGENT, REGISTRAR AND
DIVIDEND DISBURSING AGENT
PORTFOLIO MANAGER State Street Bank and Trust Company c/o MFS
James J. Calmas+ Service Center, Inc. P.O. Box 55024 Boston, MA
02205-5024 1-800-637-2304
CUSTODIANS
State Street Bank and Trust Company
225 Franklin Street, Boston, MA 02110
The Chase Manhattan Bank
One Chase Manhattan Plaza
New York, NY 10081
+ MFS Investment Management
MFS INTERMEDIATE INCOME TRUST ------------------
PRSRT STD
[MFS LOGO](R) U.S. POSTAGE
INVESTMENT MANAGEMENT PAID
MFS
500 Boylston Street ------------------
Boston, MA 02116-3741
(C) 2002 MFS Investment Management(R).
500 Boylston Street, Boston, MA 02116. MINCE-2 12/02 85.5M