MFS INTERMEDIATE HIGH INCOME FUND N-CSR
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF

REGISTERED MANAGEMENT INVESTMENT COMPANIES

Investment Company Act file number 811-05567

MFS INTERMEDIATE HIGH INCOME FUND

(Exact name of registrant as specified in charter)

500 Boylston Street, Boston, Massachusetts 02116

(Address of principal executive offices) (Zip code)

Susan S. Newton

Massachusetts Financial Services Company

500 Boylston Street

Boston, Massachusetts 02116

(Name and address of agents for service)

Registrant’s telephone number, including area code: (617) 954-5000

Date of fiscal year end: November 30

Date of reporting period: November 30, 2010


Table of Contents
ITEM 1. REPORTS TO STOCKHOLDERS.


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LOGO

 

LOGO

 

Annual report

 

MFS® Intermediate High Income Fund

 

11/30/10

CIH-ANN


Table of Contents

MFS® Intermediate High Income Fund

 

New York Stock Exchange Symbol: CIF

 

LETTER FROM THE CEO     1   
PORTFOLIO COMPOSITION     2   
MANAGEMENT REVIEW     4   
PERFORMANCE SUMMARY     6   
INVESTMENT OBJECTIVE, PRINCIPAL INVESTMENT STRATEGIES AND RISKS OF THE FUND     8   
PORTFOLIO MANAGERS’ PROFILES     10   
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN     11   
PORTFOLIO OF INVESTMENTS     12   
STATEMENT OF ASSETS AND LIABILITIES     28   
STATEMENT OF OPERATIONS     29   
STATEMENTS OF CHANGES IN NET ASSETS     30   
STATEMENT OF CASH FLOWS     31   
FINANCIAL HIGHLIGHTS     32   
NOTES TO FINANCIAL STATEMENTS     34   
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
    48   
RESULTS OF SHAREHOLDER MEETING     49   
TRUSTEES AND OFFICERS     50   
BOARD REVIEW OF INVESTMENT
ADVISORY AGREEMENT
    55   
PROXY VOTING POLICIES AND
INFORMATION
    60   
QUARTERLY PORTFOLIO DISCLOSURE     60   
FURTHER INFORMATION     60   
FEDERAL TAX INFORMATION     60   
MFS® PRIVACY NOTICE     61   
CONTACT INFORMATION        BACK COVER   

 

NOT FDIC INSURED Ÿ MAY LOSE VALUE Ÿ NO BANK GUARANTEE


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LOGO

 

LETTER FROM THE CEO

Dear Shareholders:

After an extended rebound in the financial markets, uncertainty returned in early 2010 as investors began to question the durability of the recovery for global economies and markets. That uncertainty led to increased risk aversion, especially as investors saw the eurozone struggle with the debt woes of many of its members. In September, the U.S. Federal Reserve Board’s promises to further loosen monetary policy helped assuage market fears and drive asset prices off their recent lows. A combination of solid earnings and improving economic data gave an additional boost to investor sentiment. As we begin 2011, we are cautiously optimistic that economic growth will continue to improve and that the global economies will recover from the shocks of the past few years. We expect the pace of recovery worldwide will be uneven and volatile.

As always, we continue to be mindful of the many challenges faced at the individual, national, and international levels. It is in times such as these that we want to remind investors of the merits of maintaining a long-term view, adhering to basic investing principles such as asset allocation and diversification, and working closely with their advisors to research and identify investment opportunities.

Respectfully,

LOGO

Robert J. Manning

Chairman and Chief Executive Officer

MFS Investment Management®

January 14, 2011

The opinions expressed in this letter are subject to change, may not be relied upon for investment advice, and no forecasts can be guaranteed.

 

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PORTFOLIO COMPOSITION

 

Portfolio structure (i)

LOGO

 

Top five industries (i)  
Medical & Health Technology & Services     9.0%   
Energy Independent     7.6%   
Gaming & Lodging     7.5%   
Broadcasting     7.4%   
Telecommunications-Wireless     6.3%   
Composition including fixed
income credit quality (a)(i)
 
AA     0.2%   
A     0.2%   
BBB     8.1%   
BB     38.8%   
B     58.5%   
CCC     22.6%   
CC     0.5%   
C     0.3%   
D     0.3%   
Other Fixed Income (NR) (o)     0.0%   
Non-Fixed Income (NR)     2.6%   
Cash & Other     (32.1)%   
Portfolio facts (i)  
Average Duration (d)     5.8   
Average Effective Maturity (m)     7.3 yrs.   

 

(a) The rating categories include debt securities and fixed-income structured products where these have long-term public ratings. All ratings are assigned in accordance with the following hierarchy: If a security is rated by Moody’s, then that rating is used; if not rated by Moody’s, then a Standard & Poor’s rating is used; if not rated by S&P, then a Fitch rating is used. Ratings from Moody’s are shown in the S&P and Fitch scale (e.g., AAA). All ratings are subject to change. Other Fixed Income (NR) includes unrated long-term fixed income securities, interest rate swaps and fixed income futures. Cash & Other includes cash, other assets less liabilities, offsets to derivative positions, and short-term securities. The fund may not hold all of these instruments.

 

(d) Duration is a measure of how much a bond’s price is likely to fluctuate with general changes in interest rates, e.g., if rates rise 1.00%, a bond with a 5-year duration is likely to lose about 5.00% of its value due to the interest rate move.

 

(i)

For purposes of this presentation, the components include the market value of securities, and reflect the impact of the equivalent exposure of derivative positions, if applicable. These amounts may be negative from time to time. The bond component will include any accrued interest amounts. Equivalent exposure is a calculated amount that translates the derivative position into a reasonable approximation of the

 

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Portfolio Composition – continued

 

 

amount of the underlying asset that the portfolio would have to hold at a given point in time to have the same price sensitivity that results from the portfolio’s ownership of the derivative contract. When dealing with derivatives, equivalent exposure is a more representative measure of the potential impact of a position on portfolio performance than market value. Where the fund holds convertible bonds, these are treated as part of the equity portion of the portfolio.

 

(m) In determining an instrument’s effective maturity for purposes of calculating the fund’s dollar-weighted average effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a put, pre-refunding or prepayment) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity.

 

(o) Less than 0.1%.

From time to time “Cash & Other Net Assets” may be negative due to borrowings for leverage transactions, timing of cash receipts, and/or equivalent exposure from any derivative holdings.

Percentages are based on net assets as of 11/30/10.

The portfolio is actively managed and current holdings may be different.

 

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MANAGEMENT REVIEW

Summary of Results

The MFS Intermediate High Income Fund (the “fund”) is a closed-end fund investing primarily in high-yield fixed income securities in lower-rated categories.

For the twelve months ended November 30, 2010, shares of the fund provided a total return of 21.94%, at net asset value. This compares with a return of 16.78% for the fund’s benchmark, the Barclays Capital U.S. High-Yield Corporate Bond Index.

Market Environment

The first half of the reporting period witnessed a continuation of the financial market and macroeconomic rebounds that had begun in early 2009. These recoveries in global activity and asset valuations were generally synchronized around the world, led importantly by emerging Asian economies, but broadening to include most of the global economy to varying degrees. Primary drivers of the recoveries included an unwinding of the inventory destocking that took place earlier, the production of manufacturing and capital goods, as well as massive fiscal and monetary stimulus.

During the second half of the period, heightened risk surrounding the public-debt profiles of several of the peripheral European countries impaired market sentiment. At the same time, the improving trend in global macroeconomic data began to weaken somewhat. These two dynamics caused many asset prices to retrench significantly, as many questioned the durability of the global recovery.

Towards the end of the period, the U.S. Federal Reserve led markets to believe that further monetary loosening would be forthcoming if macroeconomic activity did not show signs of improvement. The prospects for more easing by the Fed improved market sentiment and drove risk-asset prices markedly higher. However, in a text-book case of “buy the rumor, sell the fact,” the weeks following the early November announcement of further quantitative easing saw a sell-off in U.S. Treasury bonds. This rise in Treasury yields occurred despite risk-off behavior in equities and credit markets (which would normally result in Treasury yield compression), and appears to have been the result of a few factors: signs of improved U.S. economic activity; opposition to quantitative easing from some quarters; and crowded long positions in U.S. Treasuries.

Contributors to Performance

The fund’s return from yield, which was greater than that of the Barclays Capital U.S. High-Yield Corporate Bond Index, was a major driver of positive relative performance. Yield curve (y) positioning in the U.S., particularly our

 

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Management Review – continued

 

greater exposure to shifts in the middle portion of the yield curve (centered around maturities of 7 years), was another positive factor for the fund’s results.

A greater exposure to “B” rated (r) securities, and to corporate bonds in the industrial, banking, and financial sectors also contributed to strong relative results. Security selection was another area of relative strength. Individual securities that were among the fund’s top contributors included the debt of television station holding company Newport Television LLC, television station operator Local TV LLC, Spanish-language network television operator Univision, and insurance firm American International Group, Inc.

The fund employs leverage which has been created through the use of loan agreements with a bank. To the extent that investments are purchased through the use of leverage, the fund’s net asset value will increase or decrease at a greater rate than a comparable unleveraged fund. During the reporting period, the fund’s use of leverage enhanced its absolute positive returns.

Detractors from Performance

The fund’s greater exposure to holdings of Irish debt held back relative performance as the perceived risk of these assets increased and spreads widened.

A greater exposure to “CCC” rated bonds, which underperformed higher-rated securities during the months of May, June, and August 2010, also detracted from relative returns. Individual bond holdings that were among the fund’s top relative detractors for the reporting period included the debt of resorts operator Green Valley Ranch Gaming, LLC, electric power company NGC Corp. (g), network and telecommunications firm Angel Lux Common S.A. Securities (g), and payment processing company First Data Corp.

Respectfully,

 

John Addeo   David Cole
Portfolio Manager   Portfolio Manager

 

(g) Security was not held in the portfolio at period end.
(r) Bonds rated “BBB”, “Baa”, or higher are considered investment grade; bonds rated “BB”, “Ba”, or below are considered non-investment grade. The primary source for bond quality ratings is Moody’s Investors Service. If not available, ratings by Standard & Poor’s are used, else ratings by Fitch, Inc. For securities which are not rated by any of the three agencies, the security is considered Not Rated.
(y) A yield curve graphically depicts the yields of different maturity bonds of the same credit quality and type; a normal yield curve is upward sloping, with short-term rates lower than long-term rates.

The views expressed in this report are those of the portfolio managers only through the end of the period of the report as stated on the cover and do not necessarily reflect the views of MFS or any other person in the MFS organization. These views are subject to change at any time based on market or other conditions, and MFS disclaims any responsibility to update such views. These views may not be relied upon as investment advice or an indication of trading intent on behalf of any MFS portfolio. References to specific securities are not recommendations of such securities, and may not be representative of any MFS portfolio’s current or future investments.

 

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PERFORMANCE SUMMARY THROUGH 11/30/10

The following chart represents the fund’s historical performance in comparison to its benchmark(s). Investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than their original cost; current performance may be lower or higher than quoted. The performance shown does not reflect the deduction of taxes, if any, that a shareholder would pay on fund distributions or the sale of fund shares. Performance data shown represents past performance and is no guarantee of future results.

Price Summary for MFS Intermediate High Income Fund

 

Year Ended 11/30/10

 

              Date        Price     
  

Net Asset Value

       11/30/10         $3.02  
            11/30/09         $2.72  
  

New York Stock Exchange Price

       11/30/10         $3.01  
            11/08/10  (high) (t)       $3.12  
            12/01/09  (low) (t)       $2.42  
              11/30/09         $2.42    

Total Returns vs Benchmark

 

Year Ended 11/30/10

 

       
     MFS Intermediate High Income Fund at       
  

New York Stock Exchange Price (r)

       36.61%     
  

Net Asset Value (r)

       21.94%     
   Barclays Capital U.S. High-Yield Corporate Bond Index (f)        16.78%       
(f) Source: FactSet Research Systems Inc.

 

(r) Includes reinvestment of dividends and capital gain distributions.

 

(t) For the period December 1, 2009 through November 30, 2010.

Benchmark Definition

Barclays Capital U.S. High-Yield Corporate Bond Index – a market capitalization-weighted index that measures the performance of non-investment grade, fixed rate debt. Eurobonds and debt issues from countries designated as emerging markets (e.g., Argentina, Brazil, Venezuela, etc.) are excluded.

It is not possible to invest directly in an index.

 

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Performance Summary – continued

 

Notes to Performance Summary

The fund’s shares may trade at a discount or premium to net asset value. Shareholders do not have the right to cause the fund to repurchase their shares at net asset value. When fund shares trade at a premium, buyers pay more than the net asset value underlying fund shares, and shares purchased at a premium would receive less than the amount paid for them in the event of the fund’s liquidation. As a result, the total return that is calculated based on the net asset value and New York Stock Exchange price can be different.

The fund’s monthly distributions may include a return of capital to shareholders to the extent that distributions are in excess of the fund’s net investment income and net capital gains, determined in accordance with federal income tax regulations. Distributions that are treated for federal income tax purposes as a return of capital will reduce each shareholder’s basis in his or her shares and, to the extent the return of capital exceeds such basis, will be treated as gain to the shareholder from a sale of shares. Returns of shareholder capital have the effect of reducing the fund’s assets and increasing the fund’s expense ratio.

From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.

 

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INVESTMENT OBJECTIVE, PRINCIPAL

INVESTMENT STRATEGIES AND RISKS

OF THE FUND

Investment Objective

The fund’s investment objective is to seek high current income, but may also consider capital appreciation. The fund’s objective may be changed without shareholder approval.

Principal Investment Strategies

MFS (Massachusetts Financial Services Company, the fund’s investment adviser) normally invests at least 80% of the fund’s net assets, including assets attributable to borrowings for investment purposes, in high income debt instruments.

MFS may invest the fund’s assets in other types of debt instruments and equity securities.

MFS may invest up to 100% of the fund’s assets in lower quality debt instruments.

MFS may invest the fund’s assets in foreign securities.

The fund’s dollar-weighted average effective maturity will normally be between three and ten years. In determining an instrument’s effective maturity, MFS uses the instrument’s stated maturity or, if applicable, an earlier date on which MFS believes it is probable that a maturity-shortening device (such as a call, put, pre-refunding, prepayment or redemption provision, or an adjustable coupon) will cause the instrument to be repaid. Such an earlier date can be substantially shorter than the instrument’s stated maturity.

MFS may use derivatives for any investment purpose, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments.

MFS uses a bottom-up investment approach to buying and selling investments for the Fund. Investments are selected primarily based on fundamental analysis of individual issuers and/or instruments in light of issuers’ financial condition and market, economic, political, and regulatory conditions. Factors considered for debt instruments may include the instrument’s credit quality, collateral characteristics and indenture provisions and the issuer’s management ability, capital structure, leverage, and ability to meet its current obligations. Factors considered for equity securities may include analysis of an issuer’s earnings, cash flows, competitive position, and management ability. Quantitative models that systematically evaluate the structure of a debt instrument and its features or the valuation, price and earnings momentum, earnings quality and other factors of the issuer of an equity security may also be considered.

 

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Investment Objective, Principal Investment Strategies and Risks of the Fund – continued

 

The fund may use leverage by borrowing up to 33 1/3% of the fund’s assets, including borrowings for investment purposes, and investing the proceeds pursuant to its investment strategies. If approved by the fund’s Board of Trustees, the fund may use leverage by other methods.

MFS may engage in active and frequent trading in pursuing the fund’s principal investment strategies.

In response to market, economic, political, or other conditions, MFS may depart from the fund’s principal investment strategies by temporarily investing for defensive purposes.

Principal Risks

The fund may not achieve its objective and/or you could lose money on your investment in the fund. Investments in debt instruments may decline in value as the result of increases in interest rates, declines in the credit quality of the issuer, borrower, counterparty or underlying collateral, or changes in economic, political, issuer-specific, or other conditions. Certain types of debt instruments can be more sensitive to these factors and therefore more volatile. Investments in foreign markets through issuers or currencies can involve greater risk and volatility than U.S. investments because of adverse market, economic, political, regulatory, geopolitical, or other conditions. Investments in derivatives can be used to take both long and short positions, be highly volatile, result in leverage (which can magnify losses), and involve risks in addition to the risks of the underlying indicator(s) on which the derivative is based, such as counterparty and liquidity risk. Investments in lower-quality debt instruments can be more volatile and have greater risk of default than higher-quality debt instruments. The market price of common shares of the fund will be based on factors such as the supply and demand for common shares in the market and general market, economic, political or regulatory conditions. Whether shareholders will realize gains or losses upon the sale of common shares of the fund will depend on the market price of common shares at the time of the sale, not on the fund’s net asset value. The market price may be lower or higher than the fund’s net asset value. Shares of closed-end funds frequently trade at a discount to their net asset value. Leverage involves investment exposure in an amount exceeding the initial investment. Leverage can cause increased volatility by magnifying gains or losses. Please see the fund’s registration statement for further information regarding these and other risk considerations. A copy of the fund’s registration statement on Form N-2 is available on the EDGAR database on the Securities and Exchange Commission’s Internet Web site at http://sec.gov.

 

In accordance with Section 23(c) of the Investment Company Act of 1940, the fund hereby gives notice that it may from time to time repurchase shares of the fund in the open market at the option of the Board of Trustees and on such terms as the Trustees shall determine.

 

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PORTFOLIO MANAGERS’ PROFILES

 

John Addeo     Investment Officer of MFS; employed in the investment management area of MFS since 1998. Portfolio manager of the fund since June 2007.
David Cole     Investment Officer of MFS; employed in the investment management area of MFS since 2004. Portfolio manager of the fund since June 2007.

 

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DIVIDEND REINVESTMENT AND

CASH PURCHASE PLAN

The fund offers a Dividend Reinvestment and Cash Purchase Plan (the “Plan”) that allows common shareholders to reinvest either all of the distributions paid by the fund or only the long-term capital gains. Generally, 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 price of either the net asset value or 95% of the market price, whichever is greater. You can also buy shares on a quarterly basis in any amount $100 and over. The Plan Agent will purchase shares under the Cash Purchase Plan on the 15th of January, April, July, and October or shortly thereafter.

If shares are registered in your own name, new shareholders will automatically participate in the Plan, unless you have indicated that you do not wish to participate. 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 fund. 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 transaction expenses, including commissions. Dividends and capital gains distributions are taxable whether received in cash or reinvested in additional shares – 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.

You may withdraw from the Plan at any time by going to the Plan Agent’s website at www.computershare.com, by calling 1-800-637-2304 any business day from 9 a.m. to 5 p.m. Eastern time or by writing to the Plan Agent at P.O. Box 43078, Providence, RI 02940-3078. Please have available the name of the fund and your account number. For certain types of registrations, such as corporate accounts, instructions must be submitted in writing. Please call for additional details. When you withdraw from the Plan, you can receive the value of the reinvested shares in one of three ways: your full shares will be held in your account, the Plan Agent will sell your shares and send the proceeds to you, or you may transfer your full shares to your investment professional who can hold or sell them. Additionally, the Plan Agent will sell your fractional shares and send the proceeds to you.

If you have any questions or for further information or a copy of the Plan, contact the Plan Agent Computershare Trust Company, N.A. (the Transfer Agent for the fund) at 1-800-637-2304, at the Plan Agent’s website at www.computershare.com, or by writing to the Plan Agent at P.O. Box 43078, Providence, RI 02940-3078.

 

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PORTFOLIO OF INVESTMENTS

11/30/10

The Portfolio of Investments is a complete list of all securities owned by your fund. It is categorized by broad-based asset classes.

 

Bonds - 126.7%                 
Issuer    Shares/Par     Value ($)  
    
Aerospace - 2.1%                 
Alliant Techsystems, Inc., 6.875%, 2020    $ 115,000      $ 117,300   
BE Aerospace, Inc., 8.5%, 2018      315,000        342,562   
BE Aerospace, Inc., 6.875%, 2020      85,000        87,444   
Bombardier, Inc., 7.5%, 2018 (n)      280,000        299,600   
Hawker Beechcraft Acquisition Co. LLC, 8.5%, 2015      406,000        304,500   
Oshkosh Corp., 8.25%, 2017      75,000        80,625   
Oshkosh Corp., 8.5%, 2020      85,000        92,225   
          
             $ 1,324,256   
Apparel Manufacturers - 1.2%                 
Hanesbrands, Inc., 8%, 2016    $ 245,000      $ 260,619   
Hanesbrands, Inc., 6.375%, 2020 (z)      110,000        105,050   
Hanesbrands, Inc., FRN, 4.121%, 2014      220,000        216,700   
Phillips-Van Heusen Corp., 7.375%, 2020      185,000        198,413   
          
             $ 780,782   
Asset-Backed & Securitized - 1.8%                 
Banc of America Commercial Mortgage, Inc., FRN, 6.381%, 2051 (z)    $ 450,000      $ 132,076   
Citigroup Commercial Mortgage Trust, FRN, 5.884%, 2049      275,000        96,985   
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.932%, 2049      250,617        92,984   
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.932%, 2049      404,598        136,081   
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 5.932%, 2049      1,169,622        357,970   
JPMorgan Chase Commercial Mortgage Securities Corp., FRN, 6.258%, 2051      155,000        69,682   
Merrill Lynch Mortgage Trust, FRN, “B”, 6.019%, 2050      155,000        50,185   
Merrill Lynch/Countrywide Commercial Mortgage Trust, FRN, 5.747%, 2050      125,000        103,285   
Wachovia Bank Commercial Mortgage Trust, FRN, 5.883%, 2047      250,000        54,346   
Wachovia Bank Commercial Mortgage Trust, FRN, 5.943%, 2047      175,000        33,015   
          
             $ 1,126,609   
Automotive - 3.3%                 
Accuride Corp., 9.5%, 2018 (n)    $ 225,000      $ 240,187   
Allison Transmission, Inc., 11%, 2015 (n)      235,000        254,387   
Ford Motor Credit Co. LLC, 12%, 2015      1,110,000        1,375,035   

 

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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Automotive - continued                 
General Motors Corp., 7.125%, 2013 (d)    $ 457,000      $ 140,527   
Goodyear Tire & Rubber Co., 10.5%, 2016      65,000        71,175   
          
             $ 2,081,311   
Basic Industry - 0.4%                 
TriMas Corp., 9.75%, 2017 (n)    $ 215,000      $ 230,050   
Broadcasting - 6.4%                 
Allbritton Communications Co., 8%, 2018    $ 130,000      $ 129,025   
Bonten Media Acquisition Co., 9.75%, 2015 (p)(z)      52,669        25,582   
Entravision Communications Corp., 8.75%, 2017 (n)      65,000        67,925   
Inmarsat Finance PLC, 7.375%, 2017 (n)      330,000        346,500   
Intelsat Jackson Holdings Ltd., 9.5%, 2016      695,000        733,225   
Intelsat Jackson Holdings Ltd., 7.25%, 2020 (n)      165,000        164,588   
Lamar Media Corp., 6.625%, 2015      260,000        264,550   
Lamar Media Corp., “C”, 6.625%, 2015      165,000        166,238   
LBI Media, Inc., 8.5%, 2017 (z)      150,000        122,250   
Local TV Finance LLC, 10%, 2015 (p)(z)      207,852        179,446   
Newport Television LLC, 13%, 2017 (n)(p)      142,054        128,944   
Nexstar Broadcasting, Inc., 0.5% to 2011, 7% to 2014 (p)      293,265        283,905   
Nexstar Broadcasting, Inc., 7%, 2014      96,000        94,080   
Salem Communications Corp., 9.625%, 2016      38,000        39,710   
Sinclair Broadcast Group, Inc., 9.25%, 2017 (n)      125,000        135,313   
Sinclair Broadcast Group, Inc., 8.375%, 2018 (n)      40,000        41,000   
SIRIUS XM Radio, Inc., 8.75%, 2015 (n)      220,000        231,550   
Univision Communications, Inc., 12%, 2014 (n)      41,000        44,434   
Univision Communications, Inc., 9.75%, 2015 (n)(p)      653,945        676,670   
Univision Communications, Inc., 7.875%, 2020 (n)      90,000        92,025   
XM Satellite Radio, Inc., 7.625%, 2018 (z)      70,000        69,650   
Young Broadcasting, Inc., 8.75%, 2014 (d)      120,000        0   
          
             $ 4,036,610   
Brokerage & Asset Managers - 1.0%                 
E*TRADE Financial Corp., 7.875%, 2015    $ 260,000      $ 256,100   
E*TRADE Financial Corp., 12.5%, 2017      105,000        121,012   
Janus Capital Group, Inc., 6.95%, 2017      275,000        284,443   
          
             $ 661,555   
Building - 2.5%                 
Building Materials Holding Corp., 6.875%, 2018 (n)    $ 165,000      $ 161,700   
Building Materials Holding Corp., 7%, 2020 (n)      115,000        118,450   
CEMEX Finance Europe B.V., 9.625%, 2017 (n)    EUR  150,000        186,919   
Masco Corp., 7.125%, 2020    $ 110,000        115,424   

 

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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Building - continued                 
Nortek, Inc., 11%, 2013    $ 381,688      $ 401,727   
Nortek, Inc., 10%, 2018 (z)      120,000        120,000   
Owens Corning, 9%, 2019      150,000        178,051   
Ply Gem Industries, Inc., 11.75%, 2013      115,000        121,900   
Ply Gem Industries, Inc., 13.125%, 2014      185,000        194,250   
          
             $ 1,598,421   
Business Services - 2.5%                 
First Data Corp., 9.875%, 2015    $ 360,000      $ 306,000   
Interactive Data Corp., 10.25%, 2018 (n)      225,000        243,000   
Iron Mountain, Inc., 6.625%, 2016      185,000        185,463   
Iron Mountain, Inc., 8.375%, 2021      135,000        147,825   
SunGard Data Systems, Inc., 10.25%, 2015      377,000        391,138   
SunGard Data Systems, Inc., 7.375%, 2018 (z)      100,000        99,000   
SunGard Data Systems, Inc., 7.625%, 2020 (z)      105,000        105,000   
Terremark Worldwide, Inc., 12%, 2017      95,000        107,350   
          
             $ 1,584,776   
Cable TV - 4.5%                 
Cablevision Systems Corp., 8.625%, 2017    $ 375,000      $ 407,811   
CCH II LLC, 13.5%, 2016      150,000        176,437   
Charter Communications Holding Co. LLC, 7.875%, 2018 (n)      355,000        367,425   
Charter Communications Holding Co. LLC, 8.125%, 2020 (n)      135,000        141,750   
Charter Communications Operating LLC, 10.875%, 2014 (n)      120,000        133,800   
CSC Holdings LLC, 8.5%, 2014      255,000        279,544   
CSC Holdings LLC, 8.5%, 2015      90,000        97,650   
EchoStar Corp., 7.125%, 2016      350,000        359,625   
Insight Communications Co., Inc., 9.375%, 2018 (n)      160,000        173,600   
Mediacom LLC, 9.125%, 2019      255,000        257,550   
Videotron LTEE, 6.875%, 2014      110,000        111,375   
Virgin Media Finance PLC, 9.125%, 2016      100,000        106,250   
Virgin Media Finance PLC, 9.5%, 2016      200,000        223,500   
          
             $ 2,836,317   
Chemicals - 5.7%                 
Ashland, Inc., 9.125%, 2017    $ 385,000      $ 441,787   
Celanese U.S. Holdings LLC, 6.625%, 2018 (n)      135,000        138,712   
Hexion Specialty Chemicals, Inc., 8.875%, 2018      365,000        375,950   
Hexion U.S. Finance Corp/Hexion Nova Scotia Finance, 9%, 2020 (n)      60,000        59,550   
Huntsman International LLC, 6.875%, 2013 (n)    EUR  200,000        262,206   
Huntsman International LLC, 8.625%, 2021 (n)    $ 285,000        302,100   
Lumena Resources Corp., 12%, 2014 (n)      152,000        140,980   
Lyondell Chemical Co., 8%, 2017 (z)      100,000        107,875   

 

14


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Chemicals - continued                 
Lyondell Chemical Co., 11%, 2018    $ 605,539      $ 673,662   
Momentive Performance Materials, Inc., 12.5%, 2014      455,000        509,600   
Momentive Performance Materials, Inc., 11.5%, 2016      79,000        82,950   
Momentive Performance Materials, Inc., 9%, 2021 (n)      125,000        124,375   
Omnova Solutions, Inc., 7.875%, 2018 (n)      85,000        84,575   
Polypore International, Inc., 7.5%, 2017 (z)      40,000        40,500   
Solutia, Inc., 7.875%, 2020      235,000        253,213   
          
             $ 3,598,035   
Computer Software - Systems - 0.6%                 
DuPont Fabros Technology, Inc., REIT, 8.5%, 2017    $ 350,000      $ 378,875   
Conglomerates - 0.4%                 
Amsted Industries, Inc., 8.125%, 2018 (n)    $ 180,000      $ 191,700   
Pinafore LLC, 9%, 2018 (n)      85,000        89,675   
          
             $ 281,375   
Consumer Products - 1.6%                 
ACCO Brands Corp., 10.625%, 2015    $ 30,000      $ 33,375   
ACCO Brands Corp., 7.625%, 2015      80,000        79,000   
Central Garden & Pet Co., 8.25%, 2018      150,000        153,375   
Easton-Bell Sports, Inc., 9.75%, 2016      95,000        101,650   
Jarden Corp., 7.5%, 2017      215,000        225,213   
Libbey Glass, Inc., 10%, 2015 (n)      145,000        155,150   
NBTY, Inc., 9%, 2018 (n)      30,000        31,500   
Visant Corp., 10%, 2017 (n)      215,000        221,988   
          
             $ 1,001,251   
Consumer Services - 2.8%                 
KAR Holdings, Inc., 10%, 2015    $ 340,000      $ 359,550   
KAR Holdings, Inc., FRN, 4.286%, 2014      100,000        93,000   
Service Corp. International, 7.375%, 2014      25,000        27,313   
Service Corp. International, 6.75%, 2015      25,000        25,750   
Service Corp. International, 7%, 2017      785,000        807,569   
Service Corp. International, 7%, 2019      190,000        190,000   
Ticketmaster Entertainment, Inc., 10.75%, 2016      215,000        233,275   
          
             $ 1,736,457   
Containers - 1.9%                 
Graham Packaging Co. LP/GPC Capital Corp., 9.875%, 2014    $ 400,000      $ 414,000   
Graham Packaging Co. LP/GPC Capital Corp., 8.25%, 2018      40,000        40,600   
Greif, Inc., 6.75%, 2017      350,000        366,625   
Owens-Illinois, Inc., 7.375%, 2016      110,000        117,975   

 

15


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Containers - continued                 
Reynolds Group, 7.75%, 2016 (n)    $ 105,000      $ 109,463   
Reynolds Group, 7.125%, 2019 (n)      130,000        132,275   
          
             $ 1,180,938   
Defense Electronics - 0.3%                 
ManTech International Corp., 7.25%, 2018    $ 120,000      $ 124,200   
MOOG, Inc., 7.25%, 2018      90,000        92,700   
          
             $ 216,900   
Electronics - 1.1%                 
Freescale Semiconductor, Inc., 10.125%, 2018 (n)    $ 150,000      $ 162,000   
Freescale Semiconductor, Inc., 9.25%, 2018 (n)      160,000        167,600   
Jabil Circuit, Inc., 7.75%, 2016      160,000        178,800   
NXP B.V., 7.875%, 2014      165,000        169,331   
          
             $ 677,731   
Energy - Independent - 7.4%                 
Anadarko Petroleum Corp., 5.95%, 2016    $ 125,000      $ 133,383   
Anadarko Petroleum Corp., 6.375%, 2017      30,000        32,409   
Anadarko Petroleum Corp., 8.7%, 2019      85,000        103,906   
Atlas Energy Operating Co. LLC, 10.75%, 2018      70,000        85,312   
Berry Petroleum Co., 10.25%, 2014      150,000        170,250   
Carrizo Oil & Gas, Inc., 8.625%, 2018 (n)      205,000        203,975   
Denbury Resources, Inc., 8.25%, 2020      170,000        185,300   
Harvest Operations Corp., 6.875%, 2017 (n)      180,000        185,850   
Hilcorp Energy I LP, 9%, 2016 (n)      280,000        294,000   
Linn Energy LLC, 8.625%, 2020 (n)      20,000        21,200   
Linn Energy LLC, 7.75%, 2021 (n)      174,000        176,610   
Newfield Exploration Co., 6.625%, 2014      155,000        158,100   
Newfield Exploration Co., 6.625%, 2016      90,000        92,250   
OPTI Canada, Inc., 9.75%, 2013 (n)      135,000        134,325   
OPTI Canada, Inc., 8.25%, 2014      305,000        211,975   
Penn Virginia Corp., 10.375%, 2016      270,000        297,000   
Pioneer Natural Resources Co., 6.875%, 2018      175,000        186,245   
Pioneer Natural Resources Co., 7.5%, 2020      200,000        223,118   
Plains Exploration & Production Co., 7%, 2017      565,000        572,063   
QEP Resources, Inc., 6.875%, 2021      185,000        195,175   
Quicksilver Resources, Inc., 8.25%, 2015      230,000        235,175   
Quicksilver Resources, Inc., 9.125%, 2019      165,000        177,375   
Range Resources Corp., 8%, 2019      115,000        125,350   
SandRidge Energy, Inc., 8%, 2018 (n)      290,000        275,500   
Williams Cos., Inc., 7.75%, 2031      159,000        178,353   
          
             $ 4,654,199   

 

16


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Entertainment - 1.6%                 
AMC Entertainment, Inc., 11%, 2016    $ 325,000      $ 344,500   
AMC Entertainment, Inc., 8.75%, 2019      250,000        265,625   
Cinemark USA, Inc., 8.625%, 2019      380,000        407,550   
          
             $ 1,017,675   
Financial Institutions - 5.6%                 
American General Finance Corp., 6.9%, 2017    $ 205,000      $ 162,462   
CIT Group, Inc., 7%, 2014      215,000        212,850   
CIT Group, Inc., 7%, 2016      420,000        412,650   
CIT Group, Inc., 7%, 2017      970,000        945,750   
Credit Acceptance Corp., 9.125%, 2017 (z)      135,000        141,075   
General Electric Capital Corp., 6.375% to 2017, FRN to 2067      105,000        103,687   
GMAC, Inc., 6.75%, 2014      370,000        378,325   
International Lease Finance Corp., 5.625%, 2013      250,000        246,250   
International Lease Finance Corp., 8.75%, 2017 (n)      300,000        315,750   
International Lease Finance Corp., 7.125%, 2018 (n)      246,000        260,145   
Nationstar Mortgage LLC, 10.875%, 2015 (z)      215,000        209,088   
SLM Corp., 8%, 2020      120,000        120,600   
          
             $ 3,508,632   
Food & Beverages - 3.1%                 
ARAMARK Corp., 8.5%, 2015    $ 430,000      $ 445,050   
B&G Foods, Inc., 7.625%, 2018      125,000        129,531   
CEDC Finance Corp. International, Inc., 9.125%, 2016 (n)      210,000        220,500   
Constellation Brands, Inc., 7.25%, 2016      180,000        193,050   
Del Monte Foods Co., 6.75%, 2015      335,000        343,794   
Pinnacle Foods Finance LLC, 9.25%, 2015      330,000        339,488   
TreeHouse Foods, Inc., 7.75%, 2018      290,000        314,650   
          
             $ 1,986,063   
Forest & Paper Products - 3.1%                 
Boise, Inc., 8%, 2020    $ 225,000      $ 243,563   
Cascades, Inc., 7.75%, 2017      205,000        214,737   
Cellu Tissue Holdings, Inc., 11.5%, 2014      235,000        275,537   
Georgia-Pacific Corp., 7.125%, 2017 (n)      190,000        200,450   
Georgia-Pacific Corp., 8%, 2024      330,000        384,450   
Georgia-Pacific Corp., 7.25%, 2028      55,000        60,156   
Graphic Packaging Holding Co., 7.875%, 2018      125,000        129,687   
JSG Funding PLC, 7.75%, 2015      10,000        10,225   
Millar Western Forest Products Ltd., 7.75%, 2013      205,000        192,700   
Sappi Papier Holding GmbH, 6.75%, 2012 (z)      90,000        92,475   
Smurfit Kappa Group PLC, 7.75%, 2019 (n)    EUR  120,000        160,050   
          
             $ 1,964,030   

 

17


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Gaming & Lodging - 6.9%                 
Ameristar Casinos, Inc., 9.25%, 2014    $ 85,000      $ 90,950   
Circus & Eldorado Joint Venture, 10.125%, 2012      300,000        277,500   
Firekeepers Development Authority, 13.875%, 2015 (n)      335,000        391,950   
Fontainebleau Las Vegas Holdings LLC, 10.25%, 2015 (d)(n)      695,000        2,224   
Gaylord Entertainment Co., 6.75%, 2014      340,000        339,150   
GWR Operating Partnership LLP, 10.875%, 2017      220,000        228,800   
Harrah’s Operating Co., Inc., 11.25%, 2017      320,000        348,800   
Harrah’s Operating Co., Inc., 10%, 2018      164,000        138,580   
Harrah’s Operating Co., Inc., 10%, 2018      425,000        359,125   
Host Hotels & Resorts, Inc., 6.75%, 2016      250,000        256,250   
Host Hotels & Resorts, Inc., 9%, 2017      380,000        422,750   
MGM Mirage, 10.375%, 2014      40,000        44,400   
MGM Mirage, 11.125%, 2017      105,000        118,650   
MGM Mirage, 9%, 2020 (n)      170,000        185,300   
MGM Resorts International, 11.375%, 2018      150,000        154,500   
Penn National Gaming, Inc., 8.75%, 2019      185,000        203,038   
Royal Caribbean Cruises Ltd., 11.875%, 2015      80,000        98,000   
Starwood Hotels & Resorts Worldwide, Inc., 6.75%, 2018      100,000        109,250   
Station Casinos, Inc., 6.875%, 2016 (d)      715,000        286   
Station Casinos, Inc., 6.625%, 2018 (d)      875,000        350   
Wyndham Worldwide Corp., 6%, 2016      240,000        250,262   
Wyndham Worldwide Corp., 7.375%, 2020      170,000        185,875   
Wynn Las Vegas LLC, 7.75%, 2020      110,000        116,050   
          
             $ 4,322,040   
Industrial - 2.0%                 
Altra Holdings, Inc., 8.125%, 2016    $ 115,000      $ 119,600   
Baldor Electric Co., 8.625%, 2017      465,000        518,475   
Diversey, Inc., 8.25%, 2019      160,000        172,800   
Great Lakes Dredge & Dock Corp., 7.75%, 2013      140,000        140,350   
Hillman Cos., Inc., 10.875%, 2018 (n)      140,000        154,000   
Mueller Water Products, Inc., 7.375%, 2017      75,000        69,000   
Mueller Water Products, Inc., 8.75%, 2020      107,000        117,433   
          
             $ 1,291,658   
Insurance - 2.9%                 
American International Group, Inc., 8.175% to 2038, FRN to 2058    $ 750,000      $ 765,000   
ING Groep N.V., 5.775% to 2015, FRN to 2049      395,000        331,800   
MetLife, Inc., 9.25% to 2038, FRN to 2068 (n)      600,000        709,500   
          
             $ 1,806,300   
Insurance - Property & Casualty - 2.5%                 
Liberty Mutual Group, Inc., 10.75% to 2038, FRN to 2088 (n)    $ 330,000      $ 402,600   

 

18


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Insurance - Property & Casualty - continued                 
USI Holdings Corp., 9.75%, 2015 (z)    $ 575,000      $ 572,125   
XL Group PLC, 6.5% to 2017, FRN to 2049      155,000        132,138   
ZFS Finance USA Trust II, 6.45% to 2016, FRN to 2065 (n)      500,000        487,500   
          
             $ 1,594,363   
Machinery & Tools - 1.2%                 
Case Corp., 7.25%, 2016    $ 90,000      $ 97,200   
Case New Holland, Inc., 7.875%, 2017 (n)      415,000        457,537   
Rental Service Corp., 9.5%, 2014      220,000        226,600   
          
             $ 781,337   
Major Banks - 2.2%                 
Bank of America Corp., 8% to 2018, FRN to 2049    $ 375,000      $ 374,662   
JPMorgan Chase & Co., 7.9% to 2018, FRN to 2049      595,000        633,021   
Royal Bank of Scotland Group PLC, 7.648% to 2031, FRN to 2049      330,000        289,575   
Royal Bank of Scotland Group PLC, 6.99% to 2017, FRN to 2049 (d)(n)      100,000        78,000   
          
             $ 1,375,258   
Medical & Health Technology & Services - 8.8%                 
Biomet, Inc., 11.625%, 2017    $ 475,000      $ 523,687   
Community Health Systems, Inc., 8.875%, 2015      435,000        455,119   
Cooper Cos., Inc., 7.125%, 2015      120,000        123,000   
Davita, Inc., 6.375%, 2018      190,000        188,337   
Davita, Inc., 6.625%, 2020      105,000        104,081   
Fresenius Medical Care AG & Co. KGaA, 9%, 2015 (n)      165,000        188,925   
HCA, Inc., 9.25%, 2016      1,150,000        1,230,500   
HCA, Inc., 8.5%, 2019      160,000        174,400   
HealthSouth Corp., 8.125%, 2020      435,000        471,431   
Tenet Healthcare Corp., 9.25%, 2015      425,000        452,625   
Tenet Healthcare Corp., 8%, 2020 (n)      90,000        88,200   
U.S. Oncology, Inc., FRN, 6.737%, 2012 (p)      325,000        319,616   
United Surgical Partners International, Inc., 8.875%, 2017      95,000        97,613   
United Surgical Partners International, Inc., 9.25%, 2017 (p)      125,000        129,063   
Universal Hospital Services, Inc., 8.5%, 2015 (p)      400,000        410,000   
Vanguard Health Systems, Inc., 8%, 2018      195,000        196,950   
VWR Funding, Inc., 10.25%, 2015 (p)      402,062        414,124   
          
             $ 5,567,671   
Metals & Mining - 2.4%                 
Arch Coal, Inc., 7.25%, 2020    $ 110,000      $ 120,450   
Arch Western Finance LLC, 6.75%, 2013      85,000        85,956   
Cloud Peak Energy, Inc., 8.25%, 2017      165,000        179,850   
Cloud Peak Energy, Inc., 8.5%, 2019      225,000        247,500   

 

19


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Metals & Mining - continued                 
CONSOL Energy, Inc., 8%, 2017 (n)    $ 170,000      $ 182,750   
CONSOL Energy, Inc., 8.25%, 2020 (n)      110,000        119,075   
Peabody Energy Corp., 7.375%, 2016      350,000        385,875   
U.S. Steel Corp., 7.375%, 2020      170,000        169,788   
          
             $ 1,491,244   
Natural Gas - Distribution - 1.7%                 
AmeriGas Partners LP, 7.125%, 2016    $ 295,000      $ 306,800   
Ferrellgas Partners LP, 8.625%, 2020      180,000        194,850   
Inergy LP, 6.875%, 2014      335,000        339,188   
Inergy LP, 7%, 2018 (n)      210,000        215,250   
          
             $ 1,056,088   
Natural Gas - Pipeline - 2.9%                 
Atlas Pipeline Partners LP, 8.125%, 2015    $ 55,000      $ 56,650   
Atlas Pipeline Partners LP, 8.75%, 2018      200,000        218,000   
Colorado Interstate Gas Co., 6.8%, 2015      91,000        107,102   
Crosstex Energy, Inc., 8.875%, 2018      220,000        229,350   
El Paso Corp., 6.875%, 2014      325,000        349,807   
El Paso Corp., 8.25%, 2016      155,000        169,544   
El Paso Corp., 7%, 2017      185,000        194,924   
El Paso Corp., 7.75%, 2032      90,000        93,780   
Energy Transfer Equity LP, 7.5%, 2020      105,000        108,675   
Enterprise Products Partners LP, FRN, 8.375%, 2066      109,000        115,812   
Enterprise Products Partners LP, FRN, 7.034%, 2068      67,000        69,429   
MarkWest Energy Partners LP, 8.75%, 2018      40,000        43,000   
MarkWest Energy Partners LP, 6.75%, 2020      50,000        49,875   
          
             $ 1,805,948   
Network & Telecom - 5.7%                 
CenturyLink, Inc., 7.6%, 2039    $ 125,000      $ 125,649   
Cincinnati Bell, Inc., 7%, 2015      395,000        387,100   
Cincinnati Bell, Inc., 8.75%, 2018      270,000        244,350   
Citizens Communications Co., 7.875%, 2027      325,000        318,500   
Citizens Communications Co., 9%, 2031      70,000        73,325   
Frontier Communications Corp., 8.25%, 2017      65,000        71,500   
Frontier Communications Corp., 8.5%, 2020      55,000        60,500   
Nordic Telephone Co. Holdings, 8.25%, 2016 (n)    EUR  240,000        323,993   
Orascom Telecom Finance S.C.A., 7.875%, 2014 (z)    $ 225,000        211,500   
Qwest Communications International, Inc., 8%, 2015      105,000        111,563   
Qwest Communications International, Inc., 7.125%, 2018 (n)      315,000        327,600   
Qwest Communications International, Inc. “B”, 7.5%, 2014      250,000        252,500   
Qwest Corp., 7.5%, 2014      145,000        164,213   

 

20


Table of Contents

Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Network & Telecom - continued                 
Windstream Corp., 8.625%, 2016    $ 715,000      $ 741,813   
Windstream Corp., 8.125%, 2018      45,000        46,350   
Windstream Corp., 7.75%, 2020      125,000        125,781   
          
             $ 3,586,237   
Oil Services - 1.3%                 
Basic Energy Services, Inc., 7.125%, 2016    $ 65,000      $ 61,750   
Edgen Murray Corp., 12.25%, 2015      105,000        88,462   
Expro Finance Luxembourg, 8.5%, 2016 (n)      300,000        291,750   
McJunkin Red Man Holding Corp., 9.5%, 2016 (n)      160,000        145,600   
Pioneer Drilling Co., 9.875%, 2018      190,000        200,450   
          
             $ 788,012   
Oils - 0.3%                 
Petroplus Holdings AG, 9.375%, 2019 (n)    $ 205,000      $ 188,600   
Other Banks & Diversified Financials - 2.4%                 
Capital One Financial Corp., 10.25%, 2039    $ 220,000      $ 232,650   
Citigroup Capital XXI, 8.3% to 2037, FRN to 2057      580,000        603,200   
Groupe BPCE S.A., 12.5% to 2019, FRN to 2049 (n)      125,000        143,792   
LBG Capital No.1 PLC, 7.875%, 2020 (n)      210,000        191,100   
Santander UK PLC, 8.963% to 2030, FRN to 2049      308,000        327,650   
          
             $ 1,498,392   
Pharmaceuticals - 0.1%                 
Valeant Pharmaceuticals International, Inc., 6.75%, 2017 (n)    $ 60,000      $ 59,250   
Valeant Pharmaceuticals International, Inc., 7%, 2020 (n)      20,000        19,500   
          
             $ 78,750   
Printing & Publishing - 1.2%                 
American Media Operations, Inc., 9%, 2013 (p)(z)    $ 28,095      $ 28,432   
American Media Operations, Inc., 14%, 2013 (d)(p)(z)      294,705        167,900   
Morris Publishing Group LLC, 10%, 2014      97,625        93,964   
Nielsen Finance LLC, 11.5%, 2016      150,000        171,000   
Nielsen Finance LLC, 0% to 2011, 12.5% to 2016      175,000        176,750   
Nielsen Finance LLC, 7.75%, 2018 (n)      105,000        106,838   
          
             $ 744,884   
Railroad & Shipping - 0.5%                 
Kansas City Southern Railway, 8%, 2015    $ 310,000      $ 330,925   
Real Estate - 0.9%                 
CB Richard Ellis Group, Inc., 11.625%, 2017    $ 180,000      $ 208,575   

 

21


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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Real Estate - continued                 
Developers Diversified Realty Corp., REIT, 7.875%, 2020    $ 125,000      $ 143,244   
Entertainment Properties Trust, REIT, 7.75%, 2020 (n)      200,000        209,750   
          
             $ 561,569   
Restaurants - 0.1%                 
Dunkin Finance Corp., 9.625%, 2018 (z)    $ 40,000      $ 40,250   
Retailers - 3.5%                 
Couche-Tard, Inc., 7.5%, 2013    $ 70,000      $ 70,910   
Express LLC/Express Finance Corp., 8.75%, 2018      110,000        116,600   
General Nutrition Centers, Inc., FRN, 5.75%, 2014 (p)      205,000        198,850   
Limited Brands, Inc., 6.9%, 2017      125,000        133,438   
Limited Brands, Inc., 6.95%, 2033      175,000        163,625   
Neiman Marcus Group, Inc., 10.375%, 2015      300,000        315,750   
QVC, Inc., 7.375%, 2020 (n)      225,000        235,125   
Rent-A-Center, Inc., 6.625%, 2020      40,000        39,400   
Sally Beauty Holdings, Inc., 10.5%, 2016      275,000        297,000   
Toys “R” Us Property Co. II LLC, 8.5%, 2017      330,000        350,625   
Toys “R” Us, Inc., 10.75%, 2017      280,000        315,000   
          
             $ 2,236,323   
Specialty Chemicals - 0.1%                 
INVISTA, 9.25%, 2012 (n)    $ 63,000      $ 63,000   
Specialty Stores - 1.0%                 
Giraffe Acquisition Corp., 9.125%, 2018 (z)    $ 70,000      $ 70,350   
Michaels Stores, Inc., 11.375%, 2016      125,000        135,156   
Michaels Stores, Inc., 7.75%, 2018 (n)      155,000        150,738   
Payless ShoeSource, Inc., 8.25%, 2013      262,000        266,585   
          
             $ 622,829   
Telecommunications - Wireless - 6.1%                 
Clearwire Corp., 12%, 2015 (n)    $ 425,000      $ 449,969   
Cricket Communications, Inc., 7.75%, 2016      135,000        138,037   
Crown Castle International Corp., 9%, 2015      215,000        237,036   
Crown Castle International Corp., 7.75%, 2017 (n)      105,000        115,762   
Crown Castle International Corp., 7.125%, 2019      210,000        227,325   
Digicel Group Ltd., 8.25%, 2017 (n)      235,000        246,750   
Digicel Group Ltd., 10.5%, 2018 (n)      100,000        110,000   
MetroPCS Wireless, Inc., 7.875%, 2018      105,000        108,806   
Nextel Communications, 7.375%, 2015      130,000        125,450   
NII Holdings, Inc., 10%, 2016      160,000        177,600   
NII Holdings, Inc., 8.875%, 2019      100,000        108,250   

 

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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Bonds - continued                 
Telecommunications - Wireless - continued                 
SBA Communications Corp., 8%, 2016    $ 80,000      $ 86,400   
SBA Communications Corp., 8.25%, 2019      125,000        136,875   
Sprint Capital Corp., 6.875%, 2028      90,000        76,500   
Sprint Nextel Corp., 8.375%, 2017      450,000        468,000   
Sprint Nextel Corp., 8.75%, 2032      315,000        311,850   
Wind Acquisition Finance S.A., 12%, 2015 (n)      515,000        543,969   
Wind Acquisition Finance S.A., 7.25%, 2018 (z)      210,000        206,850   
          
             $ 3,875,429   
Telephone Services - 0.6%                 
Embarq Corp., 7.995%, 2036    $ 160,000      $ 173,686   
Frontier Communications Corp., 8.125%, 2018      195,000        214,500   
          
             $ 388,186   
Tobacco - 0.8%                 
Alliance One International, Inc., 10%, 2016    $ 115,000      $ 120,175   
Reynolds American, Inc., 7.625%, 2016      345,000        410,053   
          
             $ 530,228   
Transportation - Services - 2.1%                 
American Petroleum Tankers LLC, 10.25%, 2015 (n)    $ 95,000      $ 97,612   
Commercial Barge Line Co., 12.5%, 2017      285,000        329,531   
Hertz Corp., 8.875%, 2014      595,000        604,669   
Hertz Corp., 7.5%, 2018 (n)      130,000        131,300   
Navios Maritime Acquisition Corp., 8.625%, 2017 (n)      105,000        105,525   
Navios Maritime Holdings, Inc., 8.875%, 2017      55,000        58,713   
          
             $ 1,327,350   
Utilities - Electric Power - 5.6%                 
AES Corp., 8%, 2017    $ 505,000      $ 525,200   
Calpine Corp., 8%, 2016 (n)      415,000        436,787   
Calpine Corp., 7.875%, 2020 (n)      60,000        60,600   
Covanta Holding Corp., 7.25%, 2020      100,000        102,171   
Dynegy Holdings, Inc., 7.125%, 2018      540,000        345,600   
Dynegy Holdings, Inc., 7.75%, 2019      320,000        208,800   
Edison Mission Energy, 7%, 2017      370,000        290,450   
Energy Future Holdings Corp., 10%, 2020 (n)      270,000        276,252   
Energy Future Holdings Corp., 10%, 2020      355,000        364,107   
Genon Escrow Corp., 9.875%, 2020 (n)      230,000        219,075   
Mirant North America LLC, 7.375%, 2013      340,000        345,100   
NRG Energy, Inc., 7.375%, 2016      180,000        180,900   
Texas Competitive Electric Holdings LLC, 10.25%, 2015      275,000        163,625   
          
             $ 3,518,667   
Total Bonds (Identified Cost, $79,688,683)            $ 79,934,386   

 

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Portfolio of Investments – continued

 

    
Floating Rate Loans (g)(r) - 1.4%                 
Issuer    Shares/Par     Value ($)  
Aerospace - 0.1%                 
Hawker Beechcraft Acquisition Co. LLC, Term Loan, 10.5%, 2014    $ 107,276      $ 105,559   
Automotive - 0.2%                 
Ford Motor Co., Term Loan B, 3.03%, 2013    $ 139,748      $ 138,272   
Broadcasting - 0.3%                 
Gray Television, Inc., Term Loan B, 3.76%, 2014    $ 67,146      $ 65,215   
Local TV Finance LLC, Term Loan B, 2.29%, 2013      15,430        14,633   
New Young Broadcasting Holding Co., Inc., Term Loan, 8%, 2015      92,724        92,840   
          
             $ 172,688   
Building - 0.0%                 
Goodman Global Holdings, Inc., 2nd Lien Term Loan, 9%, 2017    $ 9,907      $ 10,133   
Consumer Services - 0.1%                 
Realogy Corp., Letter of Credit, 3.25%, 2013    $ 11,297      $ 10,373   
Realogy Corp., Term Loan, 3.28%, 2013      82,880        76,101   
          
             $ 86,474   
Financial Institutions - 0.1%                 
American General Financial Corp., Term Loan B, 7.25%, 2015    $ 32,250      $ 32,487   
Gaming & Lodging - 0.4%                 
Green Valley Ranch Gaming LLC, Second Lien Term Loan,
3.5%, 2014 (d)
   $ 525,000      $ 9,187   
MGM Mirage, Term Loan, 7%, 2014 (o)      249,415        229,679   
          
             $ 238,866   
Utilities - Electric Power - 0.2%                 
Texas Competitive Electric Holdings Co. LLC, Term Loan B-2, 3.75%, 2014    $ 150,690      $ 116,374   
Total Floating Rate Loans (Identified Cost, $1,222,894)            $ 900,853   
Common Stocks - 0.6%                 
Automotive - 0.2%                 
Accuride Corp. (a)      12,809      $ 148,584   
Broadcasting - 0.2%                 
New Young Broadcasting Holding Co., Inc. (a)      42      $ 92,400   
Construction - 0.1%                 
Nortek, Inc. (a)      1,490      $ 61,105   

 

24


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Portfolio of Investments – continued

 

Issuer    Shares/Par     Value ($)  
    
Common Stocks - continued                 
Gaming & Lodging - 0.1%                 
Ameristar Casinos, Inc.      2,100      $ 37,506   
Printing & Publishing - 0.0%                 
American Media, Inc. (a)      4,713      $ 0   
Quad/Graphics, Inc. (a)      357        15,530   
          
             $ 15,530   
Special Products & Services - 0.0%                 
Mark IV Industries LLC, Common Units, “A” (a)      207      $ 10,247   
Trucking - 0.0%                 
Quality Distribution, Inc. (a)      2,687      $ 18,648   
Total Common Stocks (Identified Cost, $479,651)            $ 384,020   
     Strike Price     First Exercise                 
Warrants - 0.4%                                 
Broadcasting - 0.4%                                 
New Young Broadcasting Holding Co., Inc. (1 share for 1 warrant) (Identified Cost, $208,861) (a)   $ 0.01        7/14/10        113       $        248,600   
Preferred Stocks - 0.4%                                 
Automotive - 0.3%                                 
General Motors Co., 4.75% (a)                     3,430       $ 173,901   
Other Banks & Diversified Financials - 0.1%                            
Citigroup Capital XIII, 7.87% (a)                     1,450       $ 38,106   
Total Preferred Stocks (Identified Cost, $207,750)                       $ 212,007   
Issuer/Expiration Date/Strike Price                 Number of
Contracts
         
Call Options Purchased - 0.1%                                 
S&P 500 Index - March 2011@ $1,225 (Premiums Paid, $70,254)                     18       $ 54,180   

 

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Portfolio of Investments – continued

 

Money Market Funds (v) - 1.9%                
Issuer   Shares/Par     Value ($)  
   
MFS Institutional Money Market Portfolio, 0.22%, at Cost and Net Asset Value     1,209,589      $ 1,209,589   
Total Investments (Identified Cost, $83,087,682)           $ 82,943,635   
Other Assets, Less Liabilities - (31.5)%             (19,851,605
Net Assets - 100.0%           $ 63,092,030   

 

(a) Non-income producing security.

 

(d) Non-income producing security – in default.

 

(g) The rate shown represents a weighted average coupon rate on settled positions at period end, unless otherwise indicated.

 

(n) Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be sold in the ordinary course of business in transactions exempt from registration, normally to qualified institutional buyers. At period end, the aggregate value of these securities was $18,215,069, representing 28.9% of net assets.

 

(o) All or a portion of this position has not settled. Upon settlement date, interest rates for unsettled amounts will be determined. The rate shown represents the weighted average coupon rate for settled amounts.

 

(p) Payment-in-kind security.

 

(r) Remaining maturities of floating rate loans may be less than stated maturities shown as a result of contractual or optional prepayments by the borrower. Such prepayments cannot be predicted with certainty. These loans may be subject to restrictions on resale. Floating rate loans generally have rates of interest which are determined periodically by reference to a base lending rate plus a premium.

 

(v) Underlying fund that is available only to investment companies managed by MFS. The rate quoted is the annualized seven-day yield of the fund at period end.

 

(z) Restricted securities are not registered under the Securities Act of 1933 and are subject to legal restrictions on resale. These securities generally may be resold in transactions exempt from registration or to the public if the securities are subsequently registered. Disposal of these securities may involve time-consuming negotiations and prompt sale at an acceptable price may be difficult. The fund holds the following restricted securities:

 

Restricted Securities    Acquisition
Date
   Cost      Current
Market
Value
 
American Media Operations, Inc., 9%, 2013    1/29/09-10/15/10      $21,516         $28,432   
American Media Operations, Inc., 14%, 2013    1/29/09-5/01/10      195,688         167,900   
Banc of America Commercial Mortgage, Inc., FRN, 6.381%, 2051    6/19/08      327,813         132,076   
Bonten Media Acquisition Co., 9.75%, 2015    6/26/09-5/15/10      26,567         25,582   
Credit Acceptance Corp., 9.125%, 2017    1/25/10      131,915         141,075   
Dunkin Finance Corp., 9.625%, 2018    11/15/10      39,401         40,250   
Giraffe Acquisition Corp., 9.125%, 2018    11/18/10      70,000         70,350   
Hanesbrands, Inc., 6.375%, 2020    11/04/10      110,000         105,050   
LBI Media, Inc., 8.5%, 2017    7/18/07      148,132         122,250   
Local TV Finance LLC, 10%, 2015    5/02/07      210,698         179,446   
Lyondell Chemical Co., 8%, 2017    11/02/10      110,412         107,875   

 

26


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Portfolio of Investments – continued

 

Restricted Securities - continued    Acquisition
Date
     Cost      Current
Market
Value
 
Nationstar Mortgage LLC, 10.875%, 2015      3/23/10-8/06/10         $199,821         $209,088   
Nortek, Inc., 10%, 2018      11/18/10         120,000         120,000   
Orascom Telecom Finance S.C.A., 7.875%, 2014      2/01/07         225,000         211,500   
Polypore International, Inc., 7.5%, 2017      11/10/10         40,000         40,500   
Sappi Papier Holding GmbH, 6.75%, 2012      7/29/10-8/02/10         90,521         92,475   
SunGard Data Systems, Inc., 7.375%, 2018      11/01/10         100,000         99,000   
SunGard Data Systems, Inc., 7.625%, 2020      11/01/10-11/17/10         105,674         105,000   
USI Holdings Corp., 9.75%, 2015      4/26/07-9/13/07         556,833         572,125   
Wind Acquisition Finance S.A., 7.25%, 2018      11/18/10         208,580         206,850   
XM Satellite Radio, Inc., 7.625%, 2018      11/04/10-11/18/10         73,803         69,650   
Total Restricted Securities            $2,846,474   
% of Net Assets            4.5%   

The following abbreviations are used in this report and are defined:

 

FRN   Floating Rate Note. Interest rate resets periodically and may not be the rate reported at period end.
PLC   Public Limited Company
REIT   Real Estate Investment Trust

Abbreviations indicate amounts shown in currencies other than the U.S. dollar. All amounts are stated in U.S. dollars unless otherwise indicated. A list of abbreviations is shown below:

 

EUR   Euro

Derivative Contracts at 11/30/10

Forward Foreign Currency Exchange Contracts at 11/30/10

 

Type   Currency   Counterparty   Contracts
to
Deliver/
Receive
    Settlement
Date Range
  In
Exchange
For
    Contracts at
Value
    Net
Unrealized
Appreciation
(Depreciation)
 
Liability Derivatives                                 
SELL   EUR   UBS AG     814,303      12/15/10   $ 1,035,801      $ 1,056,963      $ (21,162
                   

Futures Contracts Outstanding at 11/30/10

 

Description   Currency     Contracts     Value   Expiration Date     Unrealized
Appreciation
(Depreciation)
 
Asset Derivatives          
Interest Rate Futures          
U.S. Treasury Note 10 yr (Short)     USD        8      $992,875     March - 2011        $2,535   
               

At November 30, 2010, the fund had sufficient cash and/or other liquid securities to cover any commitments under these derivative contracts.

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENT OF ASSETS AND LIABILITIES

At 11/30/10

This statement represents your fund’s balance sheet, which details the assets and liabilities comprising the total value of the fund.

 

Assets                  

Investments-

     

Non-affiliated issuers, at value (identified cost, $81,878,093)

     $81,734,046      

Underlying funds, at cost and value

     1,209,589            

Total investments, at value (identified cost, $83,087,682)

              $82,943,635   

Cash

     15,728      

Restricted cash

     11,200      

Receivables for

     

Investments sold

     741,660      

Interest

     1,855,511      

Receivable from investment adviser

     15,070      

Other assets

     6,321            

Total assets

              $85,589,125   
Liabilities                  

Notes payable

     $22,000,000      

Payables for

     

Distributions

     24      

Forward foreign currency exchange contracts

     21,162      

Daily variation margin on open futures contracts

     1,500      

Investments purchased

     279,818      

Payable to affiliates

     

Investment adviser

     23,297      

Transfer agent and dividend disbursing costs

     863      

Administrative services fee

     105      

Payable for independent Trustees’ compensation

     4,346      

Accrued interest expense

     88,942      

Accrued expenses and other liabilities

     77,038            

Total liabilities

              $22,497,095   

Net assets

              $63,092,030   
Net assets consist of                  

Paid-in capital

     $78,601,715      

Unrealized appreciation (depreciation) on investments and translation of assets and liabilities in foreign currencies

     (162,964   

Accumulated net realized gain (loss) on investments and foreign currency transactions

     (16,073,646   

Undistributed net investment income

     726,925            

Net assets

              $63,092,030   

Shares of beneficial interest outstanding

              20,876,833   

Net asset value per share (net assets of
$63,092,030 / 20,876,833 shares of beneficial interest outstanding)

              $3.02   

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENT OF OPERATIONS

Year ended 11/30/10

This statement describes how much your fund earned in investment income and accrued in expenses. It also describes any gains and/or losses generated by fund operations.

 

Net investment income                  

Income

     

Interest

     $7,067,114      

Dividends

     16,479      

Dividends from underlying funds

     3,630            

Total investment income

              $7,087,223   

Expenses

     

Management fee

     $651,730      

Transfer agent and dividend disbursing costs

     15,379      

Administrative services fee

     18,908      

Independent Trustees’ compensation

     14,136      

Stock exchange fee

     23,717      

Custodian fee

     16,717      

Interest expense

     518,291      

Shareholder communications

     20,428      

Auditing fees

     69,972      

Legal fees

     17,273      

Miscellaneous

     29,198            

Total expenses

              $1,395,749   

Fees paid indirectly

     (123   

Reduction of expenses by investment adviser

     (257,841         

Net expenses

              $1,137,785   

Net investment income

              $5,949,438   
Realized and unrealized gain (loss) on investments and foreign currency transactions                  

Realized gain (loss) (identified cost basis)

     

Investment transactions

     $(253,541   

Futures contracts

     6,944      

Foreign currency transactions

     200,765            

Net realized gain (loss) on investments and foreign currency transactions

              $(45,832

Change in unrealized appreciation (depreciation)

     

Investments

     $5,939,728      

Futures contracts

     2,535      

Translation of assets and liabilities in foreign currencies

     18,198            

Net unrealized gain (loss) on investments and foreign currency translation

              $5,960,461   

Net realized and unrealized gain (loss) on investments and foreign currency

              $5,914,629   

Change in net assets from operations

              $11,864,067   

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENTS OF CHANGES IN NET ASSETS

These statements describe the increases and/or decreases in net assets resulting from operations, any distributions, and any shareholder transactions.

 

     Years ended 11/30  
     2010      2009  
Change in net assets              
From operations                  

Net investment income

     $5,949,438         $5,758,528   

Net realized gain (loss) on investments and foreign currency transactions

     (45,832      (5,858,494

Net unrealized gain (loss) on investments and foreign currency translation

     5,960,461         26,954,370   

Change in net assets from operations

     $11,864,067         $26,854,404   
Distributions declared to shareholders                  

From net investment income

     $(5,568,497      $(6,086,022

Change in net assets from fund share transactions

     $112,557         $(10,536

Total change in net assets

     $6,408,127         $20,757,846   
Net assets                  

At beginning of period

     56,683,903         35,926,057   

At end of period (including undistributed net investment income of $726,925 and accumulated distributions in excess of net investment income of $258,361, respectively)

     $63,092,030         $56,683,903   

See Notes to Financial Statements

 

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Financial Statements

 

STATEMENT OF CASH FLOWS

Year ended 11/30/10

This statement provides a summary of cash flows from investment activity for the fund.

 

Cash flows from operating activities:         

Net increase in net assets from operations

     $11,864,067   
Adjustments to reconcile change in net assets from operations to net cash provided by operating activities:         

Purchase of investment securities

     (60,566,636

Proceeds from disposition of investment securities

     59,086,342   

Proceeds from futures transactions

     6,944   

Proceeds from disposition of short-term investments, net

     120,464   

Realized gain/loss on investments

     253,541   

Realized gain/loss on futures transactions

     (6,944

Unrealized appreciation/depreciation on investments

     (5,939,728

Unrealized appreciation/depreciation on foreign currency contracts

     (21,354

Net amortization/accretion of income

     (267,808

Increase in dividends and interest receivable

     (144,206

Decrease in accrued expenses and other liabilities

     (25,460

Increase in receivable from investment adviser

     (15,070

Increase in payable for daily variation margin on open futures contracts

     1,500   

Increase in restricted cash

     (11,200

Decrease in other assets

     8,674   

Net cash provided by operating activities

     $4,343,126   
Cash flows from financing activities:         

Distributions paid in cash

     (5,486,954

Increase in notes payable

     1,000,000   

Increase in interest payable

     3,119   

Net cash used by financing activities

     $(4,483,835

Net decrease in cash

     $(140,709
Cash:         

Beginning of period (including foreign currency of $153,300)

     $156,437   

End of period

     $15,728   

Supplemental disclosure of cash flow information:

Cash paid during the year for interest $515,172.

See Notes to Financial Statements

 

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Financial Statements

 

FINANCIAL HIGHLIGHTS

The financial highlights table is intended to help you understand the fund’s financial performance for the past 5 years. Certain information reflects financial results for a single fund share. The total returns in the table represent the rate by which an investor would have earned (or lost) on an investment in the fund share class (assuming reinvestment of all distributions) held for the entire period.

 

     Years ended 11/30  
     2010      2009     2008     2007      2006  

Net asset value, beginning of period

     $2.72         $1.72        $3.47        $3.64         $3.60   
Income (loss) from investment operations                                     

Net investment income (d)

     $0.29         $0.28        $0.33        $0.29         $0.29   

Net realized and unrealized gain (loss) on investments and foreign currency

     0.28         1.01        (1.76     (0.18      0.09   

Total from investment operations

     $0.57         $1.29        $(1.43     $0.11         $0.38   
Less distributions declared to shareholders                                     

From net investment income

     $(0.27      $(0.29     $(0.32     $(0.28      $(0.34

Net increase from repurchase of capital shares

     $—         $ 0.00  (w)      $ 0.00  (w)      $—         $—   

Net asset value, end of period

     $3.02         $2.72        $1.72        $3.47         $3.64   

Per share market value,
end of period

     $3.01         $2.42        $1.35        $2.97         $3.46   

Total return at market value (%)

     36.61         107.88        (48.49     (6.95      21.22   

Total return at net asset
value (%) (j)(r)(s)(t)

     21.94         83.39        (43.83     3.34         11.60   
Ratios (%) (to average net assets) and Supplemental data:                                      

Expenses before expense reductions (f)

     2.31         2.85        3.55        3.35         3.33   

Expenses after expense reductions (f)

     1.88         2.16        2.81        3.24         3.12   

Net investment income

     9.85         12.69        10.80        7.97         8.24   

Portfolio turnover

     57         45        62        90         54   

Net assets at end of period (000 omitted)

     $63,092         $56,684        $35,926        $72,833         $76,433   
Supplemental Ratios (%):                                           

Expenses after expense reductions and excluding interest expense (f)

     1.03         1.08        1.01        1.04         1.04   
Senior Securities:                                           

Total notes payable outstanding (000 omitted)

     $22,000         $21,000        $17,000        $28,500         $28,500   

Asset coverage per $1,000 of indebtedness (k)

     $3,868         $3,699        $3,113        $3,556         $3,682   

 

(d) Per share data is based on average shares outstanding.
(f) Ratios do not reflect reductions from fees paid indirectly, if applicable.

 

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(j) Total return at net asset value is calculated using the net asset value of the fund, not the publicly traded price and therefore may be different than the total return at market value.
(k) Calculated by subtracting the trust’s total liabilities (not including notes payable) from the trust’s total assets and dividing this number by the notes payable outstanding and then multiplying by 1,000.
(r) Certain expenses have been reduced without which performance would have been lower.
(s) From time to time the fund may receive proceeds from litigation settlements, without which performance would be lower.
(t) Prior to November 30, 2007, total return at net asset value is unaudited.
(w) Per share amount was less than $0.01.

See Notes to Financial Statements

 

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NOTES TO FINANCIAL STATEMENTS

 

(1)   Business and Organization

MFS Intermediate High Income Fund (the fund) 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 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 revenues and expenses 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 fund’s Statement of Assets and Liabilities through the date that the financial statements were issued. The fund invests in high-yield securities rated below investment grade. Investments in high-yield securities involve greater degrees of credit and market risk than investments in higher-rated securities and tend to be more sensitive to economic conditions. The fund invests in foreign securities, including securities of emerging market issuers. 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. The markets of emerging markets countries are generally more volatile than the markets of developed countries with more mature economies. All of the risks of investing in foreign securities previously described are heightened when investing in emerging markets countries.

Investment Valuations – Debt instruments and floating rate loans (other than short-term instruments), including restricted debt instruments, are generally valued at an evaluated or composite bid as provided by a third-party pricing service. Equity securities, including restricted equity securities, are generally valued at the last sale or official closing price as provided by a third-party pricing service on the market or exchange on which they are primarily traded. Equity securities, for which there were no sales reported that day, are generally valued at the last quoted daily bid quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Equity securities held short, for which there were no sales reported for that day, are generally valued at the last quoted daily ask quotation as provided by a third-party pricing service on the market or exchange on which such securities are primarily traded. Short-term

 

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instruments with a maturity at issuance of 60 days or less generally are valued at amortized cost, which approximates market value. Exchange-traded options are generally valued at the last sale or official closing price as provided by a third-party pricing service on the exchange on which such options are primarily traded. Exchange-traded options for which there were no sales reported that day are generally valued at the last daily bid quotation as provided by a third-party pricing service on the exchange on which such options are primarily traded. Options not traded on an exchange are generally valued at a broker/dealer bid quotation. Foreign currency options are generally valued at valuations provided by a third-party pricing service. Futures contracts are generally valued at last posted settlement price as provided by a third-party pricing service on the market on which they are primarily traded. Futures contracts for which there were no trades that day for a particular position are generally valued at the closing bid quotation as provided by a third-party pricing service on the market on which such futures contracts are primarily traded. Forward foreign currency contracts are generally valued at the mean of bid and asked prices for the time period interpolated from rates provided by a third-party pricing service for proximate time periods. 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. Values obtained from 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 fund’s 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 fund’s 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 investment’s 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 fund’s net asset

 

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value, or after the halting 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 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 fund’s 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 fund’s 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 fund’s 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 investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fund’s 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 adviser’s own assumptions in determining the fair value of investments. Other financial instruments are derivative instruments not reflected in total investments, such as futures, forwards, swap contracts, and written options. The following is a summary of the levels used as of November 30, 2010 in valuing the fund’s assets or liabilities:

 

Investments at Value    Level 1      Level 2      Level 3      Total  
Equity Securities      $486,456         $412,351         $—         $898,807   
Corporate Bonds              69,975,729                 69,975,729   
Commercial Mortgage-Backed Securities              1,126,609                 1,126,609   
Foreign Bonds              8,832,048                 8,832,048   
Floating Rate Loans              900,853                 900,853   
Mutual Funds      1,209,589                         1,209,589   
Total Investments      $1,696,045         $81,247,590         $—         $82,943,635   
Other Financial Instruments                            
Futures      $2,535         $—         $—         $2,535   
Forward Currency Contracts              (21,162              (21,162

 

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For further information regarding security characteristics, see the Portfolio of Investments.

The following is a reconciliation of Level 3 assets for which significant unobservable inputs were used to determine fair value. The table presents the activity of Level 3 securities held at the beginning and the end of the period.

 

     Investments
in Securities
 
Balance as of 11/30/09      $6,315   

Accrued discounts/premiums

       

Realized gain (loss)

       

Change in unrealized appreciation (depreciation)

     (6,315

Purchases

       

Sales

       

Transfers into Level 3

       

Transfers out of Level 3

     0   
Balance as of 11/30/10      $—   

Foreign Currency Translation – 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 or on the reporting date for foreign denominated receivables and payables. 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 receivables, payables, 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.

Derivatives – The fund may use derivatives for different purposes, including to earn income and enhance returns, to increase or decrease exposure to a particular market, to manage or adjust the risk profile of the fund, or as alternatives to direct investments. Derivatives may be used for hedging or non-hedging purposes. While hedging can reduce or eliminate losses, it can also reduce or eliminate gains. When the fund uses derivatives as an investment to increase market exposure, or for hedging purposes, gains and losses from derivative instruments may be substantially greater than the derivative’s original cost.

Derivative instruments include written options, purchased options, futures contracts, forward foreign currency exchange contracts, and swap agreements. The fund’s period end derivatives, as presented in the Portfolio of Investments and the associated Derivative Contract Tables, generally are indicative of the volume of its derivative activity during the period.

 

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The following table presents, by major type of derivative contract, the fair value, on a gross basis, of the asset and liability components of derivatives held by the fund at November 30, 2010 as reported in the Statement of Assets and Liabilities:

 

        Fair Value (a)  
Risk   Derivative   Asset Derivatives     Liability Derivatives  

Interest Rate Contracts

  Interest Rate Futures     $2,535        $—   

Foreign Exchange Contracts

  Forward Foreign Currency Exchange Contracts            (21,162

Equity Contracts

  Purchased Equity Options     54,180          
Total       $56,715      $ (21,162

 

(a) The value of purchased options outstanding is included in total investments, at value, within the fund’s Statement of Assets and Liabilities. The value of futures contracts outstanding includes cumulative appreciation (depreciation) as reported in the fund’s Portfolio of Investments. Only the current day variation margin for futures contracts is separately reported within the fund’s Statement of Assets and Liabilities.

The following table presents, by major type of derivative contract, the realized gain (loss) on derivatives held by the fund for the year ended November 30, 2010 as reported in the Statement of Operations:

 

Risk    Futures
Contracts
     Foreign
Currency
Transactions
     Investment
Transactions
(Purchased
Options)
 
Interest Rate Contracts      $6,944         $—         $—   
Foreign Exchange Contracts              206,975           
Equity Contracts                      14,062   
Total      $6,944         $206,975         $14,062   

The following table presents, by major type of derivative contract, the change in unrealized appreciation (depreciation) on derivatives held by the fund for the year ended November 30, 2010 as reported in the Statement of Operations:

 

Risk    Futures
Contracts
     Translation
of Assets and
Liabilities in
Foreign
Currencies
     Investments
(Purchased
Options)
 
Interest Rate Contracts      $2,535         $—         $—   
Foreign Exchange Contracts              21,354           
Equity Contracts                      (16,074
Total      $2,535         $21,354         $(16,074

Derivative counterparty credit risk is managed through formal evaluation of the creditworthiness of all potential counterparties. On certain over-the-counter derivatives, the fund attempts to reduce its exposure to counterparty credit risk

 

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whenever possible by entering into an International Swaps and Derivatives Association (ISDA) Master Agreement on a bilateral basis with each of the counterparties with whom it undertakes a significant volume of transactions. The ISDA Master Agreement gives each party to the agreement the right to terminate all transactions traded under such agreement if there is a certain deterioration in the credit quality of the other party. The ISDA Master Agreement gives the fund the right, upon an event of default by the applicable counterparty or a termination of the agreement, to close out all transactions traded under such agreement and to net amounts owed under each transaction to one net amount payable by one party to the other. This right to close out and net payments across all transactions traded under the ISDA Master Agreement could result in a reduction of the fund’s credit risk to such counterparty equal to any amounts payable by the fund under the applicable transactions, if any. However, absent an event of default by the counterparty or a termination of the agreement, the ISDA Master Agreement does not result in an offset of reported amounts of assets and liabilities in the Statement of Assets and Liabilities across transactions between the fund and the applicable counterparty.

Collateral requirements differ by type of derivative. Collateral or margin requirements are set by the broker or exchange clearing house for exchange traded derivatives (i.e., futures and exchange-traded options) while collateral terms are contract specific for over-the-counter traded derivatives (i.e., forwards, swaps and over-the-counter options). For derivatives traded under an ISDA Master Agreement, the collateral requirements are netted across all transactions traded under such agreement and one amount is posted from one party to the other to collateralize such obligations. Cash collateral that has been pledged to cover obligations of the fund under derivative contracts, if any, will be reported separately on the Statement of Assets and Liabilities as restricted cash. Securities collateral pledged for the same purpose, if any, is noted in the Portfolio of Investments.

Purchased Options – The fund purchased call options for a premium. Purchased call options entitle the holder to buy a specified number of shares or units of a particular security, currency or index at a specified price at a specified date or within a specified period of time. Purchasing call options may be used to hedge against an anticipated increase in the dollar cost of securities or currency to be acquired or to increase the fund’s exposure to an underlying instrument.

The premium paid is initially recorded as an investment in the Statement of Assets and Liabilities. That investment is subsequently marked-to-market daily with the difference between the premium paid and the market value of the purchased option being recorded as unrealized appreciation or depreciation. Premiums paid for purchased call options which have expired are treated as

 

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realized losses on investments in the Statement of Operations. Upon the exercise or closing of a purchased call option, the premium paid is added to the cost of the security or financial instrument.

The risk in purchasing an option is that the fund pays a premium whether or not the option is exercised. The fund’s maximum risk of loss due to counterparty credit risk is limited to the market value of the option. For over-the-counter options, this risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.

Futures Contracts – The fund entered into futures contracts which may be used to gain or to hedge against broad market, interest rate or currency exposure. A futures contract represents a commitment for the future purchase or sale of an asset at a specified price on a specified date.

Upon entering into a futures contract, the fund is required to deposit with the broker, either in cash or securities, an initial margin in an amount equal to a certain percentage of the notional amount of the contract. Subsequent payments (variation margin) are made or received by the fund each day, depending on the daily fluctuations in the value of the contract, and are recorded for financial statement purposes as unrealized gain or loss by the fund until the contract is closed or expires at which point the gain or loss on futures is realized.

The fund bears the risk of interest rates, exchange rates or securities prices moving unexpectedly, in which case, the fund may not achieve the anticipated benefits of the futures contracts and may realize a loss. While futures may present less counterparty risk to the fund since the contracts are exchange traded and the exchange’s clearinghouse guarantees payments to the broker, there is still counterparty credit risk due to the insolvency of the broker. The fund’s maximum risk of loss due to counterparty credit risk is equal to the margin posted by the fund to the broker plus any gains or minus any losses on the outstanding futures contracts.

Forward Foreign Currency Exchange Contracts – The fund entered into forward foreign currency exchange contracts for the purchase or sale of a specific foreign currency at a fixed price on a future date. These contracts may be used to hedge the fund’s currency risk or for non-hedging purposes. For hedging purposes, the fund may enter into contracts to deliver or receive foreign currency that the fund will receive from or use in its normal investment activities. The fund may also use contracts to hedge against declines in the value of foreign currency denominated securities due to

 

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unfavorable exchange rate movements. For non-hedging purposes, the fund may enter into contracts with the intent of changing the relative exposure of the fund’s portfolio of securities to different currencies to take advantage of anticipated exchange rate changes.

Forward foreign currency exchange contracts are adjusted by the daily exchange rate of the underlying currency and any unrealized gains or losses are recorded as a receivable or payable for forward foreign currency exchange contracts until the contract settlement date. On contract settlement date, any gain or loss on the contract is recorded as realized gains or losses on foreign currency transactions.

Risks may arise upon entering into these contracts from unanticipated movements in the value of the contract and from the potential inability of counterparties to meet the terms of their contracts. Generally, the fund’s maximum risk due to counterparty credit risk is the unrealized gain on the contract due to our use of continuous linked settlement, an industry accepted settlement system. This risk is mitigated in cases where there is an ISDA Master Agreement between the fund and the counterparty providing for netting as described above and for posting of collateral by the counterparty to the fund to cover the fund’s exposure to the counterparty under such ISDA Master Agreement.

Loans and Other Direct Debt Instruments – The fund invests in loans and loan participations or other receivables. These investments may include standby financing commitments, including revolving credit facilities, which obligate the fund to supply additional cash to the borrower on demand. Loan participations involve a risk of insolvency of the lending bank or other financial intermediary.

Statement of Cash Flows – Information on financial transactions which have been settled through the receipt or disbursement of cash is presented in the Statement of Cash Flows. The cash amount shown in the Statement of Cash Flows is the amount included within the fund’s Statement of Assets and Liabilities and includes cash on hand at its custodian bank and does not include any short term investments.

Indemnifications – Under the fund’s 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 fund’s 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.

 

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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 U.S. generally accepted accounting principles. The fund earns certain fees in connection with its floating rate loan purchasing activities. These fees are in addition to interest payments earned and may include amendment fees, commitment fees, facility fees, consent fees, and prepayment fees. Commitment fees are recorded on an accrual basis as income in the accompanying financial statements. Dividends received in cash are recorded on the ex-dividend date. Certain dividends from foreign securities will be recorded when the fund is informed of the dividend if such information is obtained subsequent to 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. Debt obligations may be placed on non-accrual status or set to accrue at a rate of interest less than the contractual coupon when the collection of all or a portion of interest has become doubtful. Interest income for those debt obligations may be further reduced by the write-off of the related interest receivables when deemed uncollectible.

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.

Fees Paid Indirectly – The fund’s custody fee may be reduced according to an arrangement that measures the value of cash deposited with the custodian by the fund. This amount, for the year ended November 30, 2010, is shown as a reduction of total expenses on 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 fund’s federal tax returns for the prior three fiscal years remain subject to examination by the Internal Revenue Service. Foreign taxes, if any, have been accrued by the fund in the accompanying financial statements.

Distributions to shareholders are recorded on the ex-dividend date. 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

 

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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. Distributions in excess of net investment income or net realized gains are temporary overdistributions for financial statement purposes resulting from differences in the recognition or classification of income or distributions for financial statement and tax purposes.

Book/tax differences primarily relate to expiration of capital loss carryforwards, amortization and accretion of debt securities, and defaulted bonds.

The tax character of distributions declared to shareholders for the last two fiscal years is as follows:

 

    

11/30/10

     11/30/09  
Ordinary income (including any short-term capital gains)      $5,568,497         $6,086,022   

The federal tax cost and the tax basis components of distributable earnings were as follows:

 

As of 11/30/10       
Cost of investments      $82,888,586   
Gross appreciation      4,988,415   
Gross depreciation      (4,933,366
Net unrealized appreciation (depreciation)      $55,049   
Undistributed ordinary income      896,107   
Capital loss carryforwards      (16,270,207
Other temporary differences      (190,634

As of November 30, 2010, the fund had capital loss carryforwards available to offset future realized gains. Such losses expire as follows:

 

11/30/13      $(796,437
11/30/14      (2,075,017
11/30/16      (5,956,332
11/30/17      (6,983,828
11/30/18      (458,593
     $(16,270,207

 

(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 0.65% of the fund’s average daily net assets. The fund pays the adviser a monthly fee equal to 20% of the fund’s leverage income after deducting the expenses of leveraging (“Net leverage income”);

 

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provided, however, if the fund’s net leverage income is less than zero, the adviser pays the fund the percentage indicated of the fund’s net leverage income.

The management fee incurred for the year ended November 30, 2010 was equivalent to an annual effective rate of 1.08% of the fund’s average daily net assets.

The investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, such that the total annual fund operating expenses do not exceed 1.00% annually of the fund’s average daily net assets. This written agreement terminated on November 30, 2010. For the year ended November 30, 2010, this reduction amounted to $257,546 and is reflected as a reduction of total expenses in the Statement of Operations.

Effective December 1, 2010, the investment adviser has agreed in writing to pay a portion of the fund’s total annual operating expenses, exclusive of interest, taxes, extraordinary expenses, brokerage and transaction costs and investment-related expenses, such that the total annual fund operating expenses do not exceed 1.34% annually of the fund’s average daily net assets. This written agreement will continue until modified by the fund’s Board of Trustees, but such agreement will continue at least until November 30, 2011.

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 year ended November 30, 2010, these fees paid to MFSC amounted to $5,279.

Administrator – MFS provides certain financial, legal, shareholder communications, compliance, and other administrative services to the fund. Under an administrative services agreement, the fund partially 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 year ended November 30, 2010 was equivalent to an annual effective rate of 0.0313% of the fund’s 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 to officers of the fund who are also officers of the investment adviser, all of whom receive remuneration for their services to the fund from MFS. Certain officers and Trustees of the fund are officers or directors of MFS and MFSC.

 

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Notes to Financial Statements – continued

 

Deferred Trustee Compensation – Prior to MFS’ appointment as investment adviser to the fund, the fund’s former independent Trustees participated in a Deferred Compensation Plan (the “Former Colonial Trustees Plan” or “Plan”). The fund’s current independent Trustees are not allowed to defer compensation under the Former Colonial Trustees Plan. Amounts deferred under the Plan are invested in shares of certain non-MFS funds selected by the former independent Trustees as notional investments. Deferred amounts represent an unsecured obligation of the fund until distributed in accordance with the Plan. Included in other assets and payable for independent Trustees’ compensation on the Statement of Assets and Liabilities is $4,338 of deferred Trustees’ compensation. There is no current year expense associated with the Former Colonial Trustees Plan.

Other – This fund and certain other funds managed by MFS (the funds) have entered into services agreements (the Agreements) which provide for payment of fees by the funds to Tarantino LLC and Griffin Compliance LLC in return for the provision of services of an Independent Chief Compliance Officer (ICCO) and Assistant ICCO, respectively, for the funds. The ICCO and Assistant ICCO are officers of the funds and the sole members of Tarantino LLC and Griffin Compliance LLC, respectively. The funds can terminate the Agreements with Tarantino LLC and Griffin Compliance LLC at any time under the terms of the Agreements. For the year ended November 30, 2010, the aggregate fees paid by the fund to Tarantino LLC and Griffin Compliance LLC were $576 and are included in miscellaneous expense on the Statement of Operations. MFS has agreed to reimburse the fund for a portion of the payments made by the fund in the amount of $295, which is shown as a reduction of total expenses in the Statement of Operations. Additionally, MFS has agreed to bear all expenses associated with office space, other administrative support, and supplies provided to the ICCO and Assistant ICCO.

The fund invests in the MFS Institutional Money Market Portfolio which is managed by MFS and seeks a high level of current income consistent with preservation of capital and liquidity. Income earned on this investment is included in dividends from underlying funds on the Statement of Operations. This money market fund does not pay a management fee to MFS.

 

(4)   Portfolio Securities

Purchases and sales of investments, other than U.S. Government securities, purchased option transactions, and short-term obligations, aggregated $45,333,043 and $45,128,125, respectively.

 

(5)   Shares of Beneficial Interest

The fund’s 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.

 

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Notes to Financial Statements – continued

 

During the year ended November 30, 2010, the fund did not repurchase any shares. The fund repurchased and retired 80,800 shares of beneficial interest during the year ended November 30, 2009 at an average price per share of $1.33 and a weighted average discount of 18.00% per share. Transactions in fund shares were as follows:

 

     Year ended
11/30/10
     Year ended
11/30/09
 
     Shares      Amount      Shares      Amount  
Shares issued to shareholders in
reinvestment of distributions
     38,924         $112,557         50,514         $96,825   
Shares reacquired                      (80,800      (107,361
Net change      38,924         $112,557         (30,286      $(10,536

 

(6)   Loan Agreement

The fund has a credit agreement with a bank for a revolving secured line of credit that can be drawn upon up to $20,000,000. At November 30, 2010, the fund had outstanding borrowings under this agreement in the amount of $12,000,000, which are secured by a lien on the fund’s assets. The loan’s carrying value on the fund’s Statement of Assets and Liabilities approximates its fair value. The credit agreement matures on January 14, 2011. Subsequent to the fiscal year end, the Trustees approved the renewal of the revolving secured line of credit up to the amount of $30,000,000 on substantially similar terms for an additional 364 day period. Interest is charged at a rate per annum equal to LIBOR plus an agreed upon spread or an alternate rate, at the option of the borrower, stated as the greater of Overnight LIBOR or the Federal Funds Rate each plus an agreed upon spread. The fund also has a Term Loan B outstanding with a bank in the amount of $10,000,000 which is secured by a lien on the fund’s assets. The loan’s carrying value on the fund’s Statement of Assets and Liabilities approximates its fair value. This term loan bears interest at 3.68% per annum and matures on January 18, 2011.

Borrowings under both of these agreements can be made for liquidity or leverage purposes. The fund incurred interest expense in the amount of $518,291 during the period in connection with these loan agreements. The fund also incurred a commitment fee of $15,348 based on the average daily unused portion of the revolving line of credit which is reported in miscellaneous expense on the Statement of Operations. For the year ended November 30, 2010, the average loan balance was $21,613,699 at a weighted average annual interest rate of 2.40%. The fund is subject to certain covenants including, but not limited to, requirements with respect to asset coverage, portfolio diversification and liquidity.

 

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Notes to Financial Statements – continued

 

 

(7)   Transactions in Underlying Funds-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 fund assumes the following to be affiliated issuers:

 

      Beginning
Shares/Par
Amount
     Acquisitions
Shares/Par
Amount
     Dispositions
Shares/Par
Amount
     Ending
Shares/Par
Amount
 
MFS Institutional Money
Market Portfolio
     1,330,053         24,082,382         (24,202,846      1,209,589   
Underlying Funds    Realized
Gain (Loss)
     Capital Gain
Distributions
     Dividend
Income
     Ending
Value
 
MFS Institutional Money
Market Portfolio
     $—         $—         $3,630         $1,209,589   

 

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REPORT OF INDEPENDENT REGISTERED

PUBLIC ACCOUNTING FIRM

To the Trustees and Shareholders of MFS Intermediate High Income Fund:

We have audited the accompanying statement of assets and liabilities of MFS Intermediate High Income Fund (the Fund), including the portfolio of investments, as of November 30, 2010, and the related statements of operations and cash flows for the year then ended, the statements of changes in net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended. These financial statements and financial highlights are the responsibility of the Fund’s management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights for the year ended November 30, 2006 were audited by another independent registered public accounting firm whose report, dated January 25, 2007, expressed an unqualified opinion on those financial highlights.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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. We were not engaged to perform an audit of the Fund’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and financial highlights, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of November 30, 2010, by correspondence with the Fund’s custodian and brokers or by other appropriate auditing procedures where replies from brokers were not received. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of MFS Intermediate High Income Fund at November 30, 2010, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the four years in the period then ended, in conformity with U.S. generally accepted accounting principles.

LOGO

Boston, Massachusetts

January 14, 2011

 

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RESULTS OF SHAREHOLDER MEETING

(unaudited)

At the annual meeting of shareholders of MFS Intermediate High Income Fund, which was held on October 7, 2010, the following actions were taken:

Item 1. To elect the following individuals as Trustees:

 

     Number of Shares  

Nominee

   For      Withheld Authority  
Maureen R. Goldfarb      17,236,819.068         489,236.908   
Robert J. Manning      17,046,221.068         679,834.908   
Laurie J. Thomsen      17,211,406.068         514,649.908   

 

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TRUSTEES AND OFFICERS — IDENTIFICATION AND BACKGROUND

The Trustees and officers of the Trust, as of January 1, 2011, are listed below, together with their principal occupations during the past five years. (Their titles may have varied during that period.) The address of each Trustee and officer is 500 Boylston Street, Boston, Massachusetts 02116.

 

Name, Date of Birth

 

Position(s) Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal Occupations During

the Past Five Years & Other

Directorships (j)

INTERESTED TRUSTEES      

Robert J. Manning (k)

(born 10/20/63)

  Trustee   February 2004   2013   Massachusetts Financial Services Company, Chairman, Chief Executive Officer and Director; President (until December 2009); Chief Investment Officer (until July 2010)

Robert C. Pozen (k)

(born 8/08/46)

  Trustee   February 2004   2012   Massachusetts Financial Services Company, Chairman Emeritus; Chairman (until July 2010); Medtronic, Inc, (medical devices), Director (since 2004); Harvard Business School (education), Senior Lecturer (since 2008); Telesat (satellite communications), Director (until November 2007); Bell Canada Enterprises (telecommunications), Director (until February 2009)
INDEPENDENT TRUSTEES      

David H. Gunning

(born 5/30/42)

  Trustee and Chair of Trustees   January 2004   2012   Retired; Cleveland-Cliffs Inc. (mining products and service provider), Vice Chairman/Director (until May 2007); Lincoln Electric Holdings, Inc. (welding equipment manufacturer), Director; Development Alternatives, Inc. (consulting), Portman Limited (mining), Director (until 2008)

Robert E. Butler

(born 11/29/41)

  Trustee   January 2006   2012   Consultant – investment company industry regulatory and compliance matters; PricewaterhouseCoopers LLP (professional services firm), Partner (until 2002)

 

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Trustees and Officers – continued

 

Name, Date of Birth

 

Position(s) Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal Occupations During

the Past Five Years & Other

Directorships (j)

Maureen R. Goldfarb

(born 4/6/55)

  Trustee   January 2009   2013   Private investor; John Hancock Financial Services, Inc., Executive Vice President (until 2004); John Hancock Mutual Funds, Trustee and Chief Executive Officer (until 2004)

William R. Gutow

(born 9/27/41)

  Trustee   December 1993   2011   Private investor and real estate consultant ; Capital Entertainment Management Company (video franchise), Vice Chairman; Texas Donuts (donut franchise), Vice Chairman (since 2007); Atlantic Coast Tan (tanning salons), Vice Chairman (until 2007)

Michael Hegarty

(born 12/21/44)

  Trustee   December 2004   2011   Private Investor; AXA Financial (financial services and insurance), Vice Chairman and Chief Operating Officer (until 2001); The Equitable Life Assurance Society (insurance), President and Chief Operating Officer (until 2001)

John P. Kavanaugh

(born 11/4/54)

  Trustee   January 2009   2011   Private investor; The Hanover Insurance Group, Inc., Vice President and Chief Investment Officer (until 2006); Allmerica Investment Trust, Allmerica Securities Trust and Opus Investment Trust (investment companies), Chairman, President and Trustee (until 2006)

J. Dale Sherratt

(born 9/23/38)

  Trustee   June 1989   2012   Insight Resources, Inc. (acquisition planning specialists), President; Wellfleet Investments (investor in health care companies), Managing General Partner

Laurie J. Thomsen

(born 8/05/57)

  Trustee   March 2005   2013   Private investor; The Travelers Companies (property and casualty insurance), Director; New Profit, Inc. (venture philanthropy), Executive Partner (until 2010)

 

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Trustees and Officers – continued

 

Name, Date of Birth

 

Position(s) Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal Occupations During

the Past Five Years & Other

Directorships (j)

Robert W. Uek

(born 5/18/41)

  Trustee   January 2006   2011   Consultant to investment company industry; PricewaterhouseCoopers LLP (professional services firm), Partner (until 1999); TT International Funds (mutual fund complex), Trustee (until 2005); Hillview Investment Trust II Funds (mutual fund complex), Trustee (until 2005)
OFFICERS      

Maria F. DiOrioDwyer (k)

(born 12/01/58)

  President   March 2004   N/A   Massachusetts Financial Services Company, Executive Vice President and Chief Regulatory Officer (since March 2004) Chief Compliance Officer (since December 2006)

Christopher R. Bohane (k)

(born 1/18/74)

  Assistant Secretary and Assistant Clerk   July 2005   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel

John M. Corcoran (k)

(born 4/13/65)

  Treasurer   October 2008   N/A   Massachusetts Financial Services Company, Senior Vice President (since October 2008); State Street Bank and Trust (financial services provider), Senior Vice President, (until September 2008)

Ethan D. Corey (k)

(born 11/21/63)

  Assistant Secretary and Assistant Clerk   July 2005   N/A   Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel

David L. DiLorenzo (k)

(born 8/10/68)

  Assistant Treasurer   July 2005   N/A   Massachusetts Financial Services Company, Vice President

Timothy M. Fagan (k)

(born 7/10/68)

  Assistant Secretary and Assistant Clerk   September 2005   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel

Mark D. Fischer (k)

(born 10/27/70)

  Assistant Treasurer   July 2005   N/A   Massachusetts Financial Services Company, Vice President

 

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Trustees and Officers – continued

 

Name, Date of Birth

 

Position(s) Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal Occupations During

the Past Five Years & Other

Directorships (j)

Robyn L. Griffin

(born 7/04/75)

  Assistant Independent Chief Compliance Officer   August 2008   N/A   Griffin Compliance LLC (provider of compliance services), Principal (since August 2008); State Street Corporation (financial services provider), Mutual Fund Administration Assistant Vice President (October 2006 – July 2008); Liberty Mutual Group (insurance), Personal Market Assistant Controller (April 2006 – October 2006); Deloitte & Touche LLP (professional services firm), Senior Manager (prior to April 2006)

Brian E. Langenfeld (k)

(born 3/07/73)

  Assistant Secretary and Assistant Clerk   June 2006   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel (since May 2006); John Hancock Advisers, LLC, Assistant Vice President and Counsel (until April 2006)

Ellen Moynihan (k)

(born 11/13/57)

  Assistant Treasurer   April 1997   N/A   Massachusetts Financial Services Company, Senior Vice President

Susan S. Newton (k)

(born 3/07/50)

  Assistant Secretary and Assistant Clerk   May 2005   N/A   Massachusetts Financial Services Company, Senior Vice President and Associate General Counsel

Susan A. Pereira (k)

(born 11/05/70)

  Assistant Secretary and Assistant Clerk   July 2005   N/A   Massachusetts Financial Services Company, Vice President and Senior Counsel

Mark N. Polebaum (k)

(born 5/01/52)

  Secretary and Clerk   January 2006   N/A   Massachusetts Financial Services Company, Executive Vice President, General Counsel and Secretary (since January 2006); Wilmer Cutler Pickering Hale and Dorr LLP (law firm), Partner (until January 2006)

Frank L. Tarantino

(born 3/07/44)

  Independent Chief Compliance Officer   June 2004   N/A   Tarantino LLC (provider of compliance services), Principal

Richard S. Weitzel (k)

(born 7/16/70)

  Assistant Secretary and Assistant Clerk   October 2007   N/A   Massachusetts Financial Services Company, Vice President and Assistant General Counsel

 

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Trustees and Officers – continued

 

Name, Date of Birth

 

Position(s) Held

with Fund

 

Trustee/Officer

Since (h)

 

Term

Expiring

 

Principal Occupations During

the Past Five Years & Other

Directorships (j)

James O. Yost (k)

(born 6/12/60)

  Assistant Treasurer   September 1990   N/A   Massachusetts Financial Services Company, Senior Vice President

 

(h) Date first appointed to serve as Trustee/officer of an MFS fund. Each Trustee has served continuously since appointment unless indicated otherwise. For the period from December 15, 2004 until February 22, 2005, Messrs. Pozen and Manning served as Advisory Trustees. For the period March 2008 until October 2008, Ms. DiOrioDwyer served as Treasurer of the Funds.
(j) Directorships or trusteeships of companies required to report to the Securities and Exchange Commission (i.e., “public companies”).
(k) “Interested person” of the Trust 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 fund, as a result of position with MFS. The address of MFS is 500 Boylston Street, Boston, Massachusetts 02116.

The Trust holds annual shareholder meetings for the purpose of electing Trustees, and Trustees are elected for fixed terms. The Board of Trustees is currently divided into three classes, each having a term of three years which term expires on the date of the third annual meeting following the election to office of the Trustee’s class. Each year the term of one class expires. Each Trustee and officer will serve until next elected or his or her earlier death, resignation, retirement or removal.

Messrs. Butler, Kavanaugh, and Uek and Ms. Thomsen are members of the Fund’s Audit Committee.

Each of the Fund’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. As of January 1, 2011, the Trustees served as board members of 99 funds within the MFS Family of Funds.

The Statement of Additional Information for the Fund includes further information about the Trustees and is available without charge upon request by calling 1-800-225-2606.

 

Investment Adviser   Custodian
Massachusetts Financial Services Company   State Street Bank and Trust
500 Boylston Street, Boston, MA 02116-3741   1 Lincoln Street, Boston, MA 02111-2900
Portfolio Managers   Independent Registered Public Accounting Firm

John Addeo

 

Ernst & Young LLP

David Cole

 

200 Clarendon Street, Boston, MA 02116

 

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BOARD REVIEW OF INVESTMENT

ADVISORY AGREEMENT

The Investment Company Act of 1940 requires that both the full Board of Trustees and a majority of the non-interested (“independent”) Trustees, voting separately, annually approve the continuation of the Fund’s investment advisory agreement with MFS. The Trustees consider matters bearing on the Fund and its advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting. In addition, the independent Trustees met several times over the course of three months beginning in May and ending in July, 2010 (“contract review meetings”) for the specific purpose of considering whether to approve the continuation of the investment advisory agreement for the Fund and the other investment companies that the Board oversees (the “MFS Funds”). The independent Trustees were assisted in their evaluation of the Fund’s investment advisory agreement by independent legal counsel, from whom they received separate legal advice and with whom they met separately from MFS during various contract review meetings. The independent Trustees were also assisted in this process by the MFS Funds’ Independent Chief Compliance Officer, a full-time senior officer appointed by and reporting to the independent Trustees.

In June 2007, shareholders approved an investment advisory agreement between the Fund and MFS. Effective June 30, 2007, in connection with the consummation of the asset purchase agreement between MFS and Columbia Management Advisors LLC, MFS assumed investment management responsibilities for the Fund.

In connection with their deliberations regarding the continuation of the investment advisory agreement, the Trustees, including the independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The investment advisory agreement for the Fund was considered separately, although the Trustees also took into account the common interests of all MFS Funds in their review. As described below, the Trustees considered the nature, quality, and extent of the various investment advisory, administrative, and shareholder services performed by MFS under the existing investment advisory agreement and other arrangements with the Fund.

In connection with their contract review meetings, the Trustees received and relied upon materials that included, among other items: (i) information provided by Lipper Inc., an independent third party, on the investment performance (based on net asset value) of the Fund for various time periods ended December 31, 2009 and the investment performance (based on net asset value) of a group of funds with substantially similar investment classifications/objectives (the “Lipper performance universe”), (ii) information provided by

 

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Board Review of Investment Advisory Agreement – continued

 

Lipper Inc. on the Fund’s advisory fees and other expenses and the advisory fees and other expenses of comparable funds identified by Lipper Inc. (the “Lipper expense group”), (iii) information provided by MFS on the advisory fees of comparable portfolios of other clients of MFS, including institutional separate accounts and other clients, (iv) information as to whether and to what extent applicable expense waivers, reimbursements or fee “breakpoints” are observed for the Fund, (v) information regarding MFS’ financial results and financial condition, including MFS’ and certain of its affiliates’ estimated profitability from services performed for the Fund and the MFS Funds as a whole, and compared to MFS’ institutional business, (vi) MFS’ views regarding the outlook for the mutual fund industry and the strategic business plans of MFS, (vii) descriptions of various functions performed by MFS for the Funds, such as compliance monitoring and portfolio trading practices, and (viii) information regarding the overall organization of MFS, including information about MFS’ senior management and other personnel providing investment advisory, administrative and other services to the Fund and the other MFS Funds. The comparative performance, fee and expense information prepared and provided by Lipper Inc. was not independently verified and the independent Trustees did not independently verify any information provided to them by MFS.

The Trustees’ conclusion as to the continuation of the investment advisory agreement was based on a comprehensive consideration of all information provided to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different weights to various factors. It is also important to recognize that the fee arrangements for the Fund and other MFS Funds are the result of years of review and discussion between the independent Trustees and MFS, that certain aspects of such arrangements may receive greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration of these same arrangements during the course of the year and in prior years.

Based on information provided by Lipper Inc., the Trustees reviewed the Fund’s total return investment performance as well as the performance of peer groups of funds over various time periods. The Trustees placed particular emphasis on the total return performance of the Fund’s common shares in comparison to the performance of funds in its Lipper performance universe over the three-year period ended December 31, 2009, which the Trustees believed was a long enough period to reflect differing market conditions. The total return performance of the Fund’s common shares ranked 7th out of a total of 27 funds in the Lipper performance universe for this three-year period

 

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Board Review of Investment Advisory Agreement – continued

 

(a ranking of first place out of the total number of funds in the performance universe indicating the best performer and a ranking of last place out of the total number of funds in the performance universe indicating the worst performer). The total return performance of the Fund’s common shares ranked 13th out of a total of 29 funds for the one-year period and 11th out of a total of 24 funds for the five-year period ended December 31, 2009. Given the size of the Lipper performance universe and information previously provided by MFS regarding differences between the Fund and other funds in its Lipper performance universe, the Trustees also reviewed the Fund’s performance in comparison to the Barclays Capital U.S. High-Yield Corporate Bond Index. The Fund out-performed the Barclays Capital U.S. High Yield Corporate Bond Index for the one-year period ended December 31, 2009 (74.3% total return for the Fund versus 58.2% total return for the benchmark) and under-performed the Barclays Capital U.S. High-Yield Corporate Bond Index for each of the three- and five-year periods ended December 31, 2009 (three-year: 1.9% total return for the Fund versus 6.0% total return for the benchmark; five-year: 3.6% total return for the Fund versus 6.5% total return for the benchmark). Because of the passage of time, these performance results are likely to differ from the performance results for more recent periods, including those shown elsewhere in this report.

In the course of their deliberations, the Trustees took into account information provided by MFS in connection with the contract review meetings, as well as during investment review meetings conducted with portfolio management personnel during the course of the year regarding the Fund’s performance. After reviewing these and related factors, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that they were satisfied with MFS’ responses and efforts relating to investment performance.

In assessing the reasonableness of the Fund’s advisory fee, the Trustees considered, among other information, the Fund’s advisory fee and the total expense ratio of the Fund’s common shares as a percentage of average daily net assets and the advisory fee and total expense ratios of peer groups of funds based on information provided by Lipper Inc. The Trustees considered that the Fund currently observes an expense limitation for the Fund, which may not be changed without the Trustees’ approval. The Trustees also considered that, according to the Lipper data (which takes into account any fee reductions or expense limitations that were in effect during the Fund’s last fiscal year), the Fund’s effective advisory fee rate and the Fund’s total expense ratio were each lower than the Lipper expense group median.

The Trustees also considered the advisory fees charged by MFS to institutional accounts. In comparing these fees, the Trustees considered information

 

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Board Review of Investment Advisory Agreement – continued

 

provided by MFS as to the generally broader scope of services provided by MFS to the Fund in comparison to institutional accounts and the impact on MFS and expenses associated with the more extensive regulatory regime to which the Fund is subject in comparison to institutional accounts.

The Trustees considered that, as a closed-end fund, the Fund is unlikely to experience meaningful asset growth. As a result, the Trustees did not view the potential for realization of economies of scale as the Fund’s assets grow to be a material factor in their deliberations. The Trustees noted that they would consider economies of scale in the future in the event the Fund experiences significant asset growth, such as through an offering of preferred shares (which is not currently contemplated), or a material increase in the market value of the Fund’s portfolio securities.

The Trustees also considered information prepared by MFS relating to MFS’ costs and profits with respect to the Fund, the MFS Funds considered as a group, and other investment companies and accounts advised by MFS, as well as MFS’ methodologies used to determine and allocate its costs to the MFS Funds, the Fund and other accounts and products for purposes of estimating profitability.

After reviewing these and other factors described herein, the Trustees concluded, within the context of their overall conclusions regarding the investment advisory agreement, that the advisory fees charged to the Fund represent reasonable compensation in light of the services being provided by MFS to the Fund.

In addition, the Trustees considered MFS’ resources and related efforts to continue to retain, attract and motivate capable personnel to serve the Fund. The Trustees also considered current and developing conditions in the financial services industry, including the presence of large and well-capitalized companies which are spending, and appear to be prepared to continue to spend, substantial sums to engage personnel and to provide services to competing investment companies. In this regard, the Trustees also considered the financial resources of MFS and its ultimate parent, Sun Life Financial Inc. The Trustees also considered the advantages and possible disadvantages to the Fund of having an adviser that also serves other investment companies as well as other accounts.

The Trustees also considered the nature, quality, cost, and extent of administrative services provided to the Fund by MFS under agreements other than the investment advisory agreement. The Trustees also considered the nature, extent and quality of certain other services MFS performs or arranges for on the Fund’s behalf, which may include securities lending programs, directed expense payment programs, class action recovery programs, and MFS’

 

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Board Review of Investment Advisory Agreement – continued

 

interaction with third-party service providers, principally custodians and sub-custodians. The Trustees concluded that the various non-advisory services provided by MFS and its affiliates on behalf of the Funds were satisfactory.

The Trustees also considered benefits to MFS from the use of the Fund’s portfolio brokerage commissions, if applicable, to pay for investment research and various other factors. Additionally, the Trustees considered so-called “fall-out benefits” to MFS such as reputational value derived from serving as investment manager to the Fund.

Based on their evaluation of factors that they deemed to be material, including those factors described above, the Board of Trustees, including a majority of the independent Trustees, concluded that the Fund’s investment advisory agreement with MFS should be continued for an additional one-year period, commencing August 1, 2010.

A discussion regarding the Board’s most recent review and renewal of the fund’s Investment Advisory Agreement with MFS is available by clicking on the fund’s name under “Closed End Funds” in the “Products and Performance” section of the MFS Web site (mfs.com).

 

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PROXY VOTING POLICIES AND INFORMATION

A general description of the MFS funds’ proxy voting policies and procedures is available without charge, upon request, by calling 1-800-225-2606, by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s 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 without charge by visiting the Proxy Voting section of mfs.com or by visiting the SEC’s Web site at http://www.sec.gov.

QUARTERLY PORTFOLIO DISCLOSURE

The fund will file a complete schedule of portfolio holdings with the Securities and Exchange Commission (the Commission) for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q may be reviewed and copied at the:

Public Reference Room

Securities and Exchange Commission

100 F Street, NE, Room 1580

Washington, D.C. 20549

Information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-800-SEC-0330. The fund’s Form N-Q is available on the EDGAR database on the Commission’s Internet Web site at http://www.sec.gov, and copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov or by writing the Public Reference Section at the above address.

A shareholder can also obtain the quarterly portfolio holdings report at mfs.com.

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 by visiting the “News & Commentary” section of mfs.com or by clicking on the fund’s name under “Closed End Funds” in the “Products and Performance” section of mfs.com.

FEDERAL TAX INFORMATION (unaudited)

The fund will notify shareholders of amounts for use in preparing 2010 income tax forms in January 2011.

 

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MFS® PRIVACY NOTICE

Privacy is a concern for every investor today. At MFS Investment Management® and the MFS funds, we take this concern very seriously. We want you to understand our policies about the investment products and services that we offer, and how we protect the nonpublic personal information of investors who have a direct relationship with us and our wholly owned subsidiaries.

Throughout our business relationship, you provide us with personal information. We maintain information and records about you, your investments, and the services you use. Examples of the nonpublic personal information we maintain include

 

  Ÿ  

data from investment applications and other forms

  Ÿ  

share balances and transactional history with us, our affiliates, or others

  Ÿ  

facts 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 share nonpublic personal information with third parties or certain of our affiliates in connection with servicing your account or processing your transactions. We may share information with companies or financial institutions that perform marketing services on our behalf or with other financial institutions with which we have joint marketing arrangements, subject to any legal requirements.

Authorization to access your nonpublic personal information is limited to appropriate personnel who provide products, services, or information to you. We maintain physical, electronic, and procedural safeguards to help protect the personal information we collect about you.

If you have any questions about the MFS privacy policy, please call 1-800-225-2606 any business day.

Note: If you own MFS products or receive MFS services in the name of a third party such as a bank or broker-dealer, their privacy policy may apply to you instead of ours.

 

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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 43078

Providence, RI 02940-3078

LOGO

 

500 Boylston Street, Boston, MA 02116   New York Stock Exchange Symbol: CIF


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ITEM 2. CODE OF ETHICS.

The Registrant has adopted a Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act and as defined in Form N-CSR that applies to the Registrant’s principal executive officer and principal financial and accounting officer. The Registrant has not amended any provision in its Code of Ethics (the “Code”) that relates to an element of the Code’s definitions enumerated in paragraph (b) of Item 2 of this Form N-CSR. During the period covered by this report, the Registrant did not grant a waiver, including an implicit waiver, from any provision of the Code.

 

ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.

Messrs. Robert E. Butler, John P. Kavanaugh and Robert W. Uek and Ms. Laurie J. Thomsen, members of the Audit Committee, have been determined by the Board of Trustees in their reasonable business judgment to meet the definition of “audit committee financial expert” as such term is defined in Form N-CSR. In addition, Messrs. Butler, Kavanaugh and Uek and Ms. Thomsen are “independent” members of the Audit Committee (as such term has been defined by the Securities and Exchange Commission in regulations implementing Section 407 of the Sarbanes-Oxley Act of 2002). The Securities and Exchange Commission has stated that the designation of a person as an audit committee financial expert pursuant to this Item 3 on the Form N-CSR does not impose on such a person any duties, obligations or liability that are greater than the duties, obligations or liability imposed on such person as a member of the Audit Committee and the Board of Trustees in the absence of such designation or identification.

 

ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Items 4(a) through 4(d) and 4(g):

The Board of Trustees has appointed Ernst & Young LLP (“E&Y”) to serve as independent accountants to the Registrant (hereinafter the “Registrant” or the “Fund”). The tables below set forth the audit fees billed to the Fund as well as fees for non-audit services provided to the Fund and/or to the Fund’s investment adviser, Massachusetts Financial Services Company (“MFS”), and to various entities either controlling, controlled by, or under common control with MFS that provide ongoing services to the Fund (“MFS Related Entities”).

For the fiscal years ended November 30, 2010 and 2009, audit fees billed to the Fund by E&Y were as follows:

 

     Audit Fees  
     2010      2009  

Fees billed by E&Y:

     

MFS Intermediate High Income Fund

     49,327         48,179   


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For the fiscal years ended November 30, 2010 and 2009, fees billed by E&Y for audit-related, tax and other services provided to the Fund and for audit-related, tax and other services provided to MFS and MFS Related Entities were as follows:

 

     Audit-Related  Fees1      Tax Fees2      All Other  Fees3  
     2010      2009      2010      2009      2010      2009  

Fees billed by E&Y:

                 

To MFS Intermediate High Income Fund

     10,000         10,000         9,456         8,849         0         0   

To MFS and MFS Related Entities of MFS Intermediate High Income Fund*

     0         0         0         0         0         0   
     2010      20094                              

Aggregate fees for non-audit services:

                 

To MFS Intermediate High Income Fund, MFS and MFS Related Entities#

     253,585         247,655               

 

* This amount reflects the fees billed to MFS and MFS Related Entities for non-audit services relating directly to the operations and financial reporting of the Fund (portions of which services also related to the operations and financial reporting of other funds within the MFS Funds complex).
# This amount reflects the aggregate fees billed by E&Y for non-audit services rendered to the Fund and for non-audit services rendered to MFS and the MFS Related Entities.
1

The fees included under “Audit-Related Fees” are fees related to assurance and related services that are reasonably related to the performance of the audit or review of financial statements, but not reported under “Audit Fees,” including accounting consultations, agreed-upon procedure reports, attestation reports, comfort letters and internal control reviews.

2

The fees included under “Tax Fees” are fees associated with tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews and tax distribution and analysis.

3

The fees under “All Other Fees” are fees for products and services provided by E&Y other than those reported under “Audit Fees,” “Audit-Related Fees” and “Tax Fees”.

4

E&Y fees reported in 2009 have been restated in this filing from those reported in the Registrant’s filing for the reporting period ended November 30, 2009.

Item 4(e)(1):

Set forth below are the policies and procedures established by the Audit Committee of the Board of Trustees relating to the pre-approval of audit and non-audit related services:


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To the extent required by applicable law, pre-approval by the Audit Committee of the Board is needed for all audit and permissible non-audit services rendered to the Fund and all permissible non-audit services rendered to MFS or MFS Related Entities if the services relate directly to the operations and financial reporting of the Registrant. Pre-approval is currently on an engagement-by-engagement basis. In the event pre-approval of such services is necessary between regular meetings of the Audit Committee and it is not practical to wait to seek pre-approval at the next regular meeting of the Audit Committee, pre-approval of such services may be referred to the Chair of the Audit Committee for approval; provided that the Chair may not pre-approve any individual engagement for such services exceeding $50,000 or multiple engagements for such services in the aggregate exceeding $100,000 between such regular meetings of the Audit Committee. Any engagement pre-approved by the Chair between regular meetings of the Audit Committee shall be presented for ratification by the entire Audit Committee at its next regularly scheduled meeting.

Item 4(e)(2):

None, or 0%, of the services relating to the Audit-Related Fees, Tax Fees and All Other Fees paid by the Fund and MFS and MFS Related Entities relating directly to the operations and financial reporting of the Registrant disclosed above were approved by the audit committee pursuant to paragraphs (c)(7)(i)(C) of Rule 2-01 of Regulation S-X (which permits audit committee approval after the start of the engagement with respect to services other than audit, review or attest services, if certain conditions are satisfied).

Item 4(f): Not applicable.

Item 4(h): The Registrant’s Audit Committee has considered whether the provision by a Registrant’s independent registered public accounting firm of non-audit services to MFS and MFS Related Entities that were not pre-approved by the Committee (because such services were provided prior to the effectiveness of SEC rules requiring pre-approval or because such services did not relate directly to the operations and financial reporting of the Registrant) was compatible with maintaining the independence of the independent registered public accounting firm as the Registrant’s principal auditors.

 

ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.

The Registrant has an Audit Committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee are Messrs. Robert E. Butler, John P. Kavanaugh, and Robert W. Uek and Ms. Laurie J. Thomsen.

 

ITEM 6. SCHEDULE OF INVESTMENTS

A schedule of investments of the Registrant is included as part of the report to shareholders of the Registrant under Item 1 of this Form N-CSR.

 

ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES.


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MASSACHUSETTS FINANCIAL SERVICES COMPANY

PROXY VOTING POLICIES AND PROCEDURES

February 1, 2010

Massachusetts Financial Services Company, MFS Institutional Advisors, Inc., MFS International (UK) Limited, MFS Heritage Trust Company, and MFS’ other subsidiaries that perform discretionary investment management activities (except Four Pillars Capital, Inc.) (collectively, “MFS”) have adopted proxy voting policies and procedures, as set forth below (“MFS Proxy Voting Policies and Procedures”), with respect to securities owned by the clients for which MFS serves as investment adviser and has the power to vote proxies, including the registered investment companies sponsored by MFS (the “MFS Funds”). References to “clients” in these policies and procedures include the MFS Funds and other clients of MFS, such as funds organized offshore, sub-advised funds and separate account clients, to the extent these clients have delegated to MFS the responsibility to vote proxies on their behalf under the MFS Proxy Voting Policies and Procedures.

The MFS Proxy Voting Policies and Procedures include:

 

  A. Voting Guidelines;

 

  B. Administrative Procedures;

 

  C. Monitoring System;

 

  D. Records Retention; and

 

  E. Reports.

 

A. VOTING GUIDELINES

 

  1. General Policy; Potential Conflicts of Interest

MFS’ policy is that proxy voting decisions are made in what MFS believes to be the best long-term economic interests of MFS’ clients, and not in the interests of any other party or in MFS’ corporate interests, including interests such as the distribution of MFS Fund shares, and institutional relationships.

In developing these proxy voting guidelines, MFS reviews corporate governance issues and proxy voting matters that are presented for shareholder vote by either management or shareholders of public companies. Based on the overall


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principle that all votes cast by MFS on behalf of its clients must be in what MFS believes to be the best long-term economic interests of such clients, MFS has adopted proxy voting guidelines, set forth below, that govern how MFS generally will vote on specific matters presented for shareholder vote.

As a general matter, MFS votes consistently on similar proxy proposals across all shareholder meetings. However, some proxy proposals, such as certain excessive executive compensation, environmental, social and governance matters, are analyzed on a case-by-case basis in light of all the relevant facts and circumstances of the proposal. Therefore, MFS may vote similar proposals differently at different shareholder meetings based on the specific facts and circumstances of the issuer or the terms of the proposal. In addition, MFS also reserves the right to override the guidelines with respect to a particular proxy proposal when such an override is, in MFS’ best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS’ clients.

MFS also generally votes consistently on the same matter when securities of an issuer are held by multiple client accounts, unless MFS has received explicit voting instructions to vote differently from a client for its own account. From time to time, MFS may also receive comments on the MFS Proxy Voting Policies and Procedures from its clients. These comments are carefully considered by MFS when it reviews these guidelines and revises them as appropriate.

These policies and procedures are intended to address any potential material conflicts of interest on the part of MFS or its subsidiaries that are likely to arise in connection with the voting of proxies on behalf of MFS’ clients. If such potential material conflicts of interest do arise, MFS will analyze, document and report on such potential material conflicts of interest (see Sections B.2 and E below), and shall ultimately vote the relevant proxies in what MFS believes to be the best long-term economic interests of its clients. The MFS Proxy Voting Committee is responsible for monitoring and reporting with respect to such potential material conflicts of interest.

MFS is also a signatory to the United Nations Principles for Responsible Investment. In developing these guidelines, MFS considered environmental, social and corporate governance issues in light of MFS’ fiduciary obligation to vote proxies in the best long-term economic interest of its clients.

 

  2. MFS’ Policy on Specific Issues

Election of Directors


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MFS believes that good governance should be based on a board with at least a simple majority of directors who are “independent” of management, and whose key committees (e.g., compensation, nominating, and audit committees) are comprised entirely of “independent” directors. While MFS generally supports the board’s nominees in uncontested elections, we will not support a nominee to a board of a U.S. issuer if, as a result of such nominee being elected to the board, the board would be comprised of a majority of members who are not “independent” or, alternatively, the compensation, nominating (including instances in which the full board serves as the nominating committee) or audit committees would include members who are not “independent.”

MFS will also not support a nominee to a board if we can determine that he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason stated in the proxy materials or other company communications. In addition, MFS will not support all nominees standing for re-election to a board if we can determine: (1) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced or exchanged underwater stock options; or (2) since the last annual meeting, the board has either implemented a poison pill without shareholder approval (including those related to net-operating loss carryforwards), or has not taken responsive action to a majority shareholder approved resolution recommending that the poison pill be rescinded. Responsive action would include the rescission of the “poison pill” (without a broad reservation to reinstate the “poison pill” in the event of a hostile tender offer), or assurance in the proxy materials that the terms of the “poison pill” would be put to a binding shareholder vote within the next five to seven years.

MFS will also not support a nominee (other than a nominee who serves as the issuer’s Chief Executive Officer) standing for re-election if such nominee participated (as a director or committee member) in the approval of senior executive compensation that MFS deems to be “excessive” due to pay for performance issues and/or poor pay practices. In the event that MFS determines that an issuer has adopted “excessive” executive compensation, MFS may also not support the re-election of the issuer’s Chief Executive Officer as director regardless of whether the Chief Executive Officer directly participated in the approval of the package. MFS will determine whether senior executive compensation is excessive on a case-by-case basis. Examples of excessive executive compensation practices may include, but are not limited to, a pay-for-performance disconnect, egregious employment contract terms such as guaranteed bonus provisions, excessive pension payouts, backdated stock options, overly generous hiring bonuses for chief executive officers, excessive perquisites, or the potential reimbursement of excise taxes to an executive in regards to a severance package.

MFS evaluates a contested or contentious election of directors on a case-by-case basis considering the long-term financial performance of the company relative to its industry, management's track record, the qualifications of the


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nominees for both slates, if applicable, and an evaluation of what each side is offering shareholders.

Majority Voting and Director Elections

MFS votes for reasonably crafted proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the company’s bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (e.g., contested elections) (“Majority Vote Proposals”). MFS considers voting against Majority Vote Proposals if the company has adopted, or has proposed to adopt in the proxy statement, formal corporate governance principles that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast. MFS believes that a company’s election policy should address the specific circumstances at that company. In determining whether the issuer has a meaningful alternative to the majority voting standard, MFS considers whether a company’s election policy articulates the following elements to address each director nominee who fails to receive an affirmative majority of votes cast in an election:

 

   

Establish guidelines for the process by which the company determines the status of nominees who fail to receive an affirmative majority of votes cast and disclose the guidelines in the annual proxy statement;

 

   

Guidelines should include a reasonable timetable for resolution of the nominee’s status and a requirement that the resolution be disclosed together with the reasons for the resolution;

 

   

Vest management of the process in the company’s independent directors, other than the nominee in question; and

 

   

Outline the range of remedies that the independent directors may consider concerning the nominee.

Classified Boards

MFS generally opposes proposals to classify a board (e.g. a board in which only one-third of board members is elected each year) for issuers (other than for certain closed-end investment companies). MFS generally supports proposals to declassify a board for issuers (other than for certain closed-end investment companies).

Non-Salary Compensation Programs


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MFS votes against stock option programs for officers, employees or non-employee directors that do not require an investment by the optionee, that give “free rides” on the stock price, or that permit grants of stock options with an exercise price below fair market value on the date the options are granted.

MFS also opposes stock option programs that allow the board or the compensation committee, without shareholder approval, to re-price underwater options or to automatically replenish shares (i.e. evergreen plans). MFS will consider proposals to exchange existing options for newly issued options, restricted stock or cash on a case-by-case basis, taking into account certain factors, including, but not limited to, whether there is a reasonable value-for-value exchange and whether senior executives are excluded from participating in the exchange.

MFS opposes stock option programs and restricted stock plans that provide unduly generous compensation for officers, directors or employees, or could result in excessive dilution to other shareholders. As a general guideline, MFS votes against restricted stock plans, stock option, non-employee director, omnibus stock plans and any other stock plan if all such plans for a particular company involve potential dilution, in the aggregate, of more than 15%. However, MFS will also vote against stock plans that involve potential dilution, in aggregate, of more than 10% at U.S. issuers that are listed in the Standard and Poor’s 100 index as of December 31 of the previous year.

Expensing of Stock Options

MFS supports shareholder proposals to expense stock options because we believe that the expensing of options presents a more accurate picture of the company’s financial results to investors. We also believe that companies are likely to be more disciplined when granting options if the value of stock options were treated as an expense item on the company’s income statements.

Executive Compensation

MFS believes that competitive compensation packages are necessary to attract, motivate and retain executives. However, MFS also recognizes that certain executive compensation practices can be “excessive” and not in the best, long-term economic interest of a company’s shareholders. We believe that the election of an issuer’s compensation committee members and votes on stock plans (as outlined above) are currently the most effective mechanisms to express our view on a company’s compensation practices.

MFS also supports reasonably crafted shareholder proposals that (i) require the issuer to adopt a policy to recover the portion of performance-based bonuses and awards paid to senior executives that were not earned based upon a significant negative restatement of earnings unless the company already has adopted a satisfactory policy on the matter, or (ii) expressly prohibit the backdating of stock


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options. Although we support linking executive stock option grants to a company’s performance, MFS opposes shareholder proposals that mandate a link of performance-based options to a specific industry or peer group stock index. MFS also opposes shareholder proposals that seek to set rigid restrictions on executive compensation as MFS believes that compensation committees should retain some flexibility to propose the appropriate index or other criteria by which performance-based options should be measured.

Advisory Votes on Executive Compensation

MFS supports reasonably crafted shareholder proposals to include an advisory shareholder vote on an issuer’s executive compensation practices in the issuer’s proxy statement.

For a U.S. issuer that already includes an advisory vote on its executive compensation practices in its proxy statement, MFS will generally support the issuer’s advisory vote, unless MFS has determined that issuer has adopted excessive executive compensation practices.

Employee Stock Purchase Plans

MFS supports the use of a broad-based employee stock purchase plans to increase company stock ownership by employees, provided that shares purchased under the plan are acquired for no less than 85% of their market value and do not result in excessive dilution.

Golden Parachutes

From time to time, shareholders of companies have submitted proxy proposals that would require shareholder approval of severance packages for executive officers that exceed certain predetermined thresholds. MFS votes in favor of such shareholder proposals when they would require shareholder approval of any severance package for an executive officer that exceeds a certain multiple of such officer’s annual compensation that is not determined in MFS’ judgment to be excessive.

Anti-Takeover Measures

In general, MFS votes against any measure that inhibits capital appreciation in a stock, including proposals that protect management from action by shareholders. These types of proposals take many forms, ranging from “poison pills” and “shark repellents” to super-majority requirements.

MFS generally votes for proposals to rescind existing “poison pills” and proposals that would require shareholder approval to adopt prospective “poison pills,” unless the company already has adopted a clearly satisfactory policy on the


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matter. MFS may consider the adoption of a prospective “poison pill” or the continuation of an existing “poison pill” if we can determine that the following two conditions are met: (1) the “poison pill” allows MFS clients to hold an aggregate position of up to 15% of a company's total voting securities (and of any class of voting securities); and (2) either (a) the “poison pill” has a term of not longer than five years, provided that MFS will consider voting in favor of the “poison pill” if the term does not exceed seven years and the “poison pill” is linked to a business strategy or purpose that MFS believes is likely to result in greater value for shareholders; or (b) the terms of the “poison pill” allow MFS clients the opportunity to accept a fairly structured and attractively priced tender offer (e.g. a “chewable poison pill” that automatically dissolves in the event of an all cash, all shares tender offer at a premium price). MFS will also consider on a case-by-case basis proposals designed to prevent tenders which are disadvantageous to shareholders such as tenders at below market prices and tenders for substantially less than all shares of an issuer.

MFS will consider any poison pills designed to protect a company’s net-operating loss carryforwards on a case-by-case basis, weighing the accounting and tax benefits of such a pill against the risk of deterring future acquisition candidates.

Reincorporation and Reorganization Proposals

When presented with a proposal to reincorporate a company under the laws of a different state, or to effect some other type of corporate reorganization, MFS considers the underlying purpose and ultimate effect of such a proposal in determining whether or not to support such a measure. MFS generally votes with management in regards to these types of proposals, however, if MFS believes the proposal is in the best long-term economic interests of its clients, then MFS may vote against management (e.g. the intent or effect would be to create additional inappropriate impediments to possible acquisitions or takeovers).

Issuance of Stock

There are many legitimate reasons for the issuance of stock. Nevertheless, as noted above under “Non-Salary Compensation Programs,” when a stock option plan (either individually or when aggregated with other plans of the same company) would substantially dilute the existing equity (e.g. by approximately 10-15% as described above), MFS generally votes against the plan. In addition, MFS typically votes against proposals where management is asking for authorization to issue common or preferred stock with no reason stated (a “blank check”) because the unexplained authorization could work as a potential anti-takeover device. MFS may also vote against the authorization or issuance of common or preferred stock if MFS determines that the requested authorization is excessive and not warranted.


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Repurchase Programs

MFS supports proposals to institute share repurchase plans in which all shareholders have the opportunity to participate on an equal basis. Such plans may include a company acquiring its own shares on the open market, or a company making a tender offer to its own shareholders.

Confidential Voting

MFS votes in favor of proposals to ensure that shareholder voting results are kept confidential. For example, MFS supports proposals that would prevent management from having access to shareholder voting information that is compiled by an independent proxy tabulation firm.

Cumulative Voting

MFS opposes proposals that seek to introduce cumulative voting and for proposals that seek to eliminate cumulative voting. In either case, MFS will consider whether cumulative voting is likely to enhance the interests of MFS’ clients as minority shareholders. In our view, shareholders should provide names of qualified candidates to a company’s nominating committee, which, in our view, should be comprised solely of “independent” directors.

Written Consent and Special Meetings

Because the shareholder right to act by written consent (without calling a formal meeting of shareholders) can be a powerful tool for shareholders, MFS generally opposes proposals that would prevent shareholders from taking action without a formal meeting or would take away a shareholder’s right to call a special meeting of company shareholders pursuant to relevant state law.

Independent Auditors

MFS believes that the appointment of auditors for U.S. issuers is best left to the board of directors of the company and therefore supports the ratification of the board’s selection of an auditor for the company. Some shareholder groups have submitted proposals to limit the non-audit activities of a company’s audit firm or prohibit any non-audit services by a company’s auditors to that company. MFS opposes proposals recommending the prohibition or limitation of the performance of non-audit services by an auditor, and proposals recommending the removal of a company’s auditor due to the performance of non-audit work for the company by its auditor. MFS believes that the board, or its audit committee, should have the discretion to hire the company’s auditor for specific pieces of non-audit work in the limited situations permitted under current law.


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Environmental, Social and Governance (“ESG”) Issues

MFS believes that a company’s ESG practices may have an impact on the company’s long-term economic financial performance and will generally support proposals relating to ESG issues that MFS believes are in the best long-term economic interest of the company’s shareholders. For those ESG proposals for which a specific policy has not been adopted, MFS considers such ESG proposals on a case-by-case basis. As a result, it may vote similar proposals differently at various shareholder meetings based on the specific facts and circumstances of such proposal.

MFS generally supports proposals that seek to remove governance structures that insulate management from shareholders (i.e., anti-takeover measures) or that seek to enhance shareholder rights. Many of these governance-related issues, including compensation issues, are outlined within the context of the above guidelines. In addition, MFS typically supports proposals that require an issuer to reimburse successful dissident shareholders (who are not seeking control of the company) for reasonable expenses that such dissident incurred in soliciting an alternative slate of director candidates. MFS typically does not support proposals to separate the chairman and CEO positions as we believe that the most beneficial leadership structure of a company should be determined by the company’s board of directors. For any governance-related proposal for which an explicit guideline is not provided above, MFS will consider such proposals on a case-by-case basis and will support such proposals if MFS believes that it is in the best long-term economic interest of the company’s shareholders.

MFS generally supports proposals that request disclosure on the impact of environmental issues on the company’s operations, sales, and capital investments. However, MFS may not support such proposals based on the facts and circumstances surrounding a specific proposal, including, but not limited to, whether (i) the proposal is unduly costly, restrictive, or burdensome, (ii) the company already provides publicly-available information that is sufficient to enable shareholders to evaluate the potential opportunities and risks that environmental matters pose to the company’s operations, sales and capital investments, or (iii) the proposal seeks a level of disclosure that exceeds that provided by the company’s industry peers. MFS will analyze all other environmental proposals on a case-by-case basis and will support such proposals if MFS believes such proposal is in the best long-term economic interest of the company’s shareholders.

MFS will analyze social proposals on a case-by-case basis. MFS will support such proposals if MFS believes that such proposal is in the best long-term economic interest of the company’s shareholders. Generally, MFS will support shareholder proposals that (i) seek to amend a company’s equal employment opportunity policy to prohibit discrimination based on sexual orientation and


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gender identity; and (ii) request additional disclosure regarding a company’s political contributions.

The laws of various states or countries may regulate how the interests of certain clients subject to those laws (e.g. state pension plans) are voted with respect to social issues. Thus, it may be necessary to cast ballots differently for certain clients than MFS might normally do for other clients.

Foreign Issuers

MFS generally supports the election of a director nominee standing for re-election in uncontested elections unless it can be determined that (1) he or she failed to attend at least 75% of the board and/or relevant committee meetings in the previous year without a valid reason given in the proxy materials; (2) since the last annual meeting of shareholders and without shareholder approval, the board or its compensation committee has re-priced underwater stock options; or (3) since the last annual meeting, the board has either implemented a poison pill without shareholder approval or has not taken responsive action to a majority shareholder approved resolution recommending that the “poison pill” be rescinded. MFS generally supports the election of auditors, but may determine to vote against the election of a statutory auditor in certain markets if MFS reasonably believes that the statutory auditor is not truly independent.

Some international markets have adopted mandatory requirements for all companies to hold advisory votes on executive compensation. MFS will not support such proposals if MFS determines that a company’s executive compensation practices are excessive, considering such factors as the specific market’s best practices that seek to maintain appropriate pay-for-performance alignment and to create long-term shareholder value.

Many other items on foreign proxies involve repetitive, non-controversial matters that are mandated by local law. Accordingly, the items that are generally deemed routine and which do not require the exercise of judgment under these guidelines (and therefore voted with management) for foreign issuers include, but are not limited to, the following: (i) receiving financial statements or other reports from the board; (ii) approval of declarations of dividends; (iii) appointment of shareholders to sign board meeting minutes; (iv) discharge of management and supervisory boards; and (v) approval of share repurchase programs (absent any anti-takeover concerns). MFS will evaluate all other items on proxies for foreign companies in the context of the guidelines described above, but will generally vote against an item if there is not sufficient information disclosed in order to make an informed voting decision.

In accordance with local law or business practices, many foreign companies or custodians prevent the sales of shares that have been voted for a certain period beginning prior to the shareholder meeting and ending on the day following the


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meeting (“share blocking”). Depending on the country in which a company is domiciled, the blocking period may begin a stated number of days prior or subsequent to the meeting (e.g. one, three or five days) or on a date established by the company. While practices vary, in many countries the block period can be continued for a longer period if the shareholder meeting is adjourned and postponed to a later date. Similarly, practices vary widely as to the ability of a shareholder to have the “block” restriction lifted early (e.g. in some countries shares generally can be “unblocked” up to two days prior to the meeting whereas in other countries the removal of the block appears to be discretionary with the issuer’s transfer agent). Due to these restrictions, MFS must balance the benefits to its clients of voting proxies against the potentially serious portfolio management consequences of a reduced flexibility to sell the underlying shares at the most advantageous time. For companies in countries with share blocking periods or in markets where some custodians may block shares, the disadvantage of being unable to sell the stock regardless of changing conditions generally outweighs the advantages of voting at the shareholder meeting for routine items. Accordingly, MFS will not vote those proxies in the absence of an unusual, significant vote that outweighs the disadvantage of being unable to sell the stock.

In limited circumstances, other market specific impediments to voting shares may limit our ability to cast votes, including, but not limited to, late delivery of proxy materials, power of attorney and share re-registration requirements, or any other unusual voting requirements. In these limited instances, MFS votes securities on a best efforts basis in the context of the guidelines described above.

 

B. ADMINISTRATIVE PROCEDURES

 

  1. MFS Proxy Voting Committee

The administration of these MFS Proxy Voting Policies and Procedures is overseen by the MFS Proxy Voting Committee, which includes senior personnel from the MFS Legal and Global Investment Support Departments. The Proxy Voting Committee does not include individuals whose primary duties relate to client relationship management, marketing, or sales. The MFS Proxy Voting Committee:

 

  a. Reviews these MFS Proxy Voting Policies and Procedures at least annually and recommends any amendments considered to be necessary or advisable;

 

  b.

Determines whether any potential material conflict of interest exists with respect to instances in which MFS (i) seeks to override these MFS Proxy Voting Policies and Procedures; (ii) votes on ballot items not governed by these MFS Proxy Voting Policies and Procedures; (iii) evaluates an excessive executive compensation issue in relation to the election of directors; or (iv) requests a vote recommendation from an


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MFS portfolio manager or investment analyst (e.g. mergers and acquisitions); and

 

  c. Considers special proxy issues as they may arise from time to time.

 

  2. Potential Conflicts of Interest

The MFS Proxy Voting Committee is responsible for monitoring potential material conflicts of interest on the part of MFS or its subsidiaries that could arise in connection with the voting of proxies on behalf of MFS’ clients. Due to the client focus of our investment management business, we believe that the potential for actual material conflict of interest issues is small. Nonetheless, we have developed precautions to assure that all proxy votes are cast in the best long-term economic interest of shareholders. Other MFS internal policies require all MFS employees to avoid actual and potential conflicts of interests between personal activities and MFS’ client activities. If an employee identifies an actual or potential conflict of interest with respect to any voting decision, then that employee must recuse himself/herself from participating in the voting process. Additionally, with respect to decisions concerning all Non-Standard Votes, as defined below, MFS will review the securities holdings reported by the individuals that participate in such decision to determine whether such person has a direct economic interest in the decision, in which case such person shall not further participate in making the decision. Any significant attempt by an employee of MFS or its subsidiaries to influence MFS’ voting on a particular proxy matter should also be reported to the MFS Proxy Voting Committee.

In cases where proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures, no material conflict of interest will be deemed to exist. In cases where (i) MFS is considering overriding these MFS Proxy Voting Policies and Procedures, (ii) matters presented for vote are not governed by these MFS Proxy Voting Policies and Procedures, (iii) MFS evaluates an excessive executive compensation issue in relation to the election of directors, or (iv) a vote recommendation is requested from an MFS portfolio manager or investment analyst (e.g. mergers and acquisitions) (collectively, “Non-Standard Votes”); the MFS Proxy Voting Committee will follow these procedures:

 

  a. Compare the name of the issuer of such proxy against a list of significant current (i) distributors of MFS Fund shares, and (ii) MFS institutional clients (the “MFS Significant Client List”);

 

  b. If the name of the issuer does not appear on the MFS Significant Client List, then no material conflict of interest will be deemed to exist, and the proxy will be voted as otherwise determined by the MFS Proxy Voting Committee;


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  c. If the name of the issuer appears on the MFS Significant Client List, then the MFS Proxy Voting Committee will be apprised of that fact and each member of the MFS Proxy Voting Committee will carefully evaluate the proposed vote in order to ensure that the proxy ultimately is voted in what MFS believes to be the best long-term economic interests of MFS’ clients, and not in MFS' corporate interests; and

 

  d. For all potential material conflicts of interest identified under clause (c) above, the MFS Proxy Voting Committee will document: the name of the issuer, the issuer’s relationship to MFS, the analysis of the matters submitted for proxy vote, the votes as to be cast and the reasons why the MFS Proxy Voting Committee determined that the votes were cast in the best long-term economic interests of MFS’ clients, and not in MFS' corporate interests. A copy of the foregoing documentation will be provided to MFS’ Conflicts Officer.

The members of the MFS Proxy Voting Committee are responsible for creating and maintaining the MFS Significant Client List, in consultation with MFS’ distribution and institutional business units. The MFS Significant Client List will be reviewed and updated periodically, as appropriate.

From time to time, certain MFS Funds (the “top tier fund”) may own shares of other MFS Funds (the “underlying fund”). If an underlying fund submits a matter to a shareholder vote, the top tier fund will generally vote its shares in the same proportion as the other shareholders of the underlying fund.

 

  3. Gathering Proxies

Most proxies received by MFS and its clients originate at Broadridge Financial Solutions, Inc. (“Broadridge”). Broadridge and other service providers, on behalf of custodians, send proxy related material to the record holders of the shares beneficially owned by MFS’ clients, usually to the client’s proxy voting administrator or, less commonly, to the client itself. This material will include proxy ballots reflecting the shareholdings of Funds and of clients on the record dates for such shareholder meetings, as well as proxy materials with the issuer’s explanation of the items to be voted upon.

MFS, on behalf of itself and the Funds, has entered into an agreement with an independent proxy administration firm, RiskMetrics Group, Inc., (the “Proxy Administrator”), pursuant to which the Proxy Administrator performs various proxy vote related administrative services, such as vote processing and recordkeeping functions for MFS’ Funds and institutional client accounts. The Proxy


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Administrator receives proxy statements and proxy ballots directly or indirectly from various custodians, logs these materials into its database and matches upcoming meetings with MFS Fund and client portfolio holdings, which are input into the Proxy Administrator’s system by an MFS holdings data-feed. Through the use of the Proxy Administrator system, ballots and proxy material summaries for all upcoming shareholders’ meetings are available on-line to certain MFS employees and members of the MFS Proxy Voting Committee.

 

  4. Analyzing Proxies

Proxies are voted in accordance with these MFS Proxy Voting Policies and Procedures. The Proxy Administrator, at the prior direction of MFS, automatically votes all proxy matters that do not require the particular exercise of discretion or judgment with respect to these MFS Proxy Voting Policies and Procedures as determined by the MFS Proxy Voting Committee. With respect to proxy matters that require the particular exercise of discretion or judgment, MFS considers and votes on those proxy matters. MFS also receives research and recommendations from the Proxy Administrator which it may take into account in deciding how to vote. In addition, MFS expects to rely on the Proxy Administrator to identify circumstances in which a board may have approved excessive executive compensation or whether certain environmental or social proposals warrant consideration. Representatives of the MFS Proxy Voting Committee review, as appropriate, votes cast to ensure conformity with these MFS Proxy Voting Policies and Procedures.

As a general matter, portfolio managers and investment analysts have little or no involvement in specific votes taken by MFS. This is designed to promote consistency in the application of MFS’ voting guidelines, to promote consistency in voting on the same or similar issues (for the same or for multiple issuers) across all client accounts, and to minimize the potential that proxy solicitors, issuers, or third parties might attempt to exert inappropriate influence on the vote. In limited types of votes (e.g. corporate actions, such as mergers and acquisitions, or shareholder proposals relating to environmental and social issues), a representative of MFS Proxy Voting Committee may consult with or seek recommendations from MFS portfolio managers or investment analysts.2 However, the MFS Proxy Voting Committee would ultimately determine the manner in which all proxies are voted.

As noted above, MFS reserves the right to override the guidelines when such an override is, in MFS’ best judgment, consistent with the overall principle of voting proxies in the best long-term economic interests of MFS’ clients. Any such

 

2

From time to time, due to travel schedules and other commitments, an appropriate portfolio manager or research analyst may not be available to provide a recommendation on a merger or acquisition proposal. If such a recommendation cannot be obtained prior to the cut-off date of the shareholder meeting, certain members of the MFS Proxy Voting Committee may determine to abstain from voting.


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override of the guidelines shall be analyzed, documented and reported in accordance with the procedures set forth in these policies.

 

  5. Voting Proxies

In accordance with its contract with MFS, the Proxy Administrator also generates a variety of reports for the MFS Proxy Voting Committee, and makes available on-line various other types of information so that the MFS Proxy Voting Committee may review and monitor the votes cast by the Proxy Administrator on behalf of MFS’ clients.

 

  6. Securities Lending

From time to time, the MFS Funds or other pooled investment vehicles sponsored by MFS may participate in a securities lending program. In the event MFS or its agent receives timely notice of a shareholder meeting for a U.S. security, MFS and its agent will attempt to recall any securities on loan before the meeting’s record date so that MFS will be entitled to vote these shares. However, there may be instances in which MFS is unable to timely recall securities on loan for a U.S. security, in which cases MFS will not be able to vote these shares. MFS will report to the appropriate board of the MFS Funds those instances in which MFS is not able to timely recall the loaned securities. MFS generally does not recall non-U.S. securities on loan because there may be insufficient advance notice of proxy materials, record dates, or vote cut-off dates to allow MFS to timely recall the shares in certain markets. As a result, non-U.S. securities that are on loan will not generally be voted. If MFS receives timely notice of what MFS determines to be an unusual, significant vote for a non-U.S. security whereas MFS shares are on loan, and determines that voting is in the best long-term economic interest of shareholders, then MFS will attempt to timely recall the loaned shares.

 

  7. Engagement

The MFS Proxy Voting Policies and Procedures are available on www.mfs.com and may be accessed by both MFS’ clients and the companies in which MFS’ clients invest. From time to time, MFS may determine that it is appropriate and beneficial for representatives from the MFS Proxy Voting Committee to engage in a dialogue with a company or other shareholder regarding certain matters on the company’s proxy statement that are of concern to shareholders, including environmental, social and governance matters. A company or shareholder may also seek to engage with representatives of the MFS Proxy Voting Committee in advance of the company’s formal proxy solicitation to solicit support for certain contemplated proposals.

 

C. MONITORING SYSTEM


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It is the responsibility of the Proxy Administrator and MFS’ Proxy Voting Committee to monitor the proxy voting process. When proxy materials for clients are received by the Proxy Administrator, they are input into the Proxy Administrator’s system. Through an interface with the portfolio holdings database of MFS, the Proxy Administrator matches a list of all MFS Funds and clients who hold shares of a company’s stock and the number of shares held on the record date with the Proxy Administrator’s listing of any upcoming shareholder’s meeting of that company.

When the Proxy Administrator’s system “tickler” shows that the voting cut-off date of a shareholders’ meeting is approaching, a Proxy Administrator representative checks that the vote for MFS Funds and clients holding that security has been recorded in the computer system. If a proxy ballot has not been received from the client’s custodian, the Proxy Administrator contacts the custodian requesting that the materials be forwarded immediately. If it is not possible to receive the proxy ballot from the custodian in time to be voted at the meeting, then MFS may instruct the custodian to cast the vote in the manner specified and to mail the proxy directly to the issuer.

 

D. RECORDS RETENTION

MFS will retain copies of these MFS Proxy Voting Policies and Procedures in effect from time to time and will retain all proxy voting reports submitted to the Board of Trustees and Board of Managers of the MFS Funds for the period required by applicable law. Proxy solicitation materials, including electronic versions of the proxy ballots completed by representatives of the MFS Proxy Voting Committee, together with their respective notes and comments, are maintained in an electronic format by the Proxy Administrator and are accessible on-line by the MFS Proxy Voting Committee. All proxy voting materials and supporting documentation, including records generated by the Proxy Administrator’s system as to proxies processed, including the dates when proxy ballots were received and submitted, and the votes on each company’s proxy issues, are retained as required by applicable law.

 

E. REPORTS

MFS Funds

MFS publicly discloses the proxy voting records of the MFS Funds on an annual basis, as required by law. MFS will also report the results of its voting to the Board of Trustees and Board of Managers of the MFS Funds. These reports will include: (i) a summary of how votes were cast; (ii) a summary of votes against management’s recommendation; (iii) a review of situations where MFS did not vote in accordance with the guidelines and the rationale therefore; (iv) a review of the procedures used by MFS to identify material conflicts of interest and any matters


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identified as a material conflict of interest; (v) a review of these policies and the guidelines; (vi) a report and impact assessment of instances in which the recall of loaned securities of a U.S. issuer was unsuccessful; and (vii) as necessary or appropriate, any proposed modifications thereto to reflect new developments in corporate governance and other issues. Based on these reviews, the Trustees and Managers of the MFS Funds will consider possible modifications to these policies to the extent necessary or advisable.

All MFS Advisory Clients

At any time, a report can be printed by MFS for each client who has requested that MFS furnish a record of votes cast. The report specifies the proxy issues which have been voted for the client during the year and the position taken with respect to each issue and, upon request, may identify situations where MFS did not vote in accordance with the MFS Proxy Voting Policies and Procedures.

Except as described above, MFS generally will not divulge actual voting practices to any party other than the client or its representatives (unless required by applicable law) because we consider that information to be confidential and proprietary to the client. However, as noted above, MFS may determine that it is appropriate and beneficial to engage in a dialogue with a company regarding certain matters. During such dialogue with the company, MFS may disclose the vote it intends to cast in order to potentially effect positive change at a company in regards to environmental, social or governance issues.

 

ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

General. Information regarding the portfolio manager(s) of the MFS Intermediate High Income Fund (the “Fund”) is set forth below.

 

Portfolio Manager

  

Primary Role

  

Since

  

Title and Five Year History

David P. Cole

   Portfolio Manager    2007    Investment Officer of MFS; employed in the investment area of MFS since 2004.

John F. Addeo

   Portfolio Manager    2007    Investment Officer of MFS; employed in the investment area of MFS since 1998.


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Compensation. Portfolio manager compensation is reviewed annually. As of December 31, 2009, portfolio manager total cash compensation is a combination of base salary and performance bonus:

Base Salary – Base salary represents a smaller percentage of portfolio manager total cash compensation than performance bonus.

Performance Bonus – Generally, the performance bonus represents more than a majority of portfolio manager total cash compensation.

The performance bonus is based on a combination of quantitative and qualitative factors, generally with more weight given to the former and less weight given to the latter.

The quantitative portion is based on the pre-tax performance of assets managed by the portfolio manager over one-, three-, and five-year periods relative to peer group universes and/or indices (“benchmarks”). As of December 31, 2009, the following benchmarks were used:

 

Portfolio Manager

  

Benchmark(s)

David P. Cole    Lipper High Current Yield Funds
   Barclays Capital Corporate High Yield Index
   Morningstar Dollar High Yield Bond Funds
   Morningstar Euro High Yield Bond Funds
   Lipper Variable Annuity High Current Yield Funds
   BofA Merrill Lynch European Currency High Yield Constrained Index 100% Hedged
John F. Addeo    Lipper High Current Yield Funds
   Barclays Capital Corporate High Yield Index
   Morningstar Dollar High Yield Bond Funds
   Morningstar Euro High Yield Bond Funds
   Lipper Variable Annuity High Yield Funds
   BofA Merrill Lynch European Currency High Yield Constrained Index 100% Hedged

Additional or different benchmarks, including versions of indices and custom indices may also be used. Primary weight is given to portfolio performance over a three-year time period with lesser consideration given to portfolio performance over one-year and five-year periods (adjusted as appropriate if the portfolio manager has served for less than five years).

The qualitative portion is based on the results of an annual internal peer review process (conducted by other portfolio managers, analysts, and traders) and management’s assessment of overall portfolio manager contributions to investor relations and the investment process (distinct from fund and other account performance).


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Portfolio managers also typically benefit from the opportunity to participate in the MFS Equity Plan. Equity interests and/or options to acquire equity interests in MFS or its parent company are awarded by management, on a discretionary basis, taking into account tenure at MFS, contribution to the investment process, and other factors.

Finally, portfolio managers also participate in benefit plans (including a defined contribution plan and health and other insurance plans) and programs available generally to other employees of MFS. The percentage such benefits represent of any portfolio manager’s compensation depends upon the length of the individual’s tenure at MFS and salary level, as well as other factors.

Ownership of Fund Shares. The following table shows the dollar range of equity securities of the Fund beneficially owned by the Fund’s portfolio manager(s) as of the fund’s fiscal year ended November 30, 2010. The following dollar ranges apply:

N. None

A. $1 - $10,000

B. $10,001 - $50,000

C. $50,001 - $100,000

D. $100,001 - $500,000

E. $500,001 - $1,000,000

F. Over $1,000,000

 

Name of Portfolio Manager

  

Dollar Range of Equity Securities in Fund

David P. Cole

   N

John F. Addeo

   N

Other Accounts. In addition to the Fund, the Fund’s portfolio manager is named as a portfolio manager of certain other accounts managed or subadvised by MFS or an affiliate, the number and assets of which, as of the fund’s fiscal year ended November 30, 2010

 

      Registered Investment
Companies
     Other Pooled Investment
Vehicles
     Other Accounts

Name

   Number of
Accounts*
   Total Assets*      Number of
Accounts
   Total Assets      Number of
Accounts
   Total Assets

David P. Cole

   10    $ 3.8 billion       2    $ 654.2 million       0    N/A

John F. Addeo

   13    $ 4.2 billion       5    $ 1.3 billion       0    N/A

 

* Includes the Fund.

Advisory fees are not based upon performance of any of the accounts identified in the table above.

Potential Conflicts of Interest. The Adviser seeks to identify potential conflicts of interest resulting from a portfolio manager’s management of both the Fund and other accounts, and has adopted policies and procedures designed to address such potential conflicts.


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The management of multiple funds and accounts (including proprietary accounts) gives rise to potential conflicts of interest if the funds and accounts have different objectives and strategies, benchmarks, time horizons and fees as a portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. In certain instances there are securities which are suitable for the Fund’s portfolio as well as for accounts of the Adviser or its subsidiaries with similar investment objectives. A Fund’s trade allocation policies may give rise to conflicts of interest if the Fund’s orders do not get fully executed or are delayed in getting executed due to being aggregated with those of other accounts of the Adviser or its subsidiaries. A portfolio manager may execute transactions for another fund or account that may adversely affect the value of the Fund’s investments. Investments selected for funds or accounts other than the Fund may outperform investments selected for the Fund.

When two or more clients are simultaneously engaged in the purchase or sale of the same security, the securities are allocated among clients in a manner believed by the Adviser to be fair and equitable to each. It is recognized that in some cases this system could have a detrimental effect on the price or volume of the security as far as the Fund is concerned. In most cases, however, the Adviser believes that the Fund’s ability to participate in volume transactions will produce better executions for the Fund.

The Adviser and/or a portfolio manager may have a financial incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor accounts other than the Fund, for instance, those that pay a higher advisory fee and/or have a performance adjustment.

 

ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANY AND AFFILIATED PURCHASERS.

MFS Intermediate High Income Fund

 

Period

   (a) Total number
of Shares
Purchased
     (b)
Average
Price

Paid  per
Share
     (c) Total
Number of
Shares
Purchased as
Part
of Publicly
Announced
Plans or
Programs
     (d) Maximum
Number (or
Approximate
Dollar Value) of
Shares that May
Yet Be Purchased
under the Plans
or Programs
 

12/01/09-12/31/09

     0         N/A         0         2,083,791   

1/01/10-1/31/10

     0         N/A         0         2,083,791   

2/01/10-2/28/10

     0         N/A         0         2,083,791   

3/01/10-3/31/10

     0         N/A         0         2,085,481   

4/01/10-4/30/10

     0         N/A         0         2,085,481   

5/01/10-5/31/10

     0         N/A         0         2,085,481   

6/01/10-6/30/10

     0         N/A         0         2,085,481   

7/01/10-7/31/10

     0         N/A         0         2,085,481   

8/01/10-8/31/10

     0         N/A         0         2,085,481   

9/01/10-9/30/10

     0         N/A         0         2,085,481   

10/01/10-10/31/10

     0         N/A         0         2,085,481   

11/01/10-11/30/10

     0         N/A         0         2,085,481   
                       

Total

     0            0      
                       


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Note: The Board of Trustees approves procedures to repurchase shares annually. The notification to shareholders of the program is part of the semi-annual and annual reports sent to shareholders. These annual programs begin on March 1st of each year. The programs conform to the conditions of Rule 10b-18 of the securities Exchange Act of 1934 and limit the aggregate number of shares that may be purchased in each annual period (March 1 through the following February 28) to 10% of the Registrant’s outstanding shares as of the first day of the plan year (March 1). The aggregate number of shares available for purchase for the March 1, 2010 plan year is 2,085,481.

 

ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no material changes to the procedures by which shareholders may send recommendations to the Board for nominees to the Registrant’s Board since the Registrant last provided disclosure as to such procedures in response to the requirements of Item 407 (c)(2)(iv) of Regulation S-K or this Item.

 

ITEM 11. CONTROLS AND PROCEDURES.

 

(a) Based upon their evaluation of the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as conducted within 90 days of the filing date of this Form N-CSR, the registrant’s principal financial officer and principal executive officer have concluded that those disclosure controls and procedures provide reasonable assurance that the material information required to be disclosed by the registrant on this report is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

(b) There were no changes in the registrant’s internal controls over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the second fiscal quarter covered by the report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.


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ITEM 12. EXHIBITS.

 

(a) File the exhibits listed below as part of this form. Letter or number the exhibits in the sequence indicated.

(1) Any code of ethics, or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy the Item 2 requirements through filing of an exhibit: Code of Ethics attached hereto.

(2) A separate certification for each principal executive officer and principal financial officer of the registrant as required by Rule 30a-2(a) under the Act (17 CFR 270.30a-2): Attached hereto.

(3)Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the Registrant to 10 or more persons. Not applicable.

 

(b) If the report is filed under Section 13(a) or 15(d) of the Exchange Act, provide the certifications required by Rule 30a-2(b) under the Act (17 CFR 270.30a-2(b)), Rule 13a-14(b) or Rule 15d-14(b) under the Exchange Act (17 CFR 240.13a-14(b) or 240.15d-14(b)) and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. 1350) as an exhibit. A certification furnished pursuant to this paragraph will not be deemed “filed” for the purposes of Section 18 of the Exchange Act (15 U.S.C. 78r), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference: Attached hereto.


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Notice

A copy of the Agreement and Declaration of Trust, as amended, of the Registrant is on file with the Secretary of State of the Commonwealth of Massachusetts and notice is hereby given that this instrument is executed on behalf of the Registrant by an officer of the Registrant as an officer and not individually and the obligations of or arising out of this instrument are not binding upon any of the Trustees or shareholders individually, but are binding only upon the assets and property of the respective constituent series of the Registrant.


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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Registrant MFS INTERMEDIATE HIGH INCOME FUND

 

By (Signature and Title)*    MARIA F. DIORIODWYER
  Maria F. DiOrioDwyer, President

Date: January 14, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By (Signature and Title)*    MARIA F. DIORIODWYER
  Maria F. DiOrioDwyer, President (Principal Executive Officer)

Date: January 14, 2011

 

By (Signature and Title)*    JOHN M. CORCORAN
  John M. Corcoran, Treasurer (Principal Financial Officer and Accounting Officer)

Date: January 14, 2011

 

* Print name and title of each signing officer under his or her signature.