NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) Business and Organization
MFS Intermediate Income Trust (the fund) is organized as a Massachusetts business trust and is registered under the Investment Company Act of 1940,
as amended, as a diversified closed-end management investment company.
The fund is an investment company and
accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 946 Financial Services Investment Companies.
(2) Significant Accounting Policies
General
The preparation of financial statements in conformity with U.S. 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 increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates. In the preparation of
these financial statements, management has evaluated subsequent events occurring after the date of the funds Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests 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 countrys market, economic, industrial, political,
regulatory, geopolitical, and other conditions.
In March 2020, the FASB issued Accounting Standards Update
2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effects of Reference Rate Reform on Financial Reporting (ASU 2020-04), which provides
optional, temporary relief with respect to the financial reporting of contracts subject to certain types of modifications due to the planned discontinuation of the London Interbank Offered Rate (LIBOR) and other IBOR-based reference rates as of the
end of 2021. The temporary relief provided by ASU 2020-04 is effective for certain reference rate-related contract modifications that occur during the period from March 12, 2020 through December 31,
2022. Management is evaluating the impact of ASU 2020-04 on the funds investments, derivatives, debt and other contracts that will undergo reference rate-related modifications as a result of the
reference rate reform.
In March 2017, the FASB issued Accounting Standards Update 2017-08, Receivables
Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities (ASU 2017-08). For callable debt
securities purchased at a premium that have explicit, non-contingent call features and that are callable at fixed prices on preset dates, ASU 2017-08 requires the
premium to be amortized to the earliest call date. The fund adopted ASU 2017-08 as of the beginning of the reporting period on a modified retrospective basis. The adoption resulted in a change in accounting
principle, since the fund had historically amortized such premiums to maturity for U.S. GAAP. As a result of the adoption, the fund recognized a cumulative effect adjustment that decreased the beginning of period cost of investments and increased
the unrealized appreciation on investments by offsetting
19
Notes to Financial Statements (unaudited) continued
amounts. Adoption had no impact on the funds net assets or any prior period
information presented in the financial statements. With respect to the funds results of operations, amortization of premium to first call date under ASU 2017-08 accelerates amortization with the intent
of more closely aligning the recognition of income on such bonds with the economics of the instrument.
Balance Sheet Offsetting The
funds accounting policy with respect to balance sheet offsetting is that, absent an event of default by the counterparty or a termination of the agreement, the International Swaps and Derivatives Association (ISDA) Master Agreement, or similar
agreement, does not result in an offset of reported amounts of financial assets and financial liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty. The funds right to
setoff may be restricted or prohibited by the bankruptcy or insolvency laws of the particular jurisdiction to which a specific master netting agreement counterparty is subject. Balance sheet offsetting disclosures, to the extent applicable to the
fund, have been included in the funds Significant Accounting Policies note under the captions for each of the funds in-scope financial instruments and transactions.
Investment Valuations Debt instruments and floating rate loans, including restricted debt instruments, are generally valued at an evaluated or
composite bid as provided by a third-party pricing service. Short-term instruments with a maturity at issuance of 60 days or less may be valued at amortized cost, which approximates market value. Open-end
investment companies are generally valued at net asset value per share. Securities and other assets generally valued on the basis of information from a third-party pricing service may also be valued at a broker/dealer bid quotation. In determining
values, third-party pricing services can utilize both transaction data and market information such as yield, quality, coupon rate, maturity, type of issue, trading characteristics, and other market data. The values of foreign securities and other
assets and liabilities expressed in foreign currencies are converted to U.S. dollars using the mean of bid and asked prices for rates provided by a third-party pricing service.
The Board of Trustees has delegated primary responsibility for determining or causing to be determined the value of the funds investments (including any fair valuation) to the adviser pursuant to valuation
policies and procedures approved by the Board. If the adviser determines that reliable market quotations are not readily available, investments are valued at fair value as determined in good faith by the adviser in accordance with such procedures
under the oversight of the Board of Trustees. Under the funds valuation policies and procedures, market quotations are not considered to be readily available for most types of debt instruments and floating rate loans and many types of
derivatives. These investments are generally valued at fair value based on information from third-party pricing services. In addition, investments may be valued at fair value if the adviser determines that an investments value has been
materially affected by events occurring after the close of the exchange or market on which the investment is principally traded (such as foreign exchange or market) and prior to the determination of the funds net asset value, or after the halt
of trading of a specific security where trading does not resume prior to the close of the exchange or market on which the security is principally traded. The adviser generally relies on third-party pricing services or other information (such as the
correlation with price movements of similar securities in the same or other markets; the type, cost and investment characteristics of the
20
Notes to Financial Statements (unaudited) continued
security; the business and financial condition of the issuer; and trading and other
market data) to assist in determining whether to fair value and at what value to fair value an investment. The value of an investment for purposes of calculating the funds net asset value can differ depending on the source and method used to
determine value. When fair valuation is used, the value of an investment used to determine the funds net asset value may differ from quoted or published prices for the same investment. There can be no assurance that the fund could obtain the
fair value assigned to an investment if it were to sell the investment at the same time at which the fund determines its net asset value per share.
Various inputs are used in determining the value of the funds assets or liabilities. These inputs are categorized into three broad levels. In certain cases,
the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investments level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value
measurement. The funds assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. Level 1 includes unadjusted quoted prices in
active markets for identical assets or liabilities. Level 2 includes other significant observable market-based inputs (including quoted prices for similar securities, interest rates, prepayment speed, and credit risk). Level 3 includes
unobservable inputs, which may include the advisers own assumptions in determining the fair value of investments. The following is a summary of the levels used as of April 30, 2020 in valuing the funds assets or liabilities:
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Financial Instruments
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Level 1
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Level 2
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Level 3
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Total
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U.S. Treasury Bonds & U.S. Government Agencies & Equivalents
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$
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$140,862,390
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$
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$140,862,390
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Non-U.S. Sovereign Debt
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7,476,806
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|
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7,476,806
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Municipal Bonds
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|
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|
|
|
|
17,953,142
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|
|
|
|
|
|
|
17,953,142
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U.S. Corporate Bonds
|
|
|
|
|
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|
199,544,731
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|
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|
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199,544,731
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Residential Mortgage-Backed Securities
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5,596,006
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5,596,006
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Commercial Mortgage-Backed Securities
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5,648,943
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|
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5,648,943
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Asset-Backed Securities (including CDOs)
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4,336,998
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4,336,998
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Foreign Bonds
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80,549,040
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|
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80,549,040
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Mutual Funds
|
|
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102,340
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|
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|
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|
|
|
|
|
102,340
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Total
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$102,340
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|
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$461,968,056
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$
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$462,070,396
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For further information regarding security characteristics, see the Portfolio of Investments.
Indemnifications Under the funds organizational documents, its officers and Trustees may be indemnified against certain liabilities and expenses
arising out of the performance of their duties to the fund. Additionally, in the normal course of business, the fund enters into agreements with service providers that may contain indemnification clauses. The funds maximum exposure under these
agreements is unknown as this would involve future claims that may be made against the fund that have not yet occurred.
Investment Transactions and
Income Investment transactions are recorded on the trade date. Interest income is recorded on the accrual basis. All premium and discount
21
Notes to Financial Statements (unaudited) continued
is amortized or accreted for financial statement purposes in accordance with U.S.
generally accepted accounting principles. 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.
The fund may receive proceeds from litigation settlements. Any proceeds received from litigation involving portfolio holdings are reflected in the Statement of
Operations in realized gain/loss if the security has been disposed of by the fund or in unrealized gain/loss if the security is still held by the fund. Any other proceeds from litigation not related to portfolio holdings are reflected as other
income in the Statement of Operations.
Tax Matters and Distributions The fund intends to qualify as a regulated investment company, as
defined under Subchapter M of the Internal Revenue Code, and to distribute all of its taxable income, including realized capital gains. As a result, no provision for federal income tax is required. The funds federal tax returns, when filed,
will remain subject to examination by the Internal Revenue Service for a three year period. Management has analyzed the funds tax positions taken on federal and state tax returns for all open tax years and does not believe that there are any
uncertain tax positions that require recognition of a tax liability. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements in accordance with the applicable foreign tax law. Foreign income taxes may be
withheld by certain countries in which the fund invests. Additionally, capital gains realized by the fund on securities issued in or by certain foreign countries may be subject to capital gains tax imposed by those countries.
Distributions to shareholders are recorded on the ex-dividend date. The fund seeks to pay monthly distributions based on an
annual rate of 8.50% of the funds average monthly net asset value. As a result, distributions may exceed actual earnings which may result in a tax return of capital. Income and capital gain distributions are determined in accordance with
income tax regulations, which may differ from U.S. generally accepted accounting principles. Certain capital accounts in the financial statements are periodically adjusted for permanent differences in order to reflect their tax character. These
adjustments have no impact on net assets or net asset value per share. Temporary differences which arise from recognizing certain items of income, expense, gain or loss in different periods for financial statement and tax purposes will reverse at
some time in the future.
During the year ended October 31, 2019, there were no significant adjustments due to differences between book and tax
accounting.
For the six months ended April 30, 2020, the amount of distributions estimated to be a tax return of capital was approximately
$13,823,106 which is reported as distributions from other sources in the Statements of Changes in Net Assets.
22
Notes to Financial Statements (unaudited) continued
The tax character of distributions made during the current period will be determined at
fiscal year end. The tax character of distributions declared to shareholders for the last fiscal year is as follows:
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Year ended
10/31/19
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Ordinary income (including any
short-term capital gains)
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$12,403,691
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Tax return of capital (b)
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27,810,480
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Total distributions
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$40,214,171
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(b)
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Distributions in excess of tax basis earnings and profits are reported in the financial statements as a tax return of capital.
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The federal tax cost and the tax basis components of distributable earnings were as follows:
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As of 4/30/20
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Cost of investments
|
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$441,670,086
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Gross appreciation
|
|
|
22,845,208
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Gross depreciation
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|
(2,444,898
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)
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Net unrealized appreciation (depreciation)
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|
$20,400,310
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As of 10/31/19
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Capital loss carryforwards
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|
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(5,097,904
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)
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Other temporary differences
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|
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(111,129
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)
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Net unrealized appreciation (depreciation)
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|
|
17,942,188
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The aggregate cost above includes prior fiscal year end tax adjustments, if applicable.
As of October 31, 2019, the fund had capital loss carryforwards available to offset future realized gains. These net capital losses may be carried forward
indefinitely and their character is retained as short-term and/or long-term losses. Such losses are characterized as follows:
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Short-Term
|
|
|
$(2,620,236
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)
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Long-Term
|
|
|
(2,477,668
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)
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Total
|
|
|
$(5,097,904
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)
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(3) Transactions with Affiliates
Investment Adviser The fund has an investment advisory agreement with MFS to provide overall investment management and related administrative services and facilities to the fund. The management fee is
computed daily and paid monthly at an annual rate of 0.32% of the funds average daily net assets and 5.65% of gross income. Gross income is calculated based on tax elections that generally include the accretion of discount and exclude the
amortization of premium, which may differ from investment income reported in the Statement of Operations. MFS has agreed to reduce its management fee to the lesser of the contractual management fee as set forth above or 0.85% of the funds
average daily net assets. This written agreement will continue until modified by the funds Board of Trustees, but such agreement will continue at least until October 31, 2020. For the six months ended April 30, 2020, the funds
23
Notes to Financial Statements (unaudited) continued
average daily net assets and gross income fees did not meet the thresholds required to
waive the management fee under this agreement. The management fee, from net assets and gross income, incurred for the six months ended April 30, 2020 was equivalent to an annual effective rate of 0.50% of the funds average daily net
assets.
Transfer Agent The fund engages Computershare Trust Company, N.A. (Computershare) as the sole transfer agent for the
fund. MFS Service Center, Inc. (MFSC) monitors and supervises the activities of Computershare for an agreed upon fee approved by the Board of Trustees. For the six months ended April 30, 2020, these fees paid to MFSC amounted to $14,446.
Administrator MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the
fund. Under an administrative services agreement, the fund reimburses MFS the costs incurred to provide these services. The fund is charged an annual fixed amount of $17,500 plus a fee based on average daily net assets. The administrative services
fee incurred for the six months ended April 30, 2020 was equivalent to an annual effective rate of 0.0155% of the funds average daily net assets.
Trustees and Officers Compensation The fund pays compensation to independent Trustees in the form of a retainer, attendance fees, and additional compensation to Board and Committee
chairpersons. The fund does not pay compensation directly to Trustees or officers of the fund who are also officers of the investment adviser, all of whom receive remuneration from MFS for their services to the fund. Certain officers and Trustees of
the fund are officers or directors of MFS and MFSC.
Other The fund invests in the MFS Institutional Money Market Portfolio which is
managed by MFS and seeks current income consistent with preservation of capital and liquidity. This money market fund does not pay a management fee to MFS but does incur investment and operating costs.
(4) Portfolio Securities
For the six months ended
April 30, 2020, purchases and sales of investments, other than short-term obligations, were as follows:
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Purchases
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Sales
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U.S. Government securities
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|
$36,237,923
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|
|
$83,258,024
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Non-U.S. Government securities
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|
|
84,506,555
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|
|
|
47,017,175
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(5) Shares of Beneficial Interest
The funds Declaration of Trust permits the Trustees to issue an unlimited number of full and fractional shares of beneficial interest. The Trustees have authorized the repurchase by the fund of up to 10%
annually of its own shares of beneficial interest. The fund repurchased 973,652 shares of beneficial interest during the six months ended April 30, 2020 at an average price per share of $3.50 and a weighted average discount of 8.62% per share.
The fund repurchased 482,936 shares of beneficial
24
Notes to Financial Statements (unaudited) continued
interest during the year ended October 31, 2019 at an average price per share of
$3.68 and a weighted average discount of 8.44% per share. Transactions in fund shares were as follows:
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Six months ended
4/30/20
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Year ended
10/31/19
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Shares
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Amount
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Shares
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Amount
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Capital shares repurchased
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(973,652
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)
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|
|
$(3,410,552
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)
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|
|
(482,936
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)
|
|
|
$(1,777,421
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)
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(6) Line of Credit
The fund
and certain other funds managed by MFS participate in a $1.25 billion unsecured committed line of credit, subject to a $1 billion sublimit, provided by a syndicate of banks under a credit agreement. Borrowings may be made for temporary
financing needs. Interest is charged to each fund, based on its borrowings, generally at a rate equal to the highest of one month LIBOR, the Federal Funds Effective Rate and the Overnight Bank Funding Rate, plus an agreed upon spread. A commitment
fee, based on the average daily, unused portion of the committed line of credit, is allocated among the participating funds. In addition, the fund and other funds managed by MFS have established unsecured uncommitted borrowing arrangements with
certain banks for temporary financing needs. Interest is charged to each fund, based on its borrowings, at rates equal to customary reference rates plus an agreed upon spread. For the six months ended April 30, 2020, the funds commitment
fee and interest expense were $1,152 and $0, respectively, and are included in Miscellaneous expense in the Statement of Operations.
(7)
Investments in Affiliated Issuers
An affiliated issuer may be considered one in which the fund owns 5% or more of the outstanding voting securities,
or a company which is under common control. For the purposes of this report, the following were affiliated issuers:
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Affiliated Issuers
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|
Beginning
Value
|
|
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Purchases
|
|
|
Sales
Proceeds
|
|
|
Realized
Gain
(Loss)
|
|
|
Change in
Unrealized
Appreciation or
Depreciation
|
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Ending
Value
|
|
MFS Institutional Money Market Portfolio
|
|
|
$3,881,383
|
|
|
|
$62,080,556
|
|
|
|
$65,861,372
|
|
|
|
$2,109
|
|
|
|
$(336
|
)
|
|
|
$102,340
|
|
|
|
|
|
|
|
|
Affiliated Issuers
|
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Dividend
Income
|
|
|
Capital Gain
Distributions
|
|
MFS Institutional Money Market Portfolio
|
|
|
|
|
|
|
|
|
|
|
|
$25,900
|
|
|
|
$
|
|
(8) Impacts of COVID-19
The
pandemic related to the global spread of novel coronavirus disease (COVID-19), which was first detected in December 2019, has resulted in significant disruptions to global business activity and the global economy, as well as the economies of
individual countries, the financial performance of individual companies and sectors, and the securities and commodities markets in general. This pandemic, the full effects of which are still unknown, has resulted in substantial market volatility and
may have adversely impacted the prices and liquidity of the funds investments and the funds performance.
25
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Trustees and Shareholders of MFS Intermediate Income Trust:
Results of Review of Interim Financial Statements
We have
reviewed the accompanying statement of assets and liabilities of MFS Intermediate Income Trust (the Trust), including the portfolio of investments, as of April 30, 2020, and the related statements of operations and changes in net assets
and the financial highlights for the six-month period ended April 30, 2020, and the related notes. Based on our review, we are not aware of any material modifications that should be made to the accompanying interim financial statements and financial
highlights for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in
accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the statement of assets and liabilities, including the portfolio of investments, as of October 31, 2019 (not presented herein), the related
statement of operations for the year ended October 31, 2019 (not presented herein), the statements of changes in net assets for the years ended October 31, 2019, and October 31, 2018 (2018 not presented herein) and the financial highlights for
each of the five years in the period ended October 31, 2019; and in our report dated December 16, 2019, we expressed an unqualified opinion on those financial statements.
Basis for Review Results
These interim financial statements and financial highlights are the responsibility of
the Trusts management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our review in accordance with the standards of the PCAOB. A review of interim
financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards
of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 16, 2020
26
PROXY VOTING POLICIES AND INFORMATION
MFS votes proxies on behalf of the fund pursuant to proxy voting policies and procedures that are available without charge, upon request, by calling 1-800-225-2606, by visiting mfs.com/proxyvoting, or by visiting the SECs Web site at http://www.sec.gov.
Information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available
by August 31 of each year without charge by visiting mfs.com/proxyvoting, or by visiting the SECs Web site at http://www.sec.gov.
QUARTERLY PORTFOLIO DISCLOSURE
The fund files a complete schedule of
portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The funds Form N-PORT reports are available on the SECs
website at http://www.sec.gov. A shareholder can obtain the portfolio holdings report for the first and third quarters of the funds fiscal year at mfs.com/closedendfunds by choosing the funds name and then selecting the
Resources tab and clicking on Prospectus and Reports.
FURTHER INFORMATION
From time to time, MFS may post important information about the fund or the MFS funds on the MFS web site (mfs.com). This information is available at
https://www.mfs.com/en-us/what-we-do/announcements.html or at mfs.com/closedendfunds by choosing the funds name.
Additional
information about the fund (e.g., performance, dividends and the funds price history) is also available by clicking on the funds name under Closed-End Funds in the Products section of mfs.com.
INFORMATION ABOUT FUND CONTRACTS AND LEGAL CLAIMS
The fund has entered into contractual arrangements with an investment adviser, administrator, transfer agent, and custodian who each provide services to the fund. Unless expressly stated otherwise, shareholders are
not parties to, or intended beneficiaries of these contractual arrangements, and these contractual arrangements are not intended to create any shareholder right to enforce them against the service providers or to seek any remedy under them against
the service providers, either directly or on behalf of the fund.
Under the Trusts By-Laws and Declaration
of Trust, any claims asserted against or on behalf of the MFS Funds, including claims against Trustees and Officers, must be brought in state and federal courts located within the Commonwealth of Massachusetts.
27
CONTACT US
TRANSFER AGENT, REGISTRAR, AND
DIVIDEND DISBURSING AGENT
CALL
1-800-637-2304
9 a.m. to 5 p.m. Eastern time
WRITE
Computershare Trust Company, N.A.
P.O. Box 505005
Louisville, KY 40233-5005
New York Stock Exchange Symbol: MIN