<PAGE>
[Logo] M F S (R)
INVESTMENT MANAGEMENT SEMIANNUAL REPORT
75 YEARS SEPTEMBER 30, 1999
WE INVENTED THE MUTUAL FUND(R)
[Graphic Omitted]
MFS(R) MASSACHUSETTS
HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK
HIGH INCOME TAX FREE FUND
<PAGE>
<TABLE>
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D. - Chief of Cardiac Surgery, State Street Bank and Trust Company
Brigham and Women's Hospital; Professor of Surgery,
Harvard Medical School INVESTOR INFORMATION
For MFS stock and bond market outlooks, call toll free:
The Hon. Sir J. David Gibbons, KBE - Chief Executive 1-800-637-4458 anytime from a touch-tone telephone.
Officer, Edmund Gibbons Ltd.; Chairman, Colonial
Insurance Company, Ltd. For information on MFS mutual funds, call your
financial consultant or, for an information kit, call
Abby M. O'Neill - Private Investor toll free: 1-800-637-2929 any business day from 9 a.m.
to 5 p.m. Eastern time (or leave a message anytime).
Walter E. Robb, III - President and Treasurer,
Benchmark Advisors, Inc.; President, Benchmark INVESTOR SERVICE
Consulting Group, Inc. MFS Service Center, Inc.
P.O. Box 2281
Arnold D. Scott* - Senior Executive Vice President, Boston, MA 02107-9906
Director, and Secretary, MFS Investment Management
For general information, call toll free: 1-800-225-2606
Jeffrey L. Shames* - Chairman, Chief Executive Officer, any business day from 8 a.m. to 8 p.m. Eastern time.
and Director, MFS Investment Management
For service to speech- or hearing-impaired, call toll
J. Dale Sherratt - President, Insight free: 1-800-637-6576 any business day from 9 a.m. to 5
Resources, Inc.; Managing General Partner, p.m. Eastern time. (To use this service, your phone
Wellfleet Investments; Chief Executive Officer, must be equipped with a Telecommunications Device for
Cambridge Nutraceuticals the Deaf.)
Ward Smith - Former Chairman (until 1994), For share prices, account balances, and exchanges, call
NACCO Industries toll free: 1-800-MFS-TALK (1-800-637-8255) anytime from
a touch-tone telephone.
INVESTMENT ADVISER
Massachusetts Financial Services Company WORLD WIDE WEB
500 Boylston Street www.mfs.com
Boston, MA 02116-3741
DISTRIBUTOR
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
CHAIRMAN AND PRESIDENT
Jeffrey L. Shames*
PORTFOLIO MANAGER
Michael W. Roberge*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
LETTER FROM THE CHAIRMAN
Dear Shareholders,
The current investment and economic environment bears little resemblance to
last year's. One year ago, global economies were floundering, and the crisis
in Asia threatened an already weak U.S. economy. Corporate earnings were flat,
and economists used the word "deflation" for the first time in recent memory.
Entering 1999, expectations for corporate earnings growth were lowered
dramatically. In an attempt to foster U.S. growth, the Federal Reserve Board
(the Fed) lowered interest rates.
As a result, this year the U.S. economy is booming and unemployment is low. Many
corporations are focused on improving their profitability, and investors have
been rewarded with positive surprises across a variety of industries. Our
analysts predict that corporate earnings growth for 1999 will average 12% - 15%.
Global economies also are showing signs of strength, and the Asian crisis has
passed. In fact, Japan's economic woes seem to have reached bottom. Although the
process is in its infancy, some Japanese corporations not only are talking about
restructuring and cost cutting, they also are beginning to take action, looking
within to become more competitive and improve returns on equity. While still
lagging the United States, Europe is beginning to restructure and consolidate.
These signs of international growth have contributed to concerns that the U.S.
economy now may be too strong. In June, and again in August, the Fed raised
rates by one-quarter of a percentage point to help ward off the specter of
inflation.
After an unprecedented four years of 20% annual returns in the U.S. equity
market, we fear that many investors have become accustomed to high returns and
have lost sight of the risks they take on to achieve them. In the current
market many investors are taking on additional risk - whether through day
trading or investing in speculative Internet stocks.
Risks are as much a part of the market today as they were one year ago. We
believe the market remains overvalued, with stocks priced 30% above our
analysts' earnings projections. And market narrowness has not abated; the top
25 stocks in the Standard & Poor's 500 Composite Index, a popular, unmanaged
index of common stock total return performance, are still the most overvalued.
Such extreme overvaluation makes the stock market sensitive to interest-rate
news and any negative earnings surprises. The Year 2000 (Y2K) computer problem
is another factor causing investor concern. While we believe corporate America
is well prepared to address any Y2K situations that may arise at year-end, no
one can predict investor behavior. In our opinion, it is investor behavior
that has the greatest potential to create market volatility.
We believe the best way to address Y2K and other market risks is through our
continuing commitment to MFS Original Research(R) and our fundamental investment
tenet of long-term investing. Whether markets are up or down, MFS analysts focus
on analyzing industries and visiting companies to determine the long-term
winners and the prices that will make them attractive opportunities. Because all
companies will not benefit equally from the improving international environment,
bottom-up research remains critical to identifying those that we believe are
successfully restructuring, consolidating, and gaining market share.
Changes in market and economic conditions can't be predicted but should always
be expected. The changes we have seen over the past year only reinforce our
commitment to long-term planning and investing. We believe volatility helps to
create opportunity for long-term investors to buy solid companies at
attractive prices. For this reason, we are continuing to expand our domestic
and international capabilities to ensure that MFS has primary, in-house
research on companies worldwide. We believe that we have built the right
investment team, backed by MFS Original Research, to take advantage of those
opportunities for our shareholders.
We appreciate your confidence and welcome any questions or comments you may
have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
October 15, 1999
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
MFS Massachusetts High Income Tax Free Fund
Dear Shareholders,
The Fund commenced investment operations on August 2, 1999, and seeks to
provide high current income exempt from federal income tax and Massachusetts
personal income tax. The Fund is nondiversified and may invest in a small
number of issuers. Most of the Fund's assets are invested in municipal
securities and in participation interests in municipal securities, which
represent securities pooled by multiple issuers and backed by a letter of
credit or a guarantee from a bank.
Since the beginning of the year, there has been a significant bond market
sell-off due to strong economic growth and renewed fears of inflation. As a
result, the yield on 30-year U.S. Treasury bonds has increased by 95 basis
points (0.95%). (The principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) While municipal rates
also have gone up, their yield increase of 80 basis points (0.80%) has been
less, resulting in municipals outperforming Treasuries.
The two areas in which we believe we can add the most value are credit
research and yield-curve positioning. Currently the credit spreads, which are
the yield premium available for taking credit risk, are very low. Therefore,
we have been cautious in adding lower-rated securities to the portfolio.
Although we have the ability to invest up to 75% in securities rated "BBB" or
lower, we do not feel it is appropriate for the Fund to assume that much
credit risk at this time, given the tight spreads in the municipal market. The
result is a relatively high-quality portfolio. In general, we are
concentrating on bonds with a maturity of less than 20 years because we
believe these bonds offer better total return relative to the corresponding
risk level.
The Fund has benefited from a healthy and diversified Massachusetts economy,
especially from the commonwealth's efforts since the early 1990s to diversify
its industrial base. The financial services and technology sectors, in
particular, have contributed strongly to tax revenues, and the overall outlook
appears positive. Looking ahead, we are cautious about interest rates because
growth continues to be strong and we've seen some modest inflationary
pressure.
Respectfully,
/s/ Michael W. Roberge
Michael W. Roberge
Portfolio Manager
<PAGE>
MFS New York High Income Tax Free Fund
Dear Shareholders,
The Fund commenced investment operations on August 2, 1999, and seeks to
provide high current income exempt from federal income tax and New York State
and City income tax. The Fund is nondiversified and may invest in a small
number of issuers. Most of the Fund's assets are invested in municipal
securities and in participation interests in municipal securities, which
represent securities pooled by multiple issuers and backed by a letter of
credit or a guarantee from a bank.
Since the beginning of the year, there has been a significant bond market
sell-off due to strong economic growth and renewed fears of inflation. As a
result, the yield on 30-year U.S. Treasury bonds has increased by 95 basis
points (0.95%). (The principal value and interest on Treasury securities are
guaranteed by the U.S. government if held to maturity.) While municipal rates
also have gone up, their yield increase of 80 basis points (0.80%) has been
less, resulting in municipals outperforming Treasuries.
The two areas in which we believe we can add the most value are credit
research and yield-curve positioning. Currently, the credit spreads, which are
the yield premium available for taking credit risk, are very low. Therefore,
we have been cautious in adding lower-rated securities to the portfolio.
Although we have the ability to invest up to 75% in securities rated "BBB" or
lower, we do not feel it is appropriate for the Fund to assume that much
credit risk at this time, given the tight spreads in the municipal market. The
result is a relatively high-quality portfolio. In general, we are
concentrating on bonds with a maturity of less than 20 years because we
believe these bonds offer better total return relative to the corresponding
risk level.
The financial services industry has contributed significantly to the state's
economy, which has benefited the Fund. Although the industry is not dominant
in terms of its number of employees, the actual personal and corporate income
from the sector is relatively large. This contribution does make the state
somewhat vulnerable to any weakness in financial services. Looking ahead, we
are cautious about interest rates because growth continues to be strong and
we've seen some modest inflationary pressure.
Respectfully,
/s/ Michael W. Roberge
Michael W. Roberge
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are current only through the end of the period of the report as stated on the
cover. The manager's views are subject to change at any time based on market
and other conditions, and no forecasts can be guaranteed.
The portfolios are actively managed, and current holdings may be different.
Currently, each Fund offers only Class A shares which are available for purchase
at net asset value only by residents of the Commonwealth of Massachusetts or
State of New York (as applicable) who are employees (or certain relatives of
employees) of MFS and its affiliates or members of the governing boards of the
various funds sponsored by MFS.
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - September 30, 1999
<TABLE>
<CAPTION>
MFS MASSACHUSETTS HIGH INCOME TAX FREE FUND
Municipal Bonds - 83.7%
- -----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
General Obligation - 22.7%
Central Berkshire, MA, Regional School District, FSA, 5.25s, 2014 $100 $ 97,305
Commonwealth of Massachusetts, 6.5s, 2008 100 109,911
Commonwealth of Massachusetts, FGIC, 7s, 2009 100 114,113
Massachusetts Consolidated Loan, FGIC, 5.25s, 2008 100 101,937
Worcester, MA, FSA, 6s, 2016 100 103,798
----------
$ 527,064
- -----------------------------------------------------------------------------------------------------
State and Local Appropriation - 4.5%
Massachusetts Bay Transport Authority (General
Transportation Systems), 5.5s, 2004 $100 $ 103,827
- -----------------------------------------------------------------------------------------------------
Refunded and Special Obligations - 2.3%
Commonwealth of Massachusetts Water Resources Authority,
MBIA, 5.25s, 2004 $ 50 $ 52,595
- -----------------------------------------------------------------------------------------------------
Airport and Port Revenue - 4.0%
Massachusetts Port Authority Rev., FSA, 5.125s, 2017 $100 $ 92,973
- -----------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 3.3%
Puerto Rico Electric Power Authority, Power Rev., FSA,
7.25s, 2015(++)+ $ 80 $ 77,597
- -----------------------------------------------------------------------------------------------------
Health Care Revenue - 3.9%
Massachusetts Health & Education Facilities Authority
(Jordan Hospital), 5.25s, 2018 $100 $ 89,563
- -----------------------------------------------------------------------------------------------------
Industrial Revenue (Corporate Guarantee) - 2.1%
Massachusetts Development Finance Agency Rev
(Springfield Resources Recovery), 5.625s, 2019 $ 50 $ 47,897
- -----------------------------------------------------------------------------------------------------
Insured Health Care Revenue - 4.0%
Massachusetts Health & Educational Facilities Authority
(Partners Healthcare Systems), MBIA, 5.375s, 2024 $100 $ 93,078
- -----------------------------------------------------------------------------------------------------
Sales and Excise Tax Revenue - 5.3%
Massachusetts Special Obligation Rev., 5.5s, 2012 $120 $ 122,478
- -----------------------------------------------------------------------------------------------------
Universities - 12.5%
Commonwealth of Massachusetts, College Building, MBIA, 5.625s, 2016 $100 $ 99,817
Massachusetts Development Finance Agency Rev. (Eastern
Nazarine College), 5.625s, 2019 100 93,314
Massachusetts Industrial Finance Agency (Belmont Hill
School), 5.625s, 2020 100 95,664
----------
$ 288,795
- -----------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 8.7%
Massachusetts Water Pollution Abatement Trust, 5.375s, 2011 $ 75 $ 75,976
Massachusetts Water Pollution Abatement Trust, 5.5s, 2012 50 50,832
Massachusetts Water Pollution Abatement Trust, 5.5s, 2013 25 25,231
Massachusetts Water Pollution Abatement Trust, 5.75s, 2016 25 25,369
Massachusetts Water Pollution Abatement Trust, 5.75s, 2017 25 25,268
----------
$ 202,676
- -----------------------------------------------------------------------------------------------------
Other - 10.4%
Commonwealth of Massachusetts, 5.125s, 2015 $200 $ 190,702
Rail Connections, Inc. (Route 128 Parking Garage), 6s, 2012 50 50,813
----------
$ 241,515
- -----------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $1,965,895) $1,940,058
- -----------------------------------------------------------------------------------------------------
Floating Rate Demand Notes - 27.8%
- -----------------------------------------------------------------------------------------------------
Harris County, TX, Industrial Development Corp. (Shell
Oil Co.), due 10/01/99 $100 $ 100,000
Jackson County, MS, Pollution Control Rev. (Chevron USA,
Inc.), due 10/01/99 100 100,000
Kansas City, MO, Industrial Development Hospital, due 10/01/99 100 100,000
Lehigh County, PA, General Purpose Authority Rev
(Lehigh Valley Hospital), due 10/01/99 90 90,000
New York City, NY, due 10/01/99 65 65,000
Pinellas County, FL, Health Facility Authority, due 10/01/99 100 100,000
Uinta County, WY, Pollution Control Rev. (Chevron), due 10/01/99 90 90,000
- -----------------------------------------------------------------------------------------------------
Total Floating Rate Demand Notes, at Identified Cost $ 645,000
- -----------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $2,610,895) $2,585,058
Other Assets, Less Liabilities - (11.5)% (267,318)
- -----------------------------------------------------------------------------------------------------
Net assets - 100.0% $2,317,740
- -----------------------------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements.
</TABLE>
<PAGE>
PORTFOLIO OF INVESTMENTS (Unaudited) - September 30, 1999
<TABLE>
<CAPTION>
MFS NEW YORK HIGH INCOME TAX FREE FUND
Municipal Bonds - 99.0%
- -----------------------------------------------------------------------------------------------------
PRINCIPAL AMOUNT
ISSUER (000 OMITTED) VALUE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
General Obligation - 7.1%
Erie County, NY, Public Improvement, 5.625s, 2012 $ 15 $ 15,321
Nassau County, NY, FSA, 5.25s, 2008 20 20,359
----------
$ 35,680
- -----------------------------------------------------------------------------------------------------
State and Local Appropriation - 25.1%
Metropolitan Transportation Authority, NY, Transportation
Facilities Rev., MBIA, 5s, 2014 $ 25 $ 23,571
New York Dormitory Authority Rev. (Mental Health Services
Facilities), 6s, 2007 25 26,522
New York Dormitory Authority Rev. (Office Facilities -
Audit & Control), MBIA, 5.25s, 2011 25 24,862
New York Dormitory Authority Rev. (State Universities),
AMBAC, 5.5s, 2009 25 25,912
New York Urban Development Corp. Rev. (Correctional
Capital Facilities), FSA, 5.25s, 2014 25 24,646
----------
$ 125,513
- -----------------------------------------------------------------------------------------------------
Refunded and Special Obligations - 9.8%
New York City, NY, Municipal Water Finance Authority,
Water & Sewer Systems Rev., 6s, 2005 $ 25 $ 26,953
New York Medical Care Facilities Financing Agency Rev
(Mental Health Services), 6.375s, 2004 20 21,933
----------
$ 48,886
- -----------------------------------------------------------------------------------------------------
Airport and Port Revenue - 4.1%
Niagara, NY, Frontier Authority Airport Rev. (Buffalo-
Niagra International Airport), MBIA, 5.5s, 2009 $ 20 $ 20,360
- -----------------------------------------------------------------------------------------------------
Electric and Gas Utility Revenue - 8.5%
Long Island, NY, Power Authority, Electric Systems Rev., FSA, 5s, 2015 $ 25 $ 23,210
Puerto Rico Electric Power Authority, Power Rev., FSA,
7.25s, 2015(++)+ 20 19,399
----------
$ 42,609
- -----------------------------------------------------------------------------------------------------
Health Care Revenue - 1.9%
New York City, NY, Health & Hospital Corp. Rev., 5.25s, 2017 $ 10 $ 9,225
- -----------------------------------------------------------------------------------------------------
Solid Waste Revenue - 4.0%
Rockland County, NY, Solid Waste Management Authority, 4.8s, 2005 $ 20 $ 19,900
- -----------------------------------------------------------------------------------------------------
Turnpike Revenue - 10.4%
Triborough Bridge & Tunnel Authority, NY, 5.5s, 2006 $ 25 $ 25,983
Triborough Bridge & Tunnel Authority, NY, 5.75s, 2011 25 26,104
----------
$ 52,087
- -----------------------------------------------------------------------------------------------------
Universities - 10.2%
Islip, NY, Community Development Agency Rev. (New York
Institute of Technology), 7.5s, 2026 $ 10 $ 10,587
New York Dormitory Authority Rev. (New York University),
MBIA, 5.75s, 2013 20 20,725
New York Dormitory Authority Rev. (University of
Rochester), MBIA, 5.25s, 2015 20 19,369
----------
$ 50,681
- -----------------------------------------------------------------------------------------------------
Water and Sewer Utility Revenue - 4.2%
New York Environmental Facilities Corp., Pollution Control
Rev., 5.75s, 2012 $ 20 $ 20,929
- -----------------------------------------------------------------------------------------------------
Other - 13.7%
New York City, NY, Cultural Resources Rev. (American
Museum of Natural History), AMBAC, 5.25s, 2017 $ 50 $ 47,872
Suffolk County, NY, Judical Facilities Rev. (John P
Cohalan Complex), AMBAC, 5.5s, 2008 20 20,662
----------
$ 68,534
- -----------------------------------------------------------------------------------------------------
Total Municipal Bonds (Identified Cost, $498,091) $ 494,404
- -----------------------------------------------------------------------------------------------------
Floating Rate Demand Note - 2.0%
- -----------------------------------------------------------------------------------------------------
Lehigh County, PA, General Purpose Authority Rev. (Lehigh
Valley Health), due 10/01/99, at Identified Cost $10 $ 10,000
- -----------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $508,091) $ 504,404
Other Assets, Less Liabilities - (1.0)% (5,184)
- -----------------------------------------------------------------------------------------------------
Net assets - 100.0% $ 499,220
- -----------------------------------------------------------------------------------------------------
See portfolio footnotes and notes to financial statements.
PORTFOLIO FOOTNOTES:
+ Restricted security.
(++) Inverse floating rate security.
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statements of Assets and Liabilities (Unaudited)
- -------------------------------------------------------------------------------
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
SEPTEMBER 30, 1999 TAX FREE FUND TAX FREE FUND
- -------------------------------------------------------------------------------
Assets:
Investments -
Identified cost $2,610,895 $ 508,091
Unrealized depreciation (25,837) (3,687)
---------- ----------
Total investments, at value $2,585,058 $ 504,404
Cash 17,748 4,831
Interest receivable 24,721 5,319
---------- ----------
Total assets $2,627,527 $ 514,554
---------- ----------
Liabilities:
Distributions payable $ 2,004 $ --
Payable for investments purchased 307,783 15,334
---------- ----------
Total liabilities $ 309,787 $ 15,334
---------- ----------
Net assets $2,317,740 $ 499,220
========== ==========
Net assets consist of:
Paid-in-capital $2,343,577 $ 503,588
Unrealized depreciation on investments (25,837) (3,687)
Accumulated net realized loss on investments -- (681)
---------- ----------
Total $2,317,740 $ 499,220
========== ==========
Shares of beneficial interest outstanding:
Class A 235,673 50,361
========== ==========
Class A shares:
Net asset value per share
(net assets / shares of beneficial
interest outstanding) $ 9.83 $ 9.91
====== ======
Offering price per share (100 / 95.25 of
net asset value per share) $10.32 $10.40
====== ======
On sales of $100,000 or more, the offering price of Class A shares is reduced.
A contingent deferred sales charge may be imposed on redemptions of Class A.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Operations (Unaudited)
- -------------------------------------------------------------------------------
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
PERIOD ENDED SEPTEMBER 30, 1999* TAX FREE FUND TAX FREE FUND
- -------------------------------------------------------------------------------
Net investment income:
Interest Income $ 14,718 $ 3,380
-------- --------
Expenses -
Management fee $ 1,269 $ 322
Shareholder servicing agent fee 317 80
Administrative fee 47 12
Custodian fee 271 46
Printing 13,636 3,296
Postage 26 12
Auditing fees 6,600 6,600
Legal fees 1,404 1,237
Registration fees -- 1,000
Miscellaneous 3,215 1,447
-------- --------
Total expenses $ 26,785 $ 14,052
Fees paid indirectly (21) (26)
Reduction of expenses by investment adviser (26,764) (14,026)
-------- --------
Net expenses $ -- $ --
-------- --------
Net investment income $ 14,718 $ 3,380
-------- --------
Realized and unrealized loss on investments:
Realized loss (identified cost basis) on
investment transactions $ -- $ (681)
-------- --------
Change in unrealized depreciation on investments $(25,837) $ (3,687)
-------- --------
Net realized and unrealized loss on investments $(25,837) $ (4,368)
-------- --------
Decrease in net assets from operations $(11,119) $ (988)
-------- --------
* For the period from the commencement of each Fund's investment operations,
August 2, 1999, through September 30, 1999.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
Statements of Changes in Net Assets (Unaudited)
- -------------------------------------------------------------------------------
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
PERIOD ENDED SEPTEMBER 30, 1999* TAX FREE FUND TAX FREE FUND
- -------------------------------------------------------------------------------
Increase (decrease) in net assets:
From operations -
Net investment income $ 14,718 $ 3,380
Net realized loss on investments -- (681)
Net unrealized loss on investments (25,837) (3,687)
---------- --------
Decrease in net assets from operations $ (11,119) $ (988)
---------- --------
Distributions declared to shareholders from
net investment income (Class A) $ (14,718) $ (3,380)
---------- --------
Net increase in net assets from Fund share
transactions $2,343,577 $503,588
---------- --------
Total increase in net assets $2,317,740 $499,220
Net assets:
At beginning of period -- --
---------- --------
At end of period $2,317,740 $499,220
========== ========
* For the period from the commencement of each Fund's investment operations,
August 2, 1999, through September 30, 1999.
See notes to financial statements.
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
- -------------------------------------------------------------------------------
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
PERIOD ENDED SEPTEMBER 30, 1999* (UNAUDITED) TAX FREE FUND TAX FREE FUND
- -------------------------------------------------------------------------------
CLASS A CLASS A
- -------------------------------------------------------------------------------
Per share data (for a share outstanding throughout
the period):
Net asset value - beginning of period $10.00 $10.00
------ ------
Income from investment operations# -
Net investment income(S) $ 0.07 $ 0.07
Net realized and unrealized loss on investments (0.17) (0.09)
------ ------
Total from investment operations $(0.10) $(0.02)
------ ------
Less distributions declared to shareholders from net
investment income $(0.07) $(0.07)
------ ------
Net asset value - end of period $ 9.83 $ 9.91
====== ======
Total return(+) (1.00)%++ (0.23)%++
Ratios (to average net assets)/Supplemental data(S):
Expenses## 0.01%+ 0.03%+
Net investment income 4.62%+ 4.20%+
Portfolio turnover -- % 5%
Net assets at end of period (000 omitted) $2,318 $ 499
(S) The investment adviser voluntarily agreed to maintain the expenses of each
Fund at 0.00% of its average daily net assets. In addition, the investment
adviser voluntarily waived its fee for the periods indicated. To the extent
actual expenses were over this limitation and the waivers had not been in
place, the net investment loss per share and the ratios would have been:
Net investment loss $ (0.07) $(0.21)
Ratios (to average net assets):
Expenses## 8.42%+ 17.46%+
Net investment loss (3.79)%+ (13.23)%+
* For the period from the commencement of each Fund's investment operations,
August 2, 1999, through September 30, 1999.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## Each Fund has an expense offset arrangement which reduces each Fund's
custodian fee based upon the amount of cash maintained by the Fund with its
custodian and dividend disbursing agent. Each Fund's expenses are calculated
without reduction for this expense offset arrangement.
(+) Total returns for Class A shares do not include the applicable sales charge.
If the charge had been included, the results would have been lower.
See notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(1) Business and Organization
MFS Massachusetts High Income Tax Free Fund and the MFS New York High Income
Tax Free Fund are each a nondiversified series of MFS Municipal Series Trust
(the Trust). The Trust is organized as a Massachusetts business trust and is
registered under the Investment Company Act of 1940, as amended, as an open-
end management investment company.
(2) Significant Accounting Policies
General - The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Because each Fund invests primarily in the securities of a single state and
its political subdivisions, each Fund is vulnerable to the effects of changes
in the legal and economic environment of the particular state. Each Fund can
invest up to 75% of its portfolio 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.
Investment Valuations - Debt securities (other than short-term obligations
which mature in 60 days or less), including listed issues are valued on the
basis of valuations furnished by dealers or by a pricing service with
consideration to factors such as institutional-size trading in similar groups
of securities, yield, quality, coupon rate, maturity, type of issue, trading
characteristics, and other market data, without exclusive reliance upon
exchange or over-the-counter prices. Short-term obligations, which mature in
60 days or less, are valued at amortized cost, which approximates market
value. Securities for which there are no such quotations or valuations are
valued in good faith by the Trustees.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All premium
and original issue discount is amortized or accreted for financial statement
and tax reporting purposes as required by federal income tax regulations.
Interest payments received in additional securities are recorded on the ex-
interest date in an amount equal to the value of the security on such date.
Some securities may be purchased on a "when-issued" or "forward delivery"
basis, which means that the securities will be delivered to the Fund at a
future date, usually beyond customary settlement time.
Each Fund uses the effective interest method for reporting interest income on
payment-in-kind (PIK) bonds. Legal fees and other related expenses incurred to
preserve and protect the value of a security owned are added to the cost of
the security; other legal fees are expensed. Capital infusions made directly
to the security issuer, which are generally non-recurring, incurred to protect
or enhance the value of high-yield debt securities, are reported as additions
to the cost basis of the security. Costs that are incurred to negotiate the
terms or conditions of capital infusions or that are expected to result in a
plan of reorganization are reported as realized losses. Ongoing costs incurred
to protect or enhance an investment, or costs incurred to pursue other claims
or legal actions, are expensed.
Fees Paid Indirectly - The Trust's custody fee is calculated as a percentage
of each Funds' month end net assets. The fee is reduced according to an
arrangement that measures the value of cash deposited with the custodian by
each Fund. This amount is shown as a reduction of expense on the statement of
operations.
Tax Matters and Distributions - The Trust's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net income,
including any net realized gain on investments. Accordingly, no provision for
federal income or excise tax is provided.
Distributions paid by each Fund from net interest received on tax-exempt
municipal bonds are not includable by shareholders as gross income for federal
income tax purposes because each Fund intends to meet certain requirements of
the Code applicable to regulated investment companies, which will enable each
Fund to pay exempt-interest dividends. The portion of such interest, if any,
earned on private activity bonds issued after August 7, 1986, may be
considered a tax-preference item to shareholders.
Distributions to shareholders are recorded on the ex-dividend date. Each Fund
distinguishes between distributions on a tax basis and a financial reporting
basis and requires that only distributions in excess of tax basis earnings and
profits are reported in the financial statements as distributions from paid-in
capital. Differences in the recognition or classification of income between
the financial statements and tax earnings and profits, which result in
temporary over-distributions for financial statement purposes, are classified
as distributions in excess of net investment income or net realized gains.
(3) Transactions with Affiliates
Investment Adviser - Each Fund has an investment advisory agreement with
Massachusetts Financial Services Company (MFS) to provide overall investment
advisory and administrative services, and general office facilities. The
management fee is computed daily and paid monthly at an annual rate of 0.40%
of each Fund's average daily net assets. The investment adviser has
voluntarily agreed to waive its fee, which is shown as a reduction of expenses
in the Statement of Operations. The investment adviser has voluntarily agreed
to pay each Fund's operating expenses exclusive of management fees such that
each Fund's aggregate expenses do not exceed 0.00% of its average daily net
assets. This is reflected as a reduction of expenses in the Trust's Statement
of Operations.
The Trust pays no compensation directly to its Trustees who are officers of
the investment adviser, or to officers of the Trust, all of whom receive
remuneration for their services to the Trust from MFS. Certain officers and
Trustees of the Trust are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Trustees currently are
not receiving any payments for their services for the Funds.
Administrator - The Trust has an administrative services agreement with MFS to
provide the Trust with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, each Fund pays MFS an administrative fee
at the following annual percentages of each Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, did not
receive any sales charges on sales of Class A shares of each Fund for the
period ended September 30, 1999.
The Trustees have adopted a distribution plan for Class A shares pursuant to
Rule 12b-1 of the Investment Company Act of 1940 as follows:
Each Fund's distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer and a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares. Distribution and service fees under
the Class A distribution plans will commence on such date as the Trustees may
determine.
Certain Class A shares are subject to a contingent deferred sales charge in
the event of a shareholder redemption within 12 months following purchase.
There were no contingent deferred sales charges imposed on Class A shares
during the period ended September 30, 1999.
Shareholder Servicing Agent - MFSC, a wholly owned subsidiary of MFS, earns a
fee for its services as shareholder servicing agent. The fee is calculated as
a percentage of each Fund's average daily net assets at an effective annual
rate of 0.10%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities, and
short-term obligations, were as follows:
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
TAX FREE FUND TAX FREE FUND
- --------------------------------------------------------------------------------
Purchases $1,966,120 $520,967
---------- --------
Sales $ -- $ 22,050
---------- --------
The cost and unrealized appreciation and depreciation in the value of the
investments owned by each Fund, as computed on a federal income tax basis, are
as follows:
MASSACHUSETTS NEW YORK
HIGH INCOME HIGH INCOME
TAX FREE FUND TAX FREE FUND
- ------------------------------------------------------------------------------
Aggregate cost $2,610,895 $508,091
---------- --------
Gross unrealized depreciation $ (26,491) $ (3,902)
Gross unrealized appreciation 654 215
---------- --------
Net unrealized depreciation $ (25,837) $ (3,687)
========== ========
(5) Shares of Beneficial Interest
The Trust's Declaration permits the Trustees to issue an unlimited number of
full and fractional shares of beneficial interest. Transactions in Fund shares
were as follows:
Class A Shares
MASSACHUSETTS HIGH INCOME NEW YORK HIGH INCOME
TAX FREE FUND TAX FREE FUND
------------------------- --------------------
PERIOD ENDED SEPTEMBER
30, 1999* SHARES AMOUNT SHARES AMOUNT
- --------------------------------------------------------------------------------
Shares sold 234,494 $2,331,962 50,021 $500,210
Shares issued to shareholders
in reinvestment of
distributions 1,179 11,615 340 3,378
------- ---------- ------ --------
Net increase 235,673 $2,343,577 50,361 $503,588
======= ========== ====== ========
* For the period from the commencement of each Fund's investment operations,
August 2, 1999, through September 30, 1999.
(6) Restricted Securities
Each Fund may invest not more than 15% of its net assets in securities which
are subject to legal or contractual restrictions on resale. At September 30,
1999, each Fund owned the following restricted securities, excluding
securities issued under Rule 144A, constituting 3.3% and 3.9% of Massachusetts
High Income Tax Free Fund's and the New York High Income Tax Free Fund's net
assets, respectively, which may not be publicly sold without registration
under the Securities Act of 1933. Each does not have the right to demand that
such securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
in good faith by the Trustees.
<TABLE>
<CAPTION>
DATE OF PRINCIPAL
FUND DESCRIPTION ACQUISITION AMOUNT COST VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Massachusetts
High Income Puerto Rico Electric Power Authority,
Tax Free Fund Power Rev., FSA, 7.25s 2015 9/23/1999 $80,000 $78,120 $77,597
-------
New York High
Income Tax Puerto Rico Electric Power Authority,
Free Fund Power Rev., FSA, 7.25s 2015 9/23/1999 $20,000 $19,530 $19,399
-------
</TABLE>
--------------------------------------------
This report is prepared for the general information of shareholders. It is
authorized for distribution to prospective investors only when preceded or
accompanied by a current prospectus.
<PAGE>
MFS' YEAR 2000 READINESS DISCLOSURE
MFS Investment Management(R), as an investment adviser and on behalf of the
MFS funds, is committed to the effective use of technology in managing our
portfolio investments, delivering high-quality service to MFS fund
shareholders, retirement plan participants, and MFS' institutional clients,
and supporting the financial consultants who sell our products. With that in
mind, we created a separately funded Year 2000 Program Management Office in
1996 comprised of a specialized staff reporting directly to MFS senior
management.
The Year 2000 (Y2K) problem arises because calendar-year fields in computers
and software applications traditionally have used two-digit codes so that, for
example, the year 1998 is coded as "98," with the "19" being implied. In the
year 2000, unless necessary corrections have been made, computer applications
may assume "00" refers to 1900 rather than 2000, thus resulting in systems
failures or miscalculations. To address this issue, our team of dedicated
business and technology managers, working with outside experts, is taking
steps to ascertain the Y2K readiness of MFS' internal systems and is working
with our external systems vendors to determine whether they expect their
systems to be ready.
MFS recognizes that fund shareholders and institutional clients also are
concerned about whether the companies whose securities are held in their
portfolios are addressing Y2K issues. As part of the MFS Original Research(R)
process of evaluating portfolio investments, one of the many relevant factors
that MFS' portfolio managers and research analysts may consider is a company's
Y2K readiness. Each year, MFS' research analysts and portfolio managers
conduct more than 1,000 on-site meetings with companies whose securities are,
or may be, held in fund and client portfolios, and host an additional 1,500
meetings at MFS' headquarters. When assessing the Y2K readiness of these
companies, MFS' research analysts and portfolio managers may rely upon
discussions at these meetings as well as SEC disclosure documents and third-
party reports.
Y2K readiness is an enormously complex, worldwide issue. No company or
institution can guarantee that it will be unaffected by the Y2K issue. While
MFS is taking significant steps to protect the integrity of its internal
systems, there can be no assurance that these steps will be sufficient to
avoid any adverse impact on MFS, shareholders of MFS funds, participants in
retirement plans administered by MFS, or MFS' institutional clients.
If you have further questions regarding MFS' Year 2000 Readiness Program,
please visit our Web site at www.mfs.com or contact the MFS Year 2000 Program
Management Office by e-mail at [email protected] or by letter at 500 Boylston
Street, Boston, MA 02116-3741.
<PAGE>
MFS(R) MASSACHUSETTS HIGH INCOME TAX FREE FUND
MFS(R) NEW YORK HIGH INCOME TAX FREE FUND
[Logo] M F S(R)
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(c)1999 MFS Investment Management.(R)
MFS(R) investment products are offered through MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116
INC-3 11/99 1M
