<PAGE>
ANNUAL REPORT FOR
YEAR ENDED
NOVEMBER 30, 1995
[logo] M F S (SM)
THE FIRST NAME IN MUTUAL FUNDS
MFS(R) EMERGING GROWTH FUND
Front cover
Photo of computer disks.
<PAGE>
MFS(R) EMERGING GROWTH FUND
<TABLE>
<CAPTION>
<S> <C>
TRUSTEES SECRETARY
A. Keith Brodkin* - Chairman and President Stephen E. Cavan*
Richard B. Bailey* - Private Investor; ASSISTANT SECRETARY
Former Chairman and Director (until 1991), James R. Bordewick, Jr.*
Massachusetts Financial Services Company; CUSTODIAN
Director, Cambridge Bancorp; Director, State Street Bank and Trust Company
Cambridge Trust Company AUDITORS
Marshall N. Cohan - Private Investor Deloitte & Touche LLP
Lawrence H. Cohn, M.D. - Chief of Cardiac INVESTOR INFORMATION
Surgery, Brigham and Women's Hospital; For MFS stock and bond market outlooks,
Professor of Surgery, Harvard Medical School call toll free: 1-800-637-4458 anytime from
The Hon. Sir J. David Gibbons, KBE - Chief a touch-tone telephone.
Executive Officer, Edmund Gibbons Ltd.; For information on MFS mutual funds, call
Chairman, Bank of N.T. Butterfield & Son Ltd. your financial adviser or, for an information
Abby M. O'Neill - Private Investor; kit, call toll free: 1-800-637-2929 any
Director, Rockefeller Financial Services, Inc. business day from 9 a.m. to 5 p.m. Eastern time
(investment adviser) (or leave a message anytime).
Walter E. Robb, III - President and Treasurer, INVESTOR SERVICE
Benchmark Advisers, Inc. (corporate financial MFS Service Center, Inc.
consultants); President, Benchmark Consulting P.O. Box 2281
Group, Inc. (office services); Trustee, Boston, MA 02107-9906
Landmark Funds (mutual funds) For general information, call toll free:
Arnold D. Scott* - Senior Executive Vice 1-800-225-2606 any business day from
President, Director and Secretary, 8 a.m. to 8 p.m. Eastern time.
Massachusetts Financial Services Company For service to speech- or hearing-impaired,
Jeffrey L. Shames* - President and Director, call toll free: 1-800-637-6576 any business day
Massachusetts Financial Services Company from 9 a.m. to 5 p.m. Eastern time. (To use
J. Dale Sherratt - President, Insight Resources, this service, your phone must be equipped with
Inc. (acquisition planning specialists) a Telecommunications Device for the Deaf.)
Ward Smith - Former Chairman (until 1994), For share prices, account balances and
NACCO Industries; Director, Sundstrand exchanges, call toll free: 1-800-MFS-TALK
Corporation (1-800-637-8255) anytime from a touch-tone
INVESTMENT ADVISER telephone.
Massachusetts Financial Services Company
500 Boylston Street ----------------------------------------------------
Boston, MA 02116-3741 TOP-RATED SERVICE
DISTRIBUTOR DALBAR For the second year in a
MFS Fund Distributors, Inc. row, MFS earned a
500 Boylston Street MFS #1 MFS #1 ranking in
Boston, MA 02116-3741 DALBAR, Inc.'s
PORTFOLIO MANAGER DALBAR Broker/Dealer Survey,
John W. Ballen* Main Office Operations
TREASURER Service Quality category. The firm achieved a 3.49
W. Thomas London* overall score - on a scale of 1 to 4 - in the 1995
ASSISTANT TREASURER survey. A total of 71 firms responded, offering input
James O. Yost* on the quality of service they receive from 36 mutual
fund companies nationwide. The survey contained
*Affiliated with the Investment Adviser questions about service quality in 17 categories,
including "knowledge of phone service contacts,"
"accuracy of transactions processing," and "overall
ease of doing business with the firm."
----------------------------------------------------
</TABLE>
<PAGE>
LETTER TO SHAREHOLDERS
Dear Shareholders:
In January 1994, the Fund was closed to new investors in order to help maximize
the value of existing Fund shares in the investment environment which prevailed
at that time. The Fund was re-opened on January 16, 1995, following a period of
decline in stock prices during which we were able to identify a number of
industries and companies that we felt offered attractive investment
opportunities. For the year ended November 30, 1995, Class A shares of the Fund
provided a total return of 45.98%, while Class B shares had a total return of
44.89%. Both of these returns assume the reinvestment of distributions but
exclude the effects of any sales charges. The Fund's returns compare to the
36.93% return of the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock performance. Over the same period, the
stock market, as measured by the Russell 2000 Total Return Index (an unmanaged
index comprised of 2,000 of the smallest U.S.-domiciled company common stocks
which are traded on the New York Stock Exchange, the American Stock Exchange and
NASDAQ) returned 28.51%. A discussion of the Fund's performance during this
reporting period may be found in the Portfolio Performance and Strategy section
of this letter.
Economic Outlook
Moderate, but sustainable, growth has been the hallmark of the economic
expansion's fifth year. While initial estimates showed the U.S. economy growing
at an annual rate of 4.2% in the third quarter, this surprisingly strong growth
was mainly driven by a pickup in consumer spending and an increase in business
and government outlays. Although impressive, this growth rate is not expected to
continue in coming months. Recent retail sales have been disappointing, in part
because of rising levels of consumer debt. An extended period of lower mortgage
rates seems to have relieved much of the pent-up demand for housing. Growth is
not expected to get much help from the manufacturing sector, either, as order
flows from manufacturers have moderated. Export activity, meanwhile, is also
expected to remain modest as continued weakness abroad has limited demand for
many U.S. goods. However, the Federal Reserve Board's consistent and, so far,
successful efforts to fight inflation seem to be giving consumers and businesses
enough longer term confidence to help maintain modest growth in real (adjusted
for inflation) gross domestic product into 1996.
Stock Market
After some volatility late in the third quarter, the stock market continued to
strengthen. Although many companies reported solid third-quarter results, there
was some weakness in the earnings of retail, financial services and even some
technology companies. However, a slowdown in earnings may be a positive
development if it is an indication that the economy is not overheating and that
inflation is under control. While we see a deceleration of corporate earnings as
the inevitable consequence of traditional business cycles, we remain encouraged
by the high absolute level of profitability among U.S. companies. Also, many
companies' increasing emphasis on cost containment and growing use of technology
have helped keep them highly competitive and reasonably profitable. Looking
ahead, we believe that a stabilizing interest rate environment, coupled with
reasonable earnings reports, could justify current market valuations.
Portfolio Performance and Strategy
The Fund's performance benefited from strong appreciation in the stock prices of
many of its holdings in the technology sector, which responded in 1995 to very
strong earnings growth for semiconductor, hardware, software, networking and
processing companies. Oracle Systems (database software), System Software
(manufacturing application software), and Informix (database software and tools)
reported very strong earnings and their stock prices responded positively.
Sybase (database software) and BMC Software (systems software) became major
additions to the portfolio after they reported disappointing earnings which
drove their stock prices to levels we believed to be very depressed. Both stocks
rebounded strongly and contributed to the positive performance of the Fund.
Other strong performers included networking stocks such as Cabletron and Bay
Networks. The stocks of our semiconductor companies responded very positively to
their strong earnings reports. Compuware (system software) and Autodesk
(computer-aided design) reported disappointing earnings and have been
disappointing stocks. We maintain positions in these companies because we
believe their stock prices will rebound from their currently depressed levels.
The performance of our leisure stocks was particularly helpful. HFS, the
nation's largest franchiser of hotels and real estate companies, saw its stock
price more than double this year, as strong earnings gains and acquisitions such
as Century 21 assured investors of its future growth prospects. We believe HFS
has one of the most astute management teams around, and this position is the
Fund's largest.
Health care stocks had a mixed performance this year. We established major
positions in this sector to take advantage of what we believed to be depressed
prices caused by investor confusion over the effect of lower Medicare
reimbursement levels. While our timing was early and hurt the performance of the
Fund in the spring of 1995, the stocks have recently responded positively, a
trend which we believe will continue. Even though Medicare reimbursement has
been cut for many companies, we believe well-managed companies will adjust their
costs accordingly. We also believe health maintenance organizations (HMOs) will
provide many of the solutions to the high level of the nation's health care
costs. We added substantially to United Healthcare (the country's largest HMO
company) during this period of investor confusion, and the stock has since
appreciated by over 50%. Many of our long-term care companies have not yet
rebounded from their depressed levels following the Medicare budget cuts, and
investors are waiting to see whether these companies can adjust their costs
effectively. We believe they will and we continue to maintain our investments in
Integrated Health, Horizon Healthcare and Mariner despite their poor stock price
performance.
This year, the stock market and the Fund's investments moved higher as
companies reported better-than-expected earnings. This environment was very
favorable for many of our companies which reported strong earnings, and we
believe this trend of investors rewarding companies that report strong earnings
will continue into 1996 and could benefit the share prices of these companies.
Our largest sector concentration continues to be technology. While we do not
expect earnings gains to be as strong in 1996 as they were in 1995, we believe
this sector should still have the strongest earnings gains of any group in 1996.
We are also positive on the health care service and consumer sectors. Both
groups performed poorly in 1995, and we believe their stock prices to be
depressed. We believe that the health care cost-containment companies should
ultimately benefit from the cost-reduction initiatives in Washington. Also, we
believe the consumer sector is poised to respond positively to only a small
positive change in consumer spending.
Therefore, we believe 1996 could be the fifth consecutive year of
above-average earnings gains for the S&P 500. U.S. companies are realizing
record returns on their investments as they use technology and outsourcing to
reduce their costs and increase productivity. We are living through an
unprecedented era of productivity gains for the service sector. The downsizing
of corporate America would be detrimental to the U.S. economy if it were not for
the ability of the smaller companies in the United States to absorb and retrain
laid-off workers. We believe these productivity gains are responsible for what
has been one of the best stock market periods on record.
We believe the companies in the portfolio are particularly well suited to
benefit from technology-driven enhancements, while our technology holdings are
providing the tools to the rest of the economy. We remain optimistic that the
progress for our portfolio companies will be rewarded by investors in 1996.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
- ---------------------- ------------------------
A Photo of A Photo of
A. Keith Brodkin, John W. Ballen,
Chairman and President Portfolio Manager
- ---------------------- ------------------------
/s/ A. Keith Brodkin /s/ John W. Ballen
Chairman and President Portfolio Manager
December 13, 1995
PORTFOLIO MANAGER PROFILE
John Ballen began his career at MFS as an industry specialist in 1984 and was
promoted to Investment Officer in 1986, Vice President - Investments in 1987,
Director of Research in 1988 and Senior Vice President in 1990. In 1993, he
became Director of Equity Portfolio Management. He has been the Portfolio
Manager of MFS Emerging Growth Fund since 1987.
<PAGE>
OBJECTIVE AND POLICY
The Fund seeks to provide long-term growth of capital. Dividend and interest
income from portfolio securities, if any, is incidental to the Fund's investment
objective of long-term growth of capital.
The Fund's policy is to invest primarily (i.e., at least 80% of its assets under
normal circumstances) in common stocks of small and medium-sized companies that
are early in their life cycle but which have the potential to become major
enterprises (emerging growth companies). Such companies generally would be
expected to show earnings growth over time that is well above the growth rate of
the overall economy and the rate of inflation, and would have the products,
management and market opportunities which are usually necessary to become more
widely recognized as growth companies.
PERFORMANCE
The information on the following page illustrates the historical performance of
MFS Emerging Growth Fund Class B shares in comparison to various market
indicators. Fund results in the graph do not reflect the deduction of any
contingent deferred sales charge (CDSC) since the CDSC is not applicable after a
six-year period. Benchmark comparisons are unmanaged and do not reflect any fees
or expenses. You cannot invest in an index. All results reflect the reinvestment
of all dividends and capital gains.
Please note that effective September 13, 1993, Class A shares were offered.
Information on Class A share performance appears on the next page.
In the table on the next page, we have included the average annual total returns
of all mid-cap funds (including the Fund) tracked by Lipper Analytical Services,
Inc. (an independent firm which rates mutual fund performance) for the
applicable time periods. Because these returns do not reflect any applicable
sales charges, we have also included the Fund's results at net asset value (no
sales charge) for comparison.
All results are historical and, therefore, are not an indication of future
results. The investment return and principal value of an investment in a mutual
fund will vary with changes in market conditions, and shares, when redeemed, may
be worth more or less than their original cost. All Class A results reflect the
applicable expense reimbursement. All Class A share results reflect the
applicable expense subsidy which is explained in the Notes to Financial
Statements. Had the subsidy not been in effect, the results would have been less
favorable.
<PAGE>
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
(For the Period from January 1, 1987 to November 30, 1995)
Line graph representing the growth of a $10,000 investment for the nine-year
period ended November 30, 1995. The graph is scaled from $0 to $60,000 in
$10,000 segments. The years are marked in 12-month segments from 1988 to 1995.
There are four lines drawn to scale. One is a solid line representing MFS
Emerging Growth Fund (Class B), a second line of very-short dashes represents
the S&P 500, a third line of very, very-short dashes represents the Russell 2000
Index, a fourth line of medium-short dashes represents the Consumer Price Index.
MFS Emerging Growth Fund (Class B) $53,176
S&P 500 $33,034
Russell 2000 Index $26,961
Consumer Price Index $13,897
AVERAGE ANNUAL TOTAL RETURNS
Life of
Class
through
1 Year 3 Years 5 Years 11/30/95
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class A)
including 5.75% sales charge +37.61% -- -- +24.18%<F1>
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class A)
at net asset value +45.98% -- -- +27.54%<F1>
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class B)
with CDSC<F2> +40.89% +22.57% +33.35% +20.56%<F3>
- ------------------------------------------------------------------------------
MFS Emerging Growth Fund (Class B)
without CDSC +44.89% +23.23% +33.48% +20.56%<F3>
- ------------------------------------------------------------------------------
Average mid-cap fund +33.69% +15.35% +20.20% +14.62%<F4>
- ------------------------------------------------------------------------------
Standard & Poor's 500 Composite
Index +36.93% +15.05% +16.76% +14.34%<F4>
- ------------------------------------------------------------------------------
Russell 2000 Index +28.51% +14.76% +21.30% +11.77%<F4>
- ------------------------------------------------------------------------------
Consumer Price Index<F5> + 2.61% + 2.65% + 2.80% + 3.76%<F4>
- ------------------------------------------------------------------------------
<F1> For the period from the commencement of offering of Class A shares,
September 13, 1993 to November 30, 1995.
<F2> These returns reflect the applicable Class B CDSC of 4%, 3% and 2% for the
1-, 3- and 5- year periods, respectively, and 0% for the period commencing
December 29, 1986.
<F3> For the period from the commencement of offering of Class B shares,
December 29, 1986 to November 30, 1995.
<F4> Benchmark comparisons begin on January 1, 1987. Source: Lipper Analytical
Services, Inc.
<F5> The Consumer Price Index is a popular measure of change in prices.
<PAGE>
PORTFOLIO OF INVESTMENTS - November 30, 1995
Common Stocks and Warrants - 97.9%
- -----------------------------------------------------------------------------
Issuer Shares Value
- -----------------------------------------------------------------------------
Airlines
Atlas Air, Inc.* 77,400 $ 1,180,350
- -----------------------------------------------------------------------------
Apparel and Textiles - 1.0%
Donnkenny, Inc.* 30,000 $ 990,000
Nine West Group, Inc. * 676,316 30,011,522
Team Rent Group, Inc.* 130,000 1,251,250
--------------
$ 32,252,772
- -----------------------------------------------------------------------------
Automotive - 0.1%
APS Holding Corp.* 154,000 $ 2,849,000
Delfecta-Shield Corp.* 15,000 80,625
Safety Components International, Inc.* 28,000 434,000
--------------
$ 3,363,625
- -----------------------------------------------------------------------------
Banks and Credit Companies - 0.1%
Capital One Financial Corp. 28,500 $ 719,625
First Bank System, Inc. 10,900 562,713
Northern Trust Corp. 10,700 559,075
Turkiye Garanti Bankasi, ADR## 32,000 224,000
--------------
$ 2,065,413
- -----------------------------------------------------------------------------
Biotechnology - 0.6%
Guidant Corp. 487,000 $ 18,201,625
Myriad Genetics, Inc.* 26,800 844,200
Perseptive Biosystems, Inc.* 10,000 93,125
--------------
$ 19,138,950
- -----------------------------------------------------------------------------
Business Machines - 0.1%
Affiliated Computer Services, Inc.* 123,900 $ 3,995,775
CMC Industries, Inc.* 75,200 333,700
National Instruments Corp.* 23,800 452,200
--------------
$ 4,781,675
- -----------------------------------------------------------------------------
Business Services - 5.7%
APAC Teleservices, Inc.* 45,700 $ 1,445,262
Accustaff, Inc.* 110,000 3,300,000
BISYS Group, Inc.* 390,623 11,035,100
Business Resource Group* 59,600 260,750
CUC International, Inc.* 2,122,450 80,653,100
Computer Sciences Corp.* 95,000 6,911,250
Corestaff, Inc.* 41,900 1,330,325
DST Systems, Inc.* 76,150 2,198,831
Equity Corp., International* 125,000 2,437,500
Fiserv, Inc. * 247,500 6,558,750
Franklin Quest Co.* 764,500 14,429,938
Global Directmail Corp.* 313,300 8,733,238
HPR, Inc.* 14,500 420,500
Interim Services Inc.* 200,000 6,400,000
Mail Well Holdings, Inc.* 404,000 4,646,000
National Data Corp. 74,700 1,820,813
Personal Group of America, Inc.* 29,900 362,537
RTW, Inc.* 24,000 636,000
Romac International, Inc.* 16,300 326,000
Rural/Metro Corp.* 234,700 5,750,150
SOS Staffing Services, Inc.* 75,000 656,250
SPS Transaction Services, Inc.* 512,045 14,145,243
Stewart Enterprises, Inc. 277,400 9,084,850
TRM Copy Centers Corp.* 18,700 182,325
Technology Solutions Co.* 42,700 725,900
Transaction Systems Architects, Inc., "A"* 111,400 3,035,650
--------------
$ 187,486,262
- -----------------------------------------------------------------------------
Cellular Phones
Telephone & Data Systems, Inc. 9,700 $ 369,813
- -----------------------------------------------------------------------------
Chemicals
Uniroyal Chemical Corp.* 183,400 $ 1,467,200
- -----------------------------------------------------------------------------
Computer Software - 0.8%
Applix, Inc.* 24,000 $ 981,000
CBT Group, PLC* 62,000 3,348,000
DSP Communications, Inc.* 65,000 2,851,875
Diamond Multimedia Systems, Inc.* 64,200 2,166,750
Epic Design Technology, Inc.* 31,800 675,750
Expert Software, Inc.* 16,500 278,438
Hummingbird Communications* 302,200 15,185,550
Network Peripherals, Inc.* 33,700 454,950
Number Nine Visual Technology* 15,300 179,775
Objective Systems Integrator* 38,100 723,900
P-COM, Inc.* 19,800 346,500
Stormedia, Inc.* 16,300 647,925
--------------
$ 27,840,413
- -----------------------------------------------------------------------------
Computer Software - Personal Computers - 5.1%
A.D.A.M Software, Inc.* 20,800 $ 221,000
ASM Lithography Holding* 30,000 1,263,750
Acclaim Entertainment, Inc.* 100,000 2,106,250
Advent Software, Inc.* 9,300 195,300
Arbor Software Corp.* 9,700 417,100
Autodesk, Inc.++ 2,894,770 102,040,642
Avant Corp.* 16,800 756,000
Datastream Systems, Inc.* 10,000 182,500
Electronic Arts, Inc.* 260,600 8,892,975
First Data Corp. 12,052 855,692
Insight Enterprises, Inc.* 81,000 1,194,750
Learning Co.* 73,100 4,440,825
Macromedia, Inc.* 76,000 3,534,000
Mapinfo Corp.* 50,000 975,000
Maxis, Inc.* 22,700 930,700
McAfee Associates, Inc.* 11,299 539,527
Metatec Corp.* 70,000 726,250
Microsoft Corp.* 120,000 10,455,000
Pure Software, Inc.* 25,400 831,850
Simware, Inc.* 82,300 555,525
Smith Micro Software, Inc.* 28,200 274,950
Softdesk, Inc.* 37,600 864,800
Softkey International, Inc.* 390,000 13,162,500
Software Artistry, Inc.* 10,700 197,950
Spectrum Holobyte Industries* 65,600 565,800
State of the Art, Inc.* 120,000 1,245,000
Symantec Corp.* 310,000 8,215,000
TGV Software, Inc.* 20,100 170,850
TIVOLI Systems, Inc.* 15,000 446,250
Touchstone Software Corp.* 100,700 654,550
Visio Corp.* 21,900 585,825
--------------
$ 167,498,111
- -----------------------------------------------------------------------------
Computer Software - Systems - 21.9%
Adobe Systems, Inc. 171,300 $ 11,584,163
Applied Microsystems Corp.* 36,500 333,063
Aspen Technology, Inc.* 20,000 600,000
ASTEA International, Inc.* 22,000 451,000
BAAN Co.* 29,200 1,324,950
BDM International, Inc.* 43,400 1,160,950
BMC Software, Inc. * 1,901,550 80,340,488
Black Box Corp.* 75,000 1,265,625
C ATS Software, Inc.* 20,400 137,700
Cadence Design Systems, Inc.* 2,513,250 90,477,000
Carnegie Group, Inc.* 150,000 1,406,250
Clarify, Inc.* 16,200 447,525
Computer Associates International, Inc. 1,060,000 69,430,000
Computer Management Sciences, Inc.* 13,100 248,900
Computron Software, Inc.* 29,400 448,350
Compuware Corp.*++ 2,199,524 45,090,242
Cooper & Chyan Technology* 22,200 308,025
Datalogix International, Inc.* 22,100 265,200
Discreet Logic, Inc.* 29,200 890,600
Enterprise Systems, Inc.* 12,900 403,125
Firefox Communications, Inc.* 14,900 324,075
Fractal Design Corp.* 22,600 322,050
HNC Software, Inc.* 12,800 518,400
Harbinger Corp.* 10,000 251,250
Imnet Systems, Inc.* 35,700 883,575
Informix Corp.* 1,876,518 51,956,092
Insignia Solutions, Inc., ADR* 32,400 660,150
Integrated Measurement Systems* 28,900 379,313
Keane, Inc.* 209,300 5,781,912
Lexmark International Group, "A"* 276,800 5,363,000
Logic Works, Inc.* 57,100 842,225
Marcam Corp.*++ 576,800 9,877,700
Meta-Software, Inc.* 18,900 321,300
Mysoftware Co.* 28,800 432,000
Nerwork Appliance, Inc.* 22,600 683,650
Open Environment Corp.* 23,200 232,000
Oracle Systems Corp.* 3,596,800 163,204,800
Photon Dynamics, Inc.* 32,100 312,975
Pixar, Inc.* 30,600 1,246,950
Premenos Technology Corp.* 35,700 1,517,250
Programmers Paradise, Inc.* 76,000 636,500
Psinet, Inc.* 20,300 428,837
Quickturn Design System, Inc.* 66,000 676,500
Radisys Corp.* 125,400 1,567,500
Remedy Corp.* 13,800 848,700
Renaissance Solutions, Inc.* 16,600 282,200
STB Systems, Inc.* 20,000 212,500
Scopus Technology* 15,800 375,250
Secure Computing Corp.* 16,800 961,800
Security Dynamics Technology* 29,800 1,475,100
Seer Technologies, Inc.* 17,600 257,400
Shiva Corp.* 29,700 2,197,800
Smartflex Systems, Inc.* 42,300 745,537
Spyglass, Inc.* 7,000 750,750
Summit Medical Systems, Inc.* 26,900 598,525
Sybase, Inc.* 2,328,089 81,774,126
Sync Research, Inc.* 19,400 984,550
System Software Associates, Inc.++ 2,045,100 73,623,600
Unison Software, Inc.* 16,200 190,350
Uunet Technologies, Inc.* 32,200 2,559,900
Vantive Corp.* 16,000 408,000
Verity, Inc.* 32,900 1,636,775
--------------
$ 724,916,023
- -----------------------------------------------------------------------------
Construction Services
Shaw Group Inc.* 159,400 $ 1,554,150
- -----------------------------------------------------------------------------
Consumer Goods and Services - 0.5%
Bell Sports Corp.* 109,551 $ 890,102
Blyth Inds, Inc.* 57,700 3,238,413
Bollinger Inds, Inc.* 45,000 112,500
Cerplex Group, Inc.* 133,800 986,775
Department 56 Inc.* 19,050 785,812
First Alert, Inc.* 20,000 212,500
Fresh America Corp.* 42,500 350,625
Oakley, Inc.* 25,000 800,000
Perrigo Co.* 141,000 1,850,625
Service Corp. International 166,200 6,751,875
Sola International, Inc.* 63,000 1,716,750
--------------
$ 17,695,977
- -----------------------------------------------------------------------------
Electrical Equipment
Brooks Automation, Inc.* 10,000 $ 170,000
Chicago Miniature Lamp, Inc.* 10,000 210,000
Integrated Silicon Solution* 20,700 496,800
Zycon Corp.* 52,700 678,512
--------------
$ 1,555,312
- -----------------------------------------------------------------------------
Electronics - 4.3%
ACT Manufacturing, Inc.* 24,800 $ 372,000
ADE Corp.* 50,000 812,500
AG Associates, Inc.* 24,600 448,950
AVX Corp. 95,800 2,754,250
Actel Corp.* 40,000 530,000
Altera Corp.* 290,300 16,837,400
Anadigics, Inc.* 22,300 440,425
Burr Brown Corp.* 215,600 6,198,500
CP Clare Corp.* 180,000 4,455,000
Cincinnati Microwave, Inc.* 100,000 700,000
Cyberoptics Corp.* 35,000 1,181,250
ESS Technology, Inc.* 37,100 1,224,300
Euphonix, Inc.* 70,000 595,000
Gasonics International Corp.* 69,000 1,224,750
General Scanning, Inc.* 21,000 254,625
Information Storage Devices* 85,000 1,508,750
LSI Logic Corp.* 412,000 17,252,500
Linear Technology Corp. 482,800 21,846,700
MEMC Electronic Materials, Inc.* 61,000 2,020,625
Maxim Integrated Products, Inc.* 12,500 937,500
Micrel, Inc.* 29,800 491,700
Micro Linear Corp.* 108,600 1,221,750
National Semiconductor Corp.* 60,000 1,282,500
Novellus Systems, Inc.* 152,000 9,424,000
Oak Technology, Inc.* 246,800 11,599,600
Ontrak Systems, Inc.* 23,800 398,650
Paradigm Technology, Inc.* 17,900 326,675
Quality Semiconductor, Inc.* 5,000 40,000
Ross Technology, Inc.* 19,300 253,312
SDL, Inc.* 12,600 283,500
Sandisk Corp.* 33,500 745,375
Semitool, Inc.* 38,700 619,200
Telcom Semiconductor, Inc.* 42,200 353,425
Tower Semiconductor Ltd.* 250,000 6,218,750
Ultratech Stepper, Inc.* 109,800 4,144,950
Veeco Instruments, Inc.* 30,000 532,500
Xilinx, Inc.* 662,000 21,266,750
--------------
$ 140,797,662
- -----------------------------------------------------------------------------
Entertainment - 3.8%
Ambassadors International, Inc.* 86,100 $ 753,375
American Radio Systems, "A"* 31,800 723,450
Argosy Gaming Corp.* 100,100 850,850
Aztar Corp.* 30,100 263,375
Boomtown, Inc.*## 35,000 218,750
Casino America, Inc.* 412,000 2,420,500
Central European Media Enterprises Ltd.* 21,700 477,400
GT Bicycles, Inc.* 81,600 785,400
Grand Casinos, Inc.* 983,300 36,136,275
Harrah's Entertainment, Inc.* 2,104,402 52,347,000
Heftel Broadcasting Corp., "A"* 130,500 1,924,875
Heritage Media Corp.* 59,400 1,551,825
Hollywood Park, Inc.* 40,000 410,000
Infinity Broadcasting Corp., "A"* 365,150 11,684,800
Jacor Communications, Inc.* 30,000 517,500
Lodgenet Entertainment Corp.* 30,000 330,000
Marvel Entertainment Group, Inc.* 20,000 230,000
Monarch Casino & Resort, Inc.* 90,000 405,000
National Gaming Corp.*++ 260,000 2,567,500
Players International, Inc.* 261,250 3,461,562
President Casinos, Inc.* 600,000 1,462,500
Radica Games Ltd.* 210,000 393,750
Showboat, Inc. 180,000 4,860,000
Sinclair Broadcast Group, "A"* 38,900 768,275
Starsight Telecast, Inc.* 15,700 64,762
Station Casinos, Inc.* 85,000 1,275,000
--------------
$ 126,883,724
- -----------------------------------------------------------------------------
Financial Institutions - 0.3%
Advanta Corp., "B" 13,000 $ 503,750
BHC Financial, Inc. 37,875 705,422
Banca Quadrum S.A., ADR* 131,800 790,800
Credit Acceptance Corp.* 125,000 2,562,500
Finova Group, Inc. 10,900 528,650
First Investment Financial Services Group* 88,300 894,038
First Merchants Acceptance Corp.* 45,000 888,750
Franklin Resources, Inc. 13,600 719,100
Investors Financial Services Co.* 9,300 181,350
Jayhawk Acceptance Corp.* 45,000 562,500
TFC Enterprises, Inc.* 15,000 102,187
Union Acceptance Corp.* 30,000 457,500
WFS Financial, Inc.* 32,600 533,825
--------------
$ 9,430,372
- -----------------------------------------------------------------------------
Food and Beverage Products - 0.1%
Boston Beer, Inc.* 17,100 $ 440,325
Pete's Brewing Co.* 33,700 825,650
Rocky Mountain Chocolate Factory* 67,100 821,975
--------------
$ 2,087,950
- -----------------------------------------------------------------------------
Insurance - 0.4%
Amerin Corp.* 117,100 $ 2,576,200
Compdent Corp.* 159,300 5,535,675
Equitable of Iowa Cos. 18,500 647,500
Lasalle Research Holdings Ltd.* 64,100 1,330,075
Meadowbrook Insurance Group, Inc.* 27,100 752,025
PMI Group, Inc. 30,000 1,425,000
Prudential Reinsurance Holdings, Inc.* 90,000 1,878,750
--------------
$ 14,145,225
- -----------------------------------------------------------------------------
Machinery - 0.1%
Computational Systems, Inc.* 29,500 $ 442,500
Hardinge Bros., Inc. 15,000 376,875
Westinghouse Air Brake Co. 178,900 1,654,825
--------------
$ 2,474,200
- -----------------------------------------------------------------------------
Medical and Health Products - 0.9%
Amerisource Healthcare Corp., "A"* 33,800 $ 980,200
Boston Scientific Corp.* 260,000 10,530,000
Haemonetics Corp.* 40,000 710,000
Health Management, Inc.* 179,000 2,416,500
Healthdyne, Inc.* 378,500 2,933,375
ICU Medical, Inc.* 60,000 697,500
Medcath, Inc.* 30,000 517,500
Medisense, Inc.* 127,500 3,283,125
Orthofix International N.V.* 473,749 4,263,741
Parexel International Corp.* 19,500 438,750
Perclose, Inc.* 60,000 840,000
Sofamor/Danek Group, Inc.* 30,100 692,300
Tokos Medical Corp.* 200,000 1,650,000
Uromed Corp.* 35,165 356,046
Zoll Medical Corp.* 107,500 954,062
--------------
$ 31,263,099
- -----------------------------------------------------------------------------
Medical and Health Technology and Services - 18.7%
AHI Healthcare Systems, Inc.* 47,700 $ 560,475
Advantage Health Corp.* 128,300 4,233,900
American Homepatient, Inc.* 80,500 2,243,938
American Medical Response* 44,500 1,273,812
American Oncology Resources, Inc.* 36,800 1,306,400
CRA Managed Care, Inc.* 31,900 741,675
Clintrials Research* 30,000 528,750
Columbia/HCA Healthcare 472,123 24,373,350
Community Care of America* 100,000 1,212,500
Community Health Systems, Inc.* 597,800 20,474,650
FPA Medical Management, Inc.* 250,000 1,562,500
First Commonwealth, Inc.* 12,600 277,200
Foundation Health Corp.* 894,000 40,900,500
Genesis Health Ventures, Inc.* 93,500 3,050,437
HCIA, Inc.* 16,400 742,100
Health Management Assoc., Inc.* 39,000 1,033,500
Healthdyne Technologies Information Enterprises* 378,500 567,750
Healthdyne, Inc.* 246,293 2,678,437
Healthplan Services Corp.* 58,000 1,377,500
Healthsource, Inc.* 382,305 23,894,063
HealthWise of America, Inc.* 102,500 3,203,125
Horizon/CMS Healthcare Corp.* 510,325 11,035,778
IDX Systems Corp.* 21,300 585,750
Integrated Health Services,Inc.++ 1,404,927 31,084,010
Lincare Holdings, Inc.* 196,300 5,251,025
Living Centers Of America* 190,600 5,980,075
Manor Care, Inc. 78,600 2,564,325
Mariner Health Group, Inc.* 888,900 11,889,037
Medpartners, Inc.* 25,000 709,375
Mid Atlantic Medical Services,Inc.*++ 3,120,600 76,064,625
Multicare Cos Inc.* 80,900 1,688,788
National Surgery Centers, Inc.* 18,800 399,500
Occusystems, Inc.* 13,100 253,812
Option Care, Inc.* 140,000 560,000
Orthodontic Centers of America* 225,000 7,143,750
Owen Healthcare, Inc.* 214,600 4,667,550
Oxford Health Plans, Inc.* 56,100 4,207,500
Pacific Physician Services, Inc.* 17,350 286,275
Pacificare Health Systems, Inc., "A"* 194,900 16,566,500
Pacificare Health Systems, Inc., "B"* 817,146 70,887,416
Pediatric Services of America, Inc.* 45,000 843,750
Pediatrix Medical Group* 37,400 766,700
Physician Corp. of America* 23,500 355,437
Physician Reliance Network, Inc.* 100,000 3,550,000
Physician Sales & Service, Inc.* 42,000 798,000
Physicians Resource Group, Inc.* 110,300 2,399,025
Professional Sports Care Management* 60,000 397,500
Quorum Health Group, Inc.* 66,100 1,429,412
Renal Treatment Centers, Inc.* 410,000 16,553,750
Renal Treatment Centers,Inc.*+ 17,651 712,659
Schein Henry, Inc.* 26,850 677,963
Sierra Health Services, Inc.* 27,700 907,175
Sterling Healthcare Group* 105,600 1,320,000
Sterling House Corp.* 27,300 303,712
Sun Health Care Group, Inc.* 90,000 1,113,750
Surgical Care Affiliates, Inc. 394,200 12,811,500
Total Renal Care Holdings, Inc.* 29,900 803,563
United Dental Care, Inc.* 25,400 850,900
United Healthcare Corp. 2,889,786 181,695,295
Wellcare Management, Inc.* 77,700 1,651,125
--------------
$ 618,002,869
- -----------------------------------------------------------------------------
Metals and Minerals
Castech Alum Group, Inc.* 69,400 $ 1,058,350
- -----------------------------------------------------------------------------
Pollution Control - 0.9%
Laidlaw, Inc. 801,570 $ 7,414,523
Republic Industries, Inc.* 760,000 20,425,000
Sanifill, Inc.* 80,800 2,706,800
--------------
$ 30,546,323
- -----------------------------------------------------------------------------
Printing and Publishing
Desktop Data, Inc.* 15,400 $ 411,950
- -----------------------------------------------------------------------------
Railroad
Railtex Inc.* 5,000 $ 101,250
Wisconsin Central Transportation Corp.* 10,900 632,200
--------------
$ 733,450
- -----------------------------------------------------------------------------
Real Estate - 0.2%
NHP, Inc.* 444,700 $ 7,337,550
- -----------------------------------------------------------------------------
Restaurants and Lodging - 14.5%
Amerihost Properties, Inc.*++ 451,000 $ 2,762,375
Apple South, Inc. 412,150 8,655,150
Applebee's International, Inc.++ 1,960,800 54,412,200
Back Bay Restaurant Group, Inc.*++ 185,100 1,064,325
Bertucci's, Inc.* 379,700 1,993,425
Brinker International, Inc.* 1,640,300 25,219,613
Buffets, Inc.*++ 1,568,000 20,776,000
Bugaboo Creek Steak House, Inc.* 35,000 297,500
Cheesecake Factory* 10,000 225,000
Doubletree Corp.* 185,300 3,937,625
Ground Round Restaurants, Inc.* 241,000 647,687
HFS, Inc.*++ 3,220,805 223,040,746
Hammons (John Q) Hotels, Inc.*++ 544,300 5,374,962
Hometown Buffet, Inc.*++ 909,000 9,885,375
IHOP Corp.*++ 612,200 15,840,675
Innkeepers USA Trust 207,000 1,888,875
Italian Oven, Inc.* 230,000 1,840,000
La Quinta Inns, Inc. 76,000 2,061,500
Lone Star Steakhouse and Saloon, Inc.* 370,500 14,542,125
Papa John's International, Inc.* 25,000 1,071,875
Promus Hotel Corp.* 1,546,701 34,220,760
Quantum Restaurant Group, Inc.*++ 553,200 6,776,700
Renaissance Hotel Group* 687,000 14,427,000
ShoLodge, Inc.* 375,600 3,521,250
Showbiz Pizza Time, Inc.*++ 755,000 9,626,250
Sonic Corp.* 436,950 9,612,900
Studio Plus Hotels of America, Inc.* 20,700 457,988
Supertel Hospitality, Inc.* 30,000 360,000
Taco Cabana, Inc.*++ 962,395 5,172,873
UNO Restaurant Corp.* 164,500 1,130,938
--------------
$ 480,843,692
- -----------------------------------------------------------------------------
Special Products and Services - 0.4%
Central Packaging Corp.* 44,400 $ 1,221,000
Central Tractor Farm & Country, Inc.* 5,000 48,750
Childrens Discovery Centers* 125,000 968,750
Educational Insights, Inc.* 46,500 162,750
ITT Educational Services, Inc.* 149,500 3,064,750
Plasma & Materials Technology* 16,100 197,225
Simula, Inc.* 35,000 713,125
Sphere Drake Holdings Ltd.* 405,000 5,821,875
Sportmart, Inc., "A"* 96,000 474,000
West Marine, Inc.* 30,000 1,008,750
--------------
$ 13,680,975
- -----------------------------------------------------------------------------
Steel - 0.1%
Carbide/Graphite Group, Inc.* 36,600 $ 549,000
Citation Corp.* 203,000 3,273,375
--------------
$ 3,822,375
- -----------------------------------------------------------------------------
Stores - 10.1%
AutoZone, Inc.* 11,487 $ 334,559
BT Office Products International, Inc.* 465,000 5,928,750
Bed Bath & Beyond, Inc.* 70,000 2,301,250
Boise Cascade Office Products* 160,700 5,885,637
Borders Group, Inc.* 200,000 3,525,000
Circle K Corp.* 187,500 4,453,125
CompUSA, Inc.* 110,000 4,083,750
Consolidated Stores Corp.* 825,700 20,436,075
Corporate Express, Inc.* 348,000 9,309,000
Creative Computers, Inc.* 76,000 2,052,000
De Rigo SPA-ADR* 42,800 909,500
Dollar Tree Stores, Inc.* 176,500 4,942,000
Duty Free International, Inc. 687,800 9,285,300
Finish Line (The), Inc., "A"* 20,000 180,000
General Nutrition Cos., Inc.* 264,000 5,841,000
Grow Biz International, Inc.* 60,000 547,500
Gymboree Corp.* 318,750 7,530,469
Hello Direct, Inc.* 42,000 231,000
Hollywood Entertainment, Corp.* 1,050,000 16,931,250
Micro Warehouse, Inc.*++ 1,730,600 81,338,200
Moovies, Inc.* 18,300 292,800
Mothers Work, Inc.*++ 211,500 2,908,125
Movie Gallery, Inc.* 378,100 12,949,925
National Vision Associates Ltd.* 203,700 662,025
Natural Wonders, Inc.* 28,600 82,225
Office Depot, Inc.* 3,993,600 97,843,200
Officemax, Inc.* 739,100 16,814,525
PetSmart, Inc.* 67,487 2,176,456
Renters Choice, Inc.* 315,900 5,172,862
Shoe Carnival, Inc.* 487,000 1,887,125
Sports & Recreation, Inc.* 45,000 315,000
Sports Club, Inc.* 196,000 710,500
Sunglass Hut International, Inc.* 150,000 3,150,000
U.S. Office Products Co.* 92,500 1,549,375
Welcome Home, Inc.* 88,900 205,581
--------------
$ 332,765,089
- -----------------------------------------------------------------------------
Telecommunications - 5.3%
3Com Corp.* 104,622 $ 4,786,456
ACT Networks, Inc.* 16,400 170,150
Accom, Inc.* 30,500 232,562
Ascend Communications, Inc.* 115,000 8,222,500
Bay Networks, Inc.* 551,163 24,802,335
Cabletron Systems, Inc.* 520,200 43,176,600
Cisco Systems, Inc.* 50,000 4,206,250
Colonial Data Technologies* 171,200 2,717,800
Comdial Corp.* 125,000 1,312,500
Equalnet Holding Corp.*++ 447,000 8,604,750
Harmonic Lightwaves, Inc.* 18,300 192,150
Midcom Communications, Inc.* 99,000 1,757,250
Mobilemedia Corp., "A"* 74,500 1,927,688
Ortel Corp.* 24,200 284,350
Paging Network, Inc.* 44,000 979,000
Premisys Communications, Inc.* 14,900 1,434,125
Sitel Corp* 27,400 705,550
T-Netix, Inc.* 27,000 276,750
Tel-Save Holdings, Inc.* 704,900 10,044,825
Teltrend, Inc.* 25,000 1,000,000
Transwitch Corp.* 10,000 126,250
Videoserver, Inc.* 19,600 627,200
Westell Technologies, Inc.* 33,000 429,000
Worldcom, Inc.* 1,743,685 56,669,763
Xpedite Systems, Inc.* 35,000 516,250
--------------
$ 175,202,054
- -----------------------------------------------------------------------------
Trucking - 0.3%
Celadon Group, Inc.* 23,000 $ 215,625
MTL, Inc.* 45,000 590,625
PST Vans, Inc.* 58,900 364,444
Transport Corp. of America, "B"*++ 540,000 6,885,000
US Xpress Enterprises, Inc., "A"* 34,200 252,225
--------------
$ 8,307,919
- -----------------------------------------------------------------------------
Utilities - Telephone - 0.1%
Frontier Corporation 87,400 $ 2,261,475
- -----------------------------------------------------------------------------
Venture Capital - 0.3%
Copley Partners 1+ # 3,000,000 $ 761,724
Copley Partners 2+ # 3,000,000 2,029,296
Highland Capital Partners+ ++ 7,500,000 8,320,425
--------------
$ 11,111,445
- -----------------------------------------------------------------------------
Foreign - 1.2%
Australia - 0.6%
Sydney Harbor Casino Ltd 15,612,000 $ 20,987,004
Canada - 0.3%
Rogers Communications, Inc., "B" 799,000 8,377,419
Netherlands -
Call Net Enterprises, Inc., "B"*## 125,000 873,740
New Zealand - 0.3%
Sky City Ltd.* 390,000 7,949,906
- -----------------------------------------------------------------------------
Total Foreign Stocks $ 38,188,069
- -----------------------------------------------------------------------------
Total Common Stocks and Warrants (Identified Cost,
$2,063,087,976) $3,244,521,863
- -----------------------------------------------------------------------------
Convertible Bonds - 0.2%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
- -----------------------------------------------------------------------------
Entertainment - 0.1%
Argosy Gaming Corp., 12s, 2001 $ 4,176 $ 3,920,220
- -----------------------------------------------------------------------------
Restaurants and Lodging -- 0.1%
ShoLodge, Inc., 7.5s, 2004 $ 2,000 $ 1,590,000
- -----------------------------------------------------------------------------
Total Convertible Bonds (Identified Cost, $6,332,493) $ 5,510,220
- -----------------------------------------------------------------------------
Short-Term Obligations - 3.5%
- -----------------------------------------------------------------------------
Federal Home Loan Bank, due 12/06/95 $ 1,200 $ 1,199,053
Federal Home Loan Bank, due 12/07/95 2,000 1,998,113
Federal Home Loan Mortgage Corp., due 12/06/95 50,000 49,960,556
Federal National Mortgage Association,
due 12/13/95 7,450 7,435,960
General Electric Co., due 12/01/95 55,570 55,570,000
- -----------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 116,163,682
- -----------------------------------------------------------------------------
Total Investments (Identified Cost, $2,185,584,151) $3,366,195,765
Other Assets, Less Liabilities - (1.6)% (53,675,767)
=============================================================================
Net Assets - 100.0% $3,312,519,998
- -----------------------------------------------------------------------------
* Non-income producing security.
+ Restricted security.
# Security valued by or at the direction of the Trustees.
++ Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting securities of the issuer.
## SEC Rule 144A restriction.
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- ------------------------------------------------------------------------------
November 30, 1995
- ------------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $1,720,178,918) $2,571,378,890
Affiliated issuers (identified cost, $465,405,233) 794,816,875
--------------
Total investments, at value (identified cost,
$2,185,584,151) $3,366,195,765
Cash 146,892
Receivable for investments sold 3,418,864
Receivable for Fund shares sold 18,450,761
Interest and dividends receivable 334,566
Other assets 38,780
--------------
Total assets $3,388,585,628
--------------
Liabilities:
Payable for investments purchased $ 59,491,278
Payable for Fund shares reacquired 14,083,954
Payable to affiliates -
Management fee 66,439
Shareholder servicing agent fee 13,419
Distribution fee 1,309,663
Accrued expenses and other liabilities 1,100,877
--------------
Total liabilities $ 76,065,630
--------------
Net assets $3,312,519,998
==============
Net assets consist of:
Paid-in capital $2,132,225,191
Unrealized appreciation on investments 1,180,611,614
Accumulated undistributed net realized gain on
investments and foreign currency transactions (254,230)
Accumulated net investment loss (62,577)
--------------
Total $3,312,519,998
==============
Shares of beneficial interest outstanding 124,309,581
===========
Class A shares:
Net asset value and redemption price per share
(net assets of $1,311,527,175 / 48,960,009 shares of
beneficial interest outstanding) $26.79
======
Offering price per share (100/94.25) $28.42
======
Class B shares:
Net asset value and offering price per share
(net assets of $2,000,992,823 / 75,349,572 shares of
beneficial interest outstanding) $26.56
======
On sales of $50,000 or more, the offering price of Class A shares is reduced. A
contingent deferred sales charge may be imposed on redemptions of Class A and
Class B shares. See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Operations
- ------------------------------------------------------------------------------
Year Ended November 30, 1995
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest (including $118,667 received from affiliated
issuers) $ 3,663,824
Dividends (including $769,629 received from affiliated
issuers) 1,591,294
------------
Total investment income $ 5,255,118
------------
Expenses -
Management fee $ 15,957,197
Trustees' compensation 46,371
Shareholder servicing agent fee (Class A) 1,138,405
Shareholder servicing agent fee (Class B) 2,395,389
Distribution and service fee (Class A) 2,885,152
Distribution and service fee (Class B) 13,039,043
Custodian fee 636,520
Postage 344,499
Printing 227,744
Legal fees 122,732
Auditing fees 36,075
Miscellaneous 1,693,613
------------
Total expenses $ 38,522,740
Fees paid indirectly (79,255)
Reduction of expenses by distributor (823,866)
------------
Net expenses $ 37,619,619
------------
Net investment loss $(32,364,501)
============
Realized and unrealized gain (loss) on investments:
Realized gain (loss) (identified cost basis) -
Investment transactions (including $2,408,437 net gain from
transactions with affiliated issuers) $ 10,015,363
Foreign currency transactions (119,160)
------------
Net realized gain on investments $ 9,896,203
------------
Change in unrealized appreciation -
Investments $847,011,945
Translation of assets and liabilities in foreign currencies 1,885
------------
Net unrealized gain on investments $847,013,830
------------
Net realized and unrealized gain on investments and
foreign currency $856,910,033
------------
Increase in net assets from operations $824,545,532
============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (32,364,501) $ (18,775,234)
Net realized gain on investments and foreign
currency transactions 9,896,203 40,986,707
Net unrealized gain on investments and foreign
currency 847,013,830 64,922,879
--------------- --------------
Increase in net assets from operations $ 824,545,532 $ 87,134,352
--------------- --------------
Distributions declared to shareholders -
From net realized gain on investments and foreign
currency transactions (Class A) $ (9,533,382) $ (11,484,710)
From net realized gain on investments and foreign
currency transactions (Class B) (10,006,703) (17,957,239)
Tax return of capital (544,859) --
--------------- --------------
Total distributions declared to shareholders $ (20,084,944) $ (29,441,949)
--------------- --------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 3,022,835,060 $ 933,615,981
Net asset value of shares issued to shareholders
in reinvestment of distributions 17,796,191 25,655,969
Cost of shares reacquired (1,771,034,994) (750,977,096)
--------------- --------------
Increase in net assets from Fund share
transactions $ 1,269,596,257 $ 208,294,854
--------------- --------------
Total increase in net assets $ 2,074,056,845 $ 265,987,257
Net assets:
At beginning of period 1,238,463,153 972,475,896
--------------- --------------
At end of period (including accumulated net
investment loss of $62,577 and $43,710,
respectively) $ 3,312,519,998 $1,238,463,153
=============== ==============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
Year Ended November 30, 1995 1994 1993<F1> 1995 1994 1993
- -----------------------------------------------------------------------------------------------
Class A Class B
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout
each period):
Net asset value -
beginning of period $18.73 $17.68 $16.43 $18.57 $17.64 $14.93
------ ------ ------ ------ ------ ------
Income from investment
operations<F4> -
Net investment loss $(0.23) $(0.20) $(0.03) $(0.41) $(0.35) $(0.33)
Net realized and
unrealized gain on
investments 8.68 1.78 1.28 8.65 1.78 3.19
------ ------ ------ ------ ------ ------
Total from investment
operations $ 8.45 $ 1.58 $ 1.25 $ 8.24 $ 1.43 $ 2.86
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders -
From net realized gain
on investments $(0.38) $(0.53) $ -- $(0.24) $(0.50) $(0.15)
In excess of net
realized gain on investments --<F2> --<F2> -- -- -- --
Tax return of capital (0.01) -- -- (0.01) -- --
Total distributions
declared to
shareholders $(0.39) $(0.53) -- $(0.25) $(0.50) $(0.15)
------ ------ ------ ------ ------ ------
Net asset value - end of
period $26.79 $18.73 $17.68 $26.56 $18.57 $17.64
====== ====== ====== ====== ====== ======
Total return<F6> 45.98% 9.06% 38.98%<F3> 44.89% 8.21% 19.36%
Ratios (to average net
assets)/Supplemental data<F7>:
Expenses<F5> 1.28% 1.33% 1.19%<F3> 2.08% 2.14% 2.19%
Net investment loss (1.04)% (1.09)% (0.98)%<F3> (1.83)% (1.90)% (1.61)%
Portfolio turnover 20% 39% 58% 20% 39% 58%
Net assets at end of
period (000,000 omitted) $1,312 $ 470 $ 371 $2,001 $ 769 $ 602
<FN>
<F1> For the period from the date of issue of Class A shares, September 13, 1993 to November 30, 1993.
<F2> The per share distribution in excess of net realized gain on investments was $0.0049 and $0.0031 per share for Class A and
Class B shares, respectively.
<F3> Annualized.
<F4> Per share data for the periods subsequent to December 1, 1993 is based on average shares outstanding.
<F5> For fiscal years ending after September 1, 1995, the Fund's expenses are calculated without reduction for fees paid
indirectly.
<F6> 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.
<F7> The distributor did not impose a portion of its Class A distribution fee for the period indicated. If this fee had been
incurred by the Fund, the net investment loss per share and ratios would have been:
Net investment loss $(0.25) $(0.22) -- -- -- --
Ratios (to average net assets):
Expenses## 1.38% 1.43% -- -- -- --
Net investment loss (1.14)% (1.19)% -- -- -- --
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS - continued
Financial Highlights - continued
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Year Ended November 30, 1992 1991 1990 1989 1988 1987<F1>
- -------------------------------------------------------------------------------------------------
Class B
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Per share data (for a share
outstanding throughout
each period):
Net asset value -
beginning of period $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97 $ 5.50
------ ------ ------ ------ ------ ------
Income from investment
operations -
Net investment loss $(0.07) $(0.13) $(0.14) $(0.13) $(0.11) $(0.06)
Net realized and
unrealized gain (loss)
on investments 3.52 5.31 (0.66) 1.91 1.05 (0.47)
------ ------ ------ ------ ------ ------
Total from investment
operations $ 3.45 $ 5.18 $(0.80) $ 1.78 $ 0.94 $(0.53)
------ ------ ------ ------ ------ ------
Less distributions
declared to shareholders
from net realized gain on
investments $(0.59) $ -- $ -- $ -- $ -- $ --
------ ------ ------ ------ ------ ------
Net asset value - end of
period $14.93 $12.07 $ 6.89 $ 7.69 $ 5.91 $ 4.97
====== ====== ====== ====== ====== ======
Total return 29.25% 75.18% (10.40)% 30.12% 18.91% (10.44)%<F2>
Ratios (to average net assets)
/Supplemental data:
Expenses 2.33% 2.50% 2.75% 2.81% 2.30% 2.40%<F2>
Net investment loss (2.00)% (1.98)% (1.86)% (1.91)% (1.65)% (1.50)%<F2>
Portfolio turnover 59% 112% 86% 95% 57% 81%
Net assets at end of
period (000,000 omitted) $ 357 $ 145 $ 73 $ 82 $ 61 $ 50
<FN>
<F1> For the period from the commencement of investment operations, December 29, 1986 to November 30, 1987.
<F2> Annualized.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Emerging Growth Fund (the Fund) is a diversified series of MFS Series Trust
II (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
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are valued at last sale prices. Unlisted
equity securities or listed equity securities for which last sale prices are not
available are valued at last quoted bid 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 at fair value as determined in good faith by or at the direction of
the Trustees.
Repurchase Agreements - The Fund may enter into repurchase agreements with
institutions that the Fund's investment adviser has determined are creditworthy.
Each repurchase agreement is recorded at cost. The Fund requires that the
securities purchased in a repurchase transaction be transferred to the custodian
in a manner sufficient to enable the Fund to obtain those securities in the
event of a default under the repurchase agreement. The Fund monitors, on a daily
basis, the value of the securities transferred to ensure that the value,
including accrued interest, of the securities under each repurchase agreement is
greater than amounts owed to the Fund under each such repurchase agreement.
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 are amortized or accreted for financial statement and
tax reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividend payments received in additional securities are recorded on the
ex-dividend date in an amount equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custodian bank calculates its fee based on the
Fund's average daily net assets. The fee is reduced according to a fee
arrangement, which provides for custody fees to be reduced based on a formula
developed to measure the value of cash deposited with the custodian by the Fund.
This amount is shown as a reduction of expenses on the Statement of Operations.
Tax Matters and Distributions - The Fund's policy is to comply with the
provisions of the Internal Revenue Code (the Code) applicable to regulated
investment companies and to distribute to shareholders all of its net taxable
income, including any net realized gain on investments. Accordingly, no
provision for federal income or excise tax is provided. The Fund files a tax
return annually using tax accounting methods required under provisions of the
Code which may differ from generally accepted accounting principles, the basis
on which these financial statements are prepared. Accordingly, the amount of net
investment income and net realized gain reported on these financial statements
may differ from that reported on the Fund's tax return, and consequently, the
character of distributions to shareholders reported in the financial highlights
may differ from that reported to shareholders on Form 1099-DIV. Foreign taxes
have been provided for on interest and dividend income earned on foreign
investments in accordance with the applicable country's tax rates and to the
extent unrecoverable are recorded as a reduction of investment income.
Distributions to shareholders are recorded on the ex-dividend date.
The 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 a return of
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 accumulated net realized
gains. During the year ended November 30, 1995, $32,345,634 and $9,286,629 were
reclassified from accumulated net investment loss and paid-in capital,
respectively, from accumulated undistributed net realized gain on investments
and foreign currency transactions, due to differences between book and tax
accounting for short-term capital gains, net operating losses and tax basis
returns of capital. This change had no effect on the net assets or net asset
value per share.
Multiple Classes of Shares of Beneficial Interest - The Fund offers both Class A
and Class B shares. The two classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the common expenses of the Fund pro rata based on the average daily net
assets of each class, without distinction between share classes. Dividends are
declared separately for each class. Neither class has preferential dividend
rights; differences in per share dividend rates are generally due to differences
in separate class expenses.
(3) Transactions with Affiliates
Investment Adviser - The 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 0.75% of
average daily net assets.
The Fund pays no compensation directly to its Trustees who are officers of the
investment adviser, or to officers of the Fund, all of whom receive remuneration
for their services to the Fund from MFS. Certain of the officers and Trustees of
the Fund are officers or directors of MFS, MFS Fund Distributors, Inc. (MFD) and
MFS Service Center, Inc. (MFSC). The Fund has an unfunded defined benefit plan
for all of its independent Trustees and Mr. Bailey. Included in Trustees'
compensation is a net periodic pension expense of $14,996 for the year ended
November 30, 1995. Distributor - MFD, a wholly owned subsidiary of MFS, as
distributor, received $1,055,053 for the year ended November 30, 1995, as its
portion of the sales charge on sales of Class A shares of the Fund.
The Trustees have adopted a separate distribution plan for Class A and Class B
shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as follows:
The Class A 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
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, 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, commissions to dealers and payments to MFD wholesalers for
sales at or above a certain dollar level, and other such distribution-related
expenses that are approved by the Fund. MFD retains the service fee for accounts
not attributable to a securities dealer which amounted to $223,471 for the year
ended November 30, 1995. MFD is currently waiving the 0.10% distribution fees
for an indefinite period. Fees incurred under the distribution plan during the
year ended November 30, 1995 net of waiver were 0.25% of average daily net
assets attributable to Class A shares on an annualized basis.
The Class B distribution plan provides that the Fund will pay MFD a monthly
distribution fee, of 0.75% per annum, and a service fee of up to 0.25% per
annum, of the Fund's average daily net assets attributable to Class B shares.
MFD will pay to securities dealers that enter into a sales agreement with MFD
all or a portion of the service fee attributable to Class B shares. The service
fee is intended to be additional consideration for services rendered by the
dealer with respect to Class B shares. MFD retains the service fee for accounts
not attributable to a securities dealer, which amounted to $138,941 for Class B
shares for the year ended November 30, 1995. Fees incurred under the
distribution plan during the year ended November 30, 1995 were 1.00% of average
daily net assets attributable to Class B shares on an annualized basis.
A contingent deferred sales charge is imposed on shareholder redemptions of
Class A shares, on purchases of $1 million or more, in the event of a
shareholder redemption within 12 months following the share purchase. A
contingent deferred sales charge is imposed on shareholder redemptions of Class
B shares in the event of a shareholder redemption within six years of purchase.
MFD receives all contingent deferred sales charges. Contingent deferred sales
charges imposed during the year ended November 30, 1995 were $9,946 and
$1,787,150 for Class A shares and Class B shares, respectively.
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 the average daily net assets of each class of shares at an annual
rate of up to 0.15% and up to 0.22% attributable to Class A and Class B shares,
respectively. (4) Portfolio Securities Purchases and sales of investments, other
than U.S. government securities, purchased option transactions and short-term
obligations, aggregated $1,605,510,997 and $428,557,664, respectively.
The cost and unrealized appreciation or depreciation in value of the investments
owned by the Fund, as computed on a federal income tax basis, are as follows:
Aggregate cost $2,185,584,151
==============
Gross unrealized appreciation $1,303,214,394
Gross unrealized depreciation (122,602,780)
--------------
Net unrealized appreciation $1,180,611,614
==============
(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 (without par value).
Transactions in Fund shares were as follows:
Class A Shares
1995 1994
Year Ended ----------------------------- ---------------------------
November 30, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 67,800,740 $1,533,247,118 26,143,949 $483,879,494
Shares issued
to shareholders
in reinvestment
of distributions 488,159 9,182,865 584,374 10,565,806
Shares reacquired (44,418,694) (1,017,261,903) (22,607,024) (420,205,407)
----------- -------------- ------------ -------------
Net increase 23,870,205 $ 525,168,080 4,121,299 $ 74,239,893
========== ============== ============ =============
Class B Shares
1995 1994
Year Ended ----------------------------- ---------------------------
November 30, Shares Amount Shares Amount
- -----------------------------------------------------------------------------
Shares sold 67,040,946 $1,489,587,942 24,347,440 $449,736,487
Shares issued
to shareholders
in reinvestment
of distributions 458,635 8,613,326 835,529 15,090,163
Shares reacquired (33,540,206) (753,773,091) (17,900,602) (330,771,689)
----------- -------------- ------------ -------------
Net increase 33,959,375 $ 744,428,177 7,282,367 $134,054,961
========== ============== ============ ============
(6) Line of Credit
The Fund entered into an agreement which enables it to participate with other
funds managed by MFS in an unsecured line of credit with a bank which permits
borrowings up to $350 million, collectively. Borrowings may be made to
temporarily finance the repurchase of Fund shares. Interest is charged to each
fund, based on its borrowings, at a rate equal to the bank's base rate. In
addition, a commitment fee, based on the average daily unused portion of the
line of credit, is allocated among the participating funds at the end of each
quarter. The commitment fee allocated to the Fund for the year ended November
30, 1995 was $31,555.
(7) Transactions in Securities of Affiliated Issuers
Affiliated issuers, as defined under the Investment Company Act of 1940, are
those in which the Fund's holdings of an issuer represent 5% or more of the
outstanding voting securities of the issuer. A summary of the Fund's
transactions in the securities of these issuers during the year ended November
30, 1995 is set forth below:
<TABLE>
<CAPTION>
Acquisitions Dispositions
Beginning -------------------------------- ------------------------------
Share/Par Share/Par Share/Par
Affiliate Amount Amount Cost Amount Cost
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amerihost Properties, Inc. 100,000 351,000 $ 1,676,067 -- $ --
Applebee's International,
Inc. 1,864,200 96,600 2,159,257 -- --
Autodesk, Inc. 1,555,000 1,386,770 51,453,012 47,000 1,207,148
Back Bay Restaurant Group,
Inc. 185,100 -- -- -- --
Buffets Inc. 1,350,100 217,900 1,995,943 -- --
CareLine, Inc. 728,700 -- -- 728,700 5,233,371
CareLine, Inc., 8s, 2001 1,500,000 -- -- 1,500,000 1,500,000
Compuware Corp. 565,100 1,634,424 45,863,405 -- --
Equalnet Holding Corp. -- 447,000 5,347,328 -- --
HFS Inc. 2,430,000 790,805 22,676,229 -- --
Hammons (John Q) Hotels,
Inc. 133,200 411,100 5,947,170 -- --
Hometown Buffet, Inc. 823,000 86,000 985,636 -- --
IHOP Corp. 65,000 547,200 12,430,327 -- --
Integrated Health Services,
Inc. 934,300 470,627 15,740,594 -- --
Marcam Corp. 596,800 -- -- 20,000 507,787
Micro Warehouse, Inc. 1,149,000 581,600 20,778,546 -- --
Mid Atlantic Medical
Services, Inc. 2,370,000 750,800 17,221,380 200 1,504
Mothers Work, Inc. 211,500 -- -- -- --
National Gaming Corp. 243,000 17,000 132,025 -- --
Quantum Restaurant Group,
Inc. 540,700 12,500 130,437 -- --
Showbiz Pizza Time, Inc. 750,000 5,000 48,125 -- --
System Software Assoc. 1,539,600 505,500 13,262,937 -- --
Taco Cabana, Inc. 968,295 -- -- 5,900 103,250
Transportation Corp. of
America, "B" 692,516 -- -- 152,516 440,469
------------ ----------
$217,848,418 $8,993,529
============ ==========
</TABLE>
Interest
Ending Realized and
Share/Par Gain Dividend Ending
Amount (Loss) Income Value
- ---------------------------------------------------------
451,000 $ -- $ -- $ 2,762,375
1,960,800 -- 94,525 54,412,200
2,894,770 1,026,489 471,332 102,040,642
185,100 -- -- 1,064,325
1,568,000 -- -- 20,776,000
-- -- -- --
-- 135,000 118,667 --
2,199,524 -- -- 45,090,242
447,000 -- -- 8,604,750
3,220,805 -- -- 223,040,746
544,300 -- -- 5,374,962
909,000 -- -- 9,885,375
612,200 -- -- 15,840,675
1,404,927 -- 19,020 31,084,010
576,800 (187,787) -- 9,877,700
1,730,600 -- -- 81,338,200
3,120,600 2,261 -- 76,064,625
211,500 -- -- 2,908,125
260,000 -- -- 2,567,500
553,200 -- -- 6,776,700
755,000 -- -- 9,626,250
2,045,100 -- 184,752 73,623,600
962,395 (53,837) -- 5,172,873
540,000 1,486,311 -- 6,885,000
---------- -------- ------------
$2,408,437 $888,296 $794,816,875
========== ======== ============
(8) Restricted Securities
The Fund may invest not more than 15% of its net assets in securities which are
subject to legal or contractual restrictions on resale. At November 30, 1995,
the Fund owned the following restricted securities (constituting 0.40% of net
assets) which may not be publicly sold without registration under the Securities
Act of 1933 (the 1933 Act). The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations supplied by a pricing service or brokers or, if not available, in
good faith by or at the direction of the Trustees. Certain of these securities
may be offered and sold to "qualified institutional buyers" under Rule 144A of
the 1933 Act.
Dates of Share/Par
Description Acquisition Amount Cost Value
- ------------------------------------------------------------------------------
Boomtown, Inc. 10/23/92 - 5/25/93 35,000 $ 350,000 $ 218,750
Call Net
Enterprises, Inc.,
"B" 11/10/93 125,000 1,051,600 873,740
Copley Partners 1 12/06/86 3,000,000 751,263 761,724
Copley Partners 2 12/02/86 - 8/09/91 3,000,000 2,207,091 2,029,296
Highland Capital
Partners 6/28/88 - 6/28/93 7,500,000 2,561,094 8,320,425
Renal Treatment
Centers, Inc. 6/28/95 17,651 65,485 712,659
Turkiye Garanti
Bankasi 10/29/93 32,000 616,184 224,000
-----------
$13,140,594
===========
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of MFS Series Trust II and Shareholders of MFS Emerging Growth
Fund: We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of MFS Emerging Growth Fund (one of the
series constituting MFS Series Trust II) as of November 30, 1995, the related
statement of operations for the year then ended, the statement of changes in net
assets for the years ended November 30, 1995 and 1994, and the financial
highlights for each of the years in the nine-year period ended November 30,
1995. 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.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
November 30, 1995 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of MFS Emerging Growth
Fund at November 30, 1995, the results of its operations, the changes in its net
assets, and its financial highlights for the respective stated periods in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 5, 1996
---------------------------------------------
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(R) EMERGING [LOGO: NUMBER 1 DALBAR BULK RATE
GROWTH FUND TOP RATED SERVICE] U.S. POSTAGE
PAID
PERMIT #55638
500 Boylston Street BOSTON, MA
Boston, MA 02116 -------------
[LOGO: M F S(R)
THE FIRST NAME IN MUTUAL FUNDS]
MEG-2 1/96/301M 7/207
