[MFS LOGO]
Annual Report
for Year Ended
November 30, 1996
MFS(R) Emerging Growth Fund
<PAGE>
Table of Contents
Letter from the Chairman 1
A Discussion with the Portfolio Manager 3
Portfolio Manager's Profile 5
Performance Summary 6
Fund Facts 8
Portfolio of Investments 10
Financial Statements 26
Notes to Financial Statements 33
Independent Auditors' Report 40
Trustees and Officers 41
Highlights
o For the 12 months ended November 30, 1996, Class A shares of the Fund
provided a total return at net asset value of 19.52%, Class B shares 18.52%,
and Class C shares, which became available on April 1, 1996, 18.52%.
o Smaller companies underperformed most of the year. With a strong market,
investors ignored the strong earnings growth of the smaller companies and
bid up prices of the larger companies instead.
o Many of the Fund's technology stocks did very well, benefiting from the
restructuring and cost-cutting efforts of corporate America.
o We see a continuation of the slow growth that the United States has been
experiencing for the last few years, a situation which has helped corporate
earnings as restructurings have lowered costs and helped improve profit
margins.
<PAGE>
Letter from the Chairman
[Photo of A. Keith Brodkin]
A. Keith Brodkin
Dear Shareholders:
The U.S. economy appears to have settled into a pattern of moderate growth
and inflation -- two factors that we think can be important contributors to a
favorable long-term investment climate. During the first quarter of 1996,
real (inflation-adjusted) economic growth was 2.3% on an annualized basis,
followed by a rate of 4.7% in the second quarter. However, this unexpectedly
high level was followed by a more moderate 2.0% pace during the third
quarter. Overall, real growth in gross domestic product has surpassed our
expectations this year, and we now expect that growth for all of 1996 could
exceed 2.5%. While the consumer appears to be carrying an excessive debt
load, this sector, which represents two-thirds of the economy, provided some
support to the automobile and housing markets throughout much of the year.
Consumer spending has also been positively impacted by widespread job growth
and, more recently, modestly increasing wages. Retail sales, which have been
flat for several months, appear to be improving for the holiday shopping
season. The economies of Europe and Japan, meanwhile, continue to be in the
doldrums, weakening U.S. export markets. Finally, the capital spending plans
of American corporations are far from robust. Thus, while economic growth
should continue, we expect some slackening toward the end of the year.
We believe U.S. equity investors should lower their expectations for 1997.
The expected slowdown in corporate earnings growth and interest rate
increases earlier in the year have raised some near-term concerns, as was
seen in July's stock market correction. Further increases in interest rates
and an acceleration of inflation, coupled with an additional slowdown in
corporate earnings growth, could have a negative effect on the stock market
in the near term. However, to the extent that some earnings disappointments
are taken as a sign that the economy is not overheating, this may prove
beneficial for the equity market's longer-term health. We believe many of the
technology-driven productivity gains that U.S. companies have made in recent
years will continue to enhance corporate America's competitiveness and
profitability. Therefore, while we have some near-term concerns, we remain
quite constructive on the long-term viability of the equity market.
Finally, as you may notice, this report to shareholders incorporates a
number of changes which we hope you will find informative and useful.
Following a discussion with the Portfolio Manager, we have added new infor-
1
<PAGE>
Letter from the Chairman - continued
mation on the Fund's holdings, including a chart illustrating the portfolio's
concentration in the types of investments that meet its criteria. Near the
back of the report, telephone numbers and addresses are listed if you would
like to contact MFS.
We appreciate your support and welcome any questions or comments you may
have.
Respectfully,
/s/ A. Keith Brodkin
A. Keith Brodkin
Chairman and President
December 12, 1996
2
<PAGE>
A Discussion with the Portfolio Manager
[Photo of John W. Ballen]
John W. Ballen
For the 12 months ended November 30, 1996, Class A shares of the Fund
provided a total return of 19.52%, Class B shares 18.52%, and Class C shares,
which became available on April 1, 1996, 18.52%. All of these returns assume
the reinvestment of distributions but exclude the effects of any sales
charges, and they compare to a 27.85% return for the Standard & Poor's 500
Composite Index (the S&P 500), a popular, unmanaged index of common stock
performance, and a 16.52% return for the Russell 2000 Total Return Index (an
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 the NASDAQ).
Q. What do you think were some of the major reasons for the Fund's
performance over the past year, John?
A. The stock market in 1996 was dominated by the larger-capitalization issues
as represented by the Dow Jones Industrial Average and the S&P 500. Most of
the other indices, which include less well-known names, have lagged. However,
the Fund's performance compared favorably to the Russell 2000 as investors
rewarded the earnings growth of many companies owned by the Fund.
Q. How would you describe the business and economic environment you faced
over the past year, particularly as it relates to the Fund?
A. The business and economic environment was benign. Modest economic growth
coupled with productivity gains by corporate America provided a favorable
environment. However, semiconductor issues performed poorly as inventory
oversupply hurt their sales. The health maintenance organizations (HMOs) also
performed poorly as companies underestimated health care costs and set their
prices too low. This poor performance spilled over from the first half of the
year to affect performance for the entire technology and health care sectors
- -- two of the larger components of the portfolio.
Q. How would you characterize the performance of smaller companies relative
to larger companies over the past year, and what do you think were some of
the reasons for the difference in performance?
A. Smaller companies underperformed most of the year. With a very strong
market, investors ignored the strong earnings growth of the smaller companies
and bid up prices of the larger companies instead. In fact, earnings results
for the smaller companies in the Fund generally remained strong all year.
3
<PAGE>
A Discussion with the Portfolio Manager - continued
Q. We noticed that technology is the largest sector in the Fund. What is it
you like about technology, and could you discuss any sub-groups within
technology that you find particularly attractive?
A. The U.S. economy has experienced very weak growth in gross domestic
product. At the same time, this has been one of the best five-year periods
for earnings growth. A major reason for this is the restructuring occurring
throughout corporate America, which has improved productivity. Much of this
restructuring has been made possible by technology companies, especially
software and networking companies that are helping their corporate customers
reduce costs.
Q. However, your largest holding is not a technology stock, but HFS, Inc., a
franchisor of hotels and real estate companies. What makes this company
attractive?
A. HFS is a consumer services company. This company has acquired companies in
the hotel, real estate, and car rental industries. All of these businesses
fit into HFS very well, and the company has increased internal growth over
30% from revenue and cost savings opportunities. Supplementing this internal
growth has been what we believe to be the best acquisition team of the 1990s.
The team has made several acquisitions that greatly increased the earnings
growth rate this year. And while the stock has outperformed the market, its
valuation has lagged its earnings growth rate, making it attractively priced.
Q. In general, what characteristics or qualities do you look for in selecting
stocks for the Fund?
A. We try to be early in identifying small-and mid-cap growth stocks selling
at lower-than-average valuations, with the potential to become attractive to
investors as they grow. We are long-term investors and the Fund has a low
turnover, so we look for companies that will succeed over the long term with
what we regard as superior management and market positions.
Q. Can you talk about some other stocks or sectors that performed as well as
or better than expected and tell us why you think they did well?
A. Many of our technology stocks did very well. As corporate America
restructures and focuses on reducing costs, companies are making more use of
technology and software. Oracle Systems, the database and applications
provider, BMC Software, Computer Associates, and Compuware have all performed
well.
Q. Now, could you talk about some stocks or sectors that did not perform as
well as you expected?
4
<PAGE>
A Discussion with the Portfolio Manager - continued
A. The health care sector was a disappointing sector for the Fund this year.
The HMOs set their prices too low to ensure revenues in 1996. United
Healthcare, Healthsource, and Mid Atlantic Medical all underperformed. We
are, however, optimistic that these companies will benefit from price
increases implemented in 1997.
Q. Can you tell us about some sectors you might be avoiding, and why?
A. We tend usually to avoid some of the slower-growing sectors of the U.S.
economy. Examples are energy, industrial, and cyclical-related stocks.
Q. As you look ahead, what changes do you see in the overall market or
economic environment, particularly as it relates to the Fund, and how are you
positioning the Fund to try to take advantage of those changes?
A. I see a continuation of the slow growth that the United States has been
experiencing for the past few years. While this has been a slow-growing
economy, it has been great for corporate earnings, as restructurings have
lowered costs and helped improve profit margins. Many of the smaller
companies, with their lower costs, can capitalize on this trend. We believe
technology and outsourcing companies, which are large holdings for the Fund,
can continue to benefit from these developments.
Respectfully,
/s/ John W. Ballen
John W. Ballen
Portfolio Manager
Portfolio Manager's Profile
John W. Ballen began his career at MFS as an industry specialist in
1984. A graduate of Harvard College, the University of New South
Wales and the Stanford University Graduate School of Business
Administration, he 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 and on May 1, 1995 he became Chief
Equity Officer. He has been the Portfolio Manager of MFS Emerging
Growth Fund since 1987.
5
<PAGE>
Performance Summary
The information below and on the following page illustrates the historical
performance of MFS Emerging Growth Fund Class B shares in comparison to
various market indicators. Graph results do not reflect the deduction of any
contingent deferred sales charge (CDSC) which 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 are historical
and assume the reinvestment of dividends and capital gains. The performance
of Class A and Class C shares will be greater or less than the line shown,
based on differences in loads and fees.
[Description of line chart]
Growth of a Hypothetical $10,000 Investment
(For the Period from December 29, 1986 to November 30, 1996)
MFS Emerging Growth S&P 500 Russell Consumer Price
Fund Class B Composite Index 2000 Index Index - U.S.
12/86 10000 10000 10000 10000
9036 10453 8201 9528
11/88 10745 10891 10648 11735
13982 11398 12811 15345
11/90 12527 12113 9962 14808
21945 12475 14000 17818
11/92 28364 12856 17332 21097
33854 13200 20621 23225
11/94 36633 13553 20391 23463
53079 13901 26200 32104
11/96 62912 14377 30526 41017
6
<PAGE>
Performance Summary - continued
<TABLE>
<CAPTION>
Life of
Average Annual Total Returns 1 Year 3 Years 5 Years Fund+++
- ------------------------------------- --------- --------- --------- ----------
<S> <C> <C> <C> <C>
MFS Emerging Growth Fund (Class A)
including 5.75% sales charge +12.67% +21.50% +22.63% +19.95%
- ------------------------------------- --------- --------- --------- ----------
MFS Emerging Growth Fund (Class A) at
net asset value +19.52% +23.92% +24.09% +20.67%
- ------------------------------------- --------- --------- --------- ----------
MFS Emerging Growth Fund (Class B)
with CDSC +14.52% +22.28% +23.27% +20.35%
- ------------------------------------- --------- --------- --------- ----------
MFS Emerging Growth Fund (Class B)
without CDSC +18.52% +22.94% +23.45% +20.35%
- ------------------------------------- --------- --------- --------- ----------
MFS Emerging Growth Fund (Class C)
with CDSC +17.52% +22.94% +23.45% +20.35%
- ------------------------------------- --------- --------- --------- ----------
MFS Emerging Growth Fund (Class C)
without CDSC +18.52% +22.94% +23.45% +20.35%
- ------------------------------------- --------- --------- --------- ----------
Average mid-cap fund** +19.21% +16.66% +16.45% +14.34%
- ------------------------------------- --------- --------- --------- ----------
Standard & Poor's 500 Composite
Index+ +27.85% +20.88% +18.15% +15.28%
- ------------------------------------- --------- --------- --------- ----------
Russell 2000 Index+ +16.52% +13.97% +16.83% +11.90%
- ------------------------------------- --------- --------- --------- ----------
Consumer Price Index* +3.42% +2.89% +2.88% +3.73%
- ------------------------------------- --------- --------- --------- ----------
</TABLE>
*The Consumer Price Index is a popular measure of change in prices.
**Source: Lipper Analytical Services.
+Source: CDA/Wiesenberger.
+++For the period from commencement of investment operations, December 29,
1986 to November 30, 1996.
Investment return and principal value will fluctuate, and shares, when
redeemed, may be worth more or less than their original cost. Past
performance is no guarantee of future results.
Class B results with the contingent deferred sales charge (CDSC) reflect the
applicable CDSC which declines over six years as follows: 4%, 4%, 3%, 3%, 2%,
1%, 0%. Class C shares have no initial sales charge but, along with Class B
shares, have higher annual fees and expenses than Class A shares. As of April
1, 1996, Class C shares redeemed within 12 months of purchase will be subject
to a 1% CDSC.
Class A and Class C share performance includes the performance of the Fund's
Class B shares for periods prior to the commencement of offering of Class A
shares on September 13, 1993 and of Class C shares on April 1, 1996. Sales
charges and operating expenses for Class A, Class B, and Class C shares
differ. The Class B share performance, which is included within the Class A
share performance, including the sales charge, has been adjusted to reflect
the initial sales charge generally applicable to Class A shares rather than
the CDSC generally applicable to Class B shares. The Class B share
performance included within the Class C share performance with CDSC has
7
<PAGE>
been adjusted to reflect the lower CDSC generally applicable to Class C
shares, rather than the higher CDSC generally applicable to Class B shares.
Class A and Class C share performance has not been adjusted, however, to
reflect differences in operating expenses (e.g., Rule 12b-1 fees), which
generally are higher for Class B shares, and not significantly different for
Class C shares.
Fund results reflect any applicable expense subsidies and waivers, without
which the performance results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details.
Fund Facts
Strategy: The Fund's investment objective is to provide long-term
growth of capital by investing primarily in common
stocks of companies that MFS believes are early in their
life cycle but which have the potential to become major
enterprises.
Commencement of
investment operations: December 29, 1986
Size: $6.3 billion net assets as of November 30, 1996
Largest Sectors
[Description of Pie Chart]
Retailing 11.0%
Technology 40.5%
Miscellaneous 19.3%
Leisure 16.1%
Health Care 13.1%
8
<PAGE>
Portfolio Concentration as of November 30, 1996
Top Ten Equity Holdings
HFS, Inc.
Franchiser of hotels and real estate companies
Oracle Corporation
Developer and manufacturer of database software
Computer Associates
Computer software company
Cisco Systems
Computer network developer
United Healthcare
Health maintenance organization
BMC Software
Computer software company
Cadence Design Systems, Inc.
Computer software and systems company
Office Depot
Office supply retailer
Republic Industries
Waste disposal company
Cabletron Systems
Computer network company
Tax Form Summary
In January 1997, shareholders will be mailed a tax form summary reporting the
federal tax status of all distributions paid during the calendar year 1996.
For the year ended November 30, 1996, the amount of distributions from income
eligible for the 70% dividends-received deduction for corporations came to
31.1%.
9
<PAGE>
Portfolio of Investments - November 30, 1996
Common Stocks - 97.4%
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - 92.8%
Advertising - 0.2%
Lamar Advertising Co., "A"* 51,300 $ 1,192,725
Leap Group, Inc.* 150,000 918,750
Outdoor Systems, Inc.* 295,425 7,496,409
Universal Outdoor Holdings, Inc.* 113,300 3,087,425
---------------
$12,695,309
--------------------------------------------- ------------ ---------------
Airlines - 0.1%
AirNet Systems, Inc.* 210,400 $ 2,630,000
Atlas Air, Inc.* 77,400 3,599,100
---------------
$ 6,229,100
--------------------------------------------- ------------ ---------------
Apparel and Textiles - 0.4%
Designer Holdings Ltd.* 30,000 $ 461,250
Donna Karan International, Inc.* 50,000 818,750
Donnkenny, Inc.* 30,000 121,875
Mossimo, Inc.* 18,200 275,275
Nine West Group, Inc.* 507,316 24,034,096
---------------
$25,711,246
--------------------------------------------- ------------ ---------------
Automotive - 0.1%
APS Holding Corp.* 144,000 $ 2,736,000
Dura Automotive Systems, Inc.* 58,400 1,562,200
Safety Components International, Inc.* 28,000 343,000
United Auto Group, Inc.* 21,400 494,875
---------------
$ 5,136,075
--------------------------------------------- ------------ ---------------
Aerospace - 0.3%
Greenwich Air Services, Inc., "B"* 649,900 $14,947,700
Gulfstream Aerospace Corp.* 131,800 3,163,200
---------------
$18,110,900
--------------------------------------------- ------------ ---------------
Banks and Credit Companies
Capital One Financial Corp. 28,500 $ 1,029,562
First Bank Systems, Inc. 10,900 794,338
Northern Trust Corp. 10,700 777,088
---------------
$ 2,600,988
--------------------------------------------- ------------ ---------------
Building
Dayton Superior Corp.* 265,000 $ 2,616,875
--------------------------------------------- ------------ ---------------
Business Machines - 0.2%
CMC Industries, Inc.* 25,000 $ 231,250
Sun Microsystems, Inc.* 260,000 15,145,000
---------------
$15,376,250
--------------------------------------------- ------------ ---------------
Business Services - 6.7%
Abacus Direct Corp. 22,700 $ 550,475
AccuStaff, Inc.* 1,992,400 40,346,100
ADT Ltd.* 1,125,800 23,078,900
Affiliated Computer Services, Inc., "A"* 482,800 14,001,200
Alco Standard Corp. 585,300 30,289,275
10
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Business Services - continued
American List Corp. 130,000 $ 3,835,000
Barnett, Inc.* 100,000 2,475,000
BISYS Group, Inc.* 390,623 14,550,707
Caribiner International, Inc.* 28,200 1,244,325
Carriage Services, Inc.* 92,000 1,771,000
CCC Information Services Group, Inc.* 307,100 4,760,050
Ceridian Corp.* 131,300 6,318,812
Claremont Technology Group, Inc.* 53,400 1,308,300
Computer Sciences Corp.* 214,000 16,825,750
Corestaff, Inc.* 894,300 22,916,437
Cornell Corrections, Inc.* 104,300 1,029,963
CUC International, Inc.* 3,450,112 90,996,704
Data Processing Corp.* 65,000 1,129,375
Dendrite International, Inc.* 155,400 3,729,600
Donnelley Enterprise Solution* 57,400 1,442,175
DST Systems, Inc.* 307,850 9,966,644
E Trade Group, Inc.* 82,700 904,531
Education Management Corp.* 129,600 2,397,600
Employee Solutions, Inc.* 259,000 4,791,500
Equity Corp. International* 425,550 9,149,325
Fine Host Corp.* 125,100 1,985,962
First Data Corp. 24,104 961,147
First USA Paymentech, Inc.* 19,500 760,500
Fiserv, Inc.* 307,500 11,608,125
Forrester Research, Inc.* 23,500 502,313
ICT Group, Inc.* 300,000 1,350,000
Intelliquest Information Group* 53,800 1,291,200
Interim Services, Inc.* 565,800 22,207,650
International Network Services* 17,800 569,600
Labor Ready, Inc.* 50,000 612,500
Lason Holdings, Inc.* 18,500 360,750
Learning Tree International, Inc.* 47,700 2,158,425
May and Speh, Inc.* 80,000 1,080,000
Mecon, Inc.* 33,600 226,800
MedQuist, Inc.* 163,000 3,137,750
Meta Group, Inc.* 12,500 346,875
National Data Corp. 70,700 2,819,162
National Processing, Inc.* 190,900 3,436,200
NCO Group Inc.* 33,100 566,838
NOVA Corp.* 22,700 431,300
Nu Skin Asia Pacific, Inc.* 38,300 1,134,637
PHH Corporation* 45,300 2,032,837
PIA Merchandising Services, Inc.* 35,500 319,500
Precision Response Corp.* 250,000 9,281,250
Profit Recovery Group International, Inc.* 75,000 1,050,000
Registry, Inc.* 13,800 674,475
RemedyTemp, Inc.* 99,900 1,598,400
11
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Business Services - continued
Romac International, Inc.* 60,100 $ 1,472,450
RTW, Inc.* 36,000 576,000
Rural/Metro Corp.* 272,700 9,544,500
Sabre Group Holding, Inc.* 124,400 3,638,700
Service Experts, Inc.* 57,100 1,413,225
SPS Transaction Services Corp.* 558,245 8,792,359
Superior Consultant, Inc.* 15,200 364,800
Superior Services, Inc.* 28,700 491,488
Technology Solutions Co.* 64,050 2,882,250
Transaction System Architects, Inc.* 222,800 8,076,500
Vincam Group, Inc.* 21,900 761,025
Walsh International, Inc.* 47,500 380,000
---------------
$420,706,241
--------------------------------------------- ------------ ---------------
Cellular Telephones
Telephone & Data Systems, Inc. 18,000 $ 672,750
--------------------------------------------- ------------ ---------------
Chemicals
Polymer Group, Inc.* 249,600 $ 3,213,600
--------------------------------------------- ------------ ---------------
Computer Software - Services
Ingram Micro, Inc.* 112,900 $ 2,780,163
--------------------------------------------- ------------ ---------------
Computer Software - Personal Computers - 3.6%
Autodesk, Inc.* 1,566,490 $ 43,861,720
Avant Corp.* 8,221 240,464
Clarify, Inc.* 32,400 1,458,000
Compuserve, Inc.* 85,100 893,550
Cybermedia, Inc.* 17,400 352,350
Documentum, Inc.* 12,200 463,600
Electronic Arts, Inc.* 229,679 7,378,438
Epic Design Technology, Inc.* 76,200 1,905,000
HCIA, Inc.* 565,000 16,243,750
HNC Software, Inc.* 25,600 761,600
Hummingbird Communications Ltd.* 302,200 9,557,075
Imnet Systems, Inc.* 35,700 651,525
Insight Enterprises, Inc.* 216,000 7,263,000
InterSolv, Inc.* 135,500 1,253,375
Keane, Inc.* 100,000 5,287,500
Logic Works, Inc.* 52,100 306,088
MapInfo Corp.* 50,000 562,500
McAfee Associates, Inc.* 26,271 1,254,440
Microsoft Corp.* 670,100 105,121,937
National Instruments Corp.* 23,800 761,600
Openvision Technologies, Inc.* 25,300 227,700
P-Com, Inc.* 54,800 1,739,900
Quality Systems* 90,000 821,250
Segue Software, Inc.* 25,800 328,950
Selected Software Tools Ltd.* 31,500 551,250
Softdesk, Inc.* 37,600 329,000
12
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Computer Software - Personal Computers - continued
Symantec Corp.* 1,282,000 $ 19,069,750
Verity, Inc.* 30,400 505,400
Videoserver, Inc.* 19,600 960,400
---------------
$230,111,112
--------------------------------------------- ------------ ---------------
Computer Software - Systems - 21.9%
Adobe Systems, Inc. 1,015,900 $ 40,128,050
Alphanet Solutions, Inc.* 15,000 183,750
Ansys, Inc.* 13,000 147,875
Applix, Inc.* 48,000 948,000
Aspect Development, Inc.* 25,500 592,875
Aspen Technology, Inc.* 75,000 6,253,125
Astea International, Inc.* 22,000 123,750
Aurum Softwave, Inc.* 19,000 672,125
BDM International, Inc.* 43,400 2,039,800
BMC Software, Inc.* 4,053,750 176,338,125
Cadence Design Systems, Inc.+++* 4,267,525 170,167,559
Carnegie Group, Inc.* 150,000 881,250
Checkfree Corp.* 170,000 2,890,000
Citrix Systems, Inc.* 31,000 1,414,375
Computer Associates International, Inc. 4,371,900 287,452,425
Computer Management Sciences, Inc.* 29,475 501,075
Compuware Corp.* 1,963,624 110,944,756
Cotelligent Group, Inc.* 303,100 6,043,056
CSG Systems International, Inc.* 23,300 413,575
Desktop Data, Inc.* 15,400 346,500
Document Sciences Corp.* 24,000 270,000
Edify Corp.* 120,000 1,680,000
Factset Research Systems, Inc.* 59,600 1,400,600
Helisys, Inc.* 50,000 143,750
HMT Technology Corp.* 90,000 1,575,000
HPR, Inc.* 29,000 435,000
IA Corporation I* 100,000 562,500
IDX Systems Corp.* 21,300 527,175
Information Management Resources, Inc.* 106,800 1,762,200
Informix Corp.* 1,184,100 28,122,375
Intelidata Technologies Corp.* 171,200 1,259,925
Intelligroup, Inc.* 10,700 155,150
Isocor* 53,000 311,375
Learning Company, Inc.* 390,000 6,630,000
Metatec Corp.* 60,000 390,000
Metromail Corp.* 106,400 2,460,500
Oak Technology* 400,000 3,950,000
Objective Systems Integrators, Inc.* 38,500 948,063
Oracle Systems Corp.* 7,553,500 370,121,500
Programmers Paradise, Inc.* 100,000 650,000
Radisys Corp.* 85,000 3,888,750
13
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Computer Software - Systems - continued
Remedy Corp.* 41,400 $ 1,873,350
Renaissance Solutions, Inc.* 67,200 2,536,800
Rogue Wave Software, Inc.* 24,400 314,150
Sapient Corp.* 12,400 489,800
Security Dynamics Technology* 59,600 2,451,050
Simulation Sciences, Inc.* 93,200 1,153,350
Sterling Software, Inc.* 10,000 331,250
Summit Design, Inc.* 50,000 500,000
Sunquest Information Systems, Inc.* 20,000 297,500
Sybase, Inc.* 3,054,589 53,837,131
Sykes Enterprises, Inc.* 14,850 645,975
Synopsys, Inc.* 662,800 29,328,900
System Software Associates, Inc.+++ 2,519,350 34,955,981
Techforce Corp.* 50,000 331,250
Technology Modeling Associates, Inc.* 23,100 248,325
Transition Systems, Inc.* 51,900 583,875
Ultradata Corp.* 40,000 200,000
USCS International, Inc.* 217,300 3,639,775
Viisage Technology, Inc.* 41,700 589,013
Whittman-Hart, Inc.* 118,200 5,378,100
Xionics Document Technologies* 134,500 1,748,500
---------------
$1,377,159,984
--------------------------------------------- ------------ ---------------
Construction Services - 0.1%
Shaw Group, Inc.* 159,400 $ 4,104,550
--------------------------------------------- ------------ ---------------
Consumer Goods and Services - 0.6%
American Residential Services, Inc.* 88,000 $ 1,881,000
Bell Sports Corp.* 40,000 255,000
Blyth Industries, Inc.* 115,400 5,005,475
Bollinger Industries, Inc.* 45,000 33,750
Boston Communications Group* 36,100 320,388
Carson, Inc.* 121,100 1,695,400
Cerplex Group, Inc.* 123,800 170,225
Childtime Learning Centers, Inc.* 70,000 595,000
Department 56, Inc.* 50,000 1,162,500
Franklin Quest Co.* 567,800 12,065,750
GT Bicycles, Inc.* 10,000 120,000
Rockshox, Inc.* 90,000 1,158,750
Service Corp. International* 322,400 9,712,300
Ticketmaster Group, Inc.* 170,000 2,486,250
---------------
$ 36,661,788
--------------------------------------------- ------------ ---------------
Electrical Equipment - 0.1%
Anadigics, Inc.* 11,800 $ 442,500
Comdial Corp.* 115,000 790,625
CP Clare Corp.* 180,000 1,485,000
Cyberoptics Corp.* 35,000 411,250
JPM Co.* 145,000 1,776,250
14
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Electrical Equipment - continued
Micrel, Inc.* 29,800 $ 748,725
Remec, Inc.* 10,000 191,250
Zycon Corp.* 47,000 587,500
---------------
$ 6,433,100
--------------------------------------------- ------------ ---------------
Electronics - 4.2%
Aavid Thermal Technologies, Inc.* 65,000 $ 568,750
Actel Corp.* 40,000 880,000
Altera Corp.* 1,300,600 98,195,300
Analog Devices, Inc.* 735,000 23,611,875
Atmel Corp.* 399,300 13,126,987
AVX Corp. 85,800 1,919,775
Blonder Tongue Laboratories, Inc.* 52,500 525,000
Burr Brown Corp.* 398,300 10,355,800
Integrated Measurements Systems, Inc.* 23,900 424,225
Linear Technology Corp. 386,900 18,232,662
LSI Logic Corp.* 994,600 29,962,325
Maxim Integrated Products, Inc.* 155,900 7,229,863
MEMC Electronic Materials, Inc.* 25,000 668,750
Micro Linear Corp.* 198,000 1,274,625
National Semiconductor Corp.* 60,000 1,470,000
Novellus Systems, Inc.* 152,000 8,740,000
Photon Dynamics, Inc.* 32,100 204,638
Triumph Group, Inc.* 31,200 819,000
Ultrak, Inc.* 70,000 2,143,750
Xilinx, Inc.* 994,882 43,650,448
---------------
$264,003,773
--------------------------------------------- ------------ ---------------
Entertainment - 3.1%
Ambassadors International, Inc.* 20,000 $ 165,000
American Radio Systems Corp., "A"* 325,800 8,959,500
Chartwell Leisure, Inc.* 260,000 3,510,000
Clear Channel Communications, Inc.* 9,000 621,000
Cox Radio, Inc.* 157,700 2,759,750
Golden Bear Golf, Inc.* 25,400 346,075
Grand Casinos, Inc.* 1,422,921 18,142,243
Harrah's Entertainment, Inc.* 2,181,402 38,719,885
Hertiage Media Corp.* 118,800 1,648,350
Hollywood Entertainment Corp.+++* 3,436,500 69,159,562
Infinity Broadcasting Corp., "A"* 562,725 18,077,541
International Speedway Corp.* 24,000 480,000
Jacor Communications, Inc., "A"* 379,400 9,105,600
LIN Television Corp.* 412,200 16,539,525
Macromedia, Inc.* 76,000 1,377,500
Metro Networks, Inc.* 74,200 1,799,350
Players International, Inc.* 47,000 305,500
Premier Parks, Inc.* 35,700 1,137,938
Showboat, Inc. 245,000 4,563,125
15
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Entertainment - continued
Sinclair Broadcast Group, Inc.,"A"* 38,900 $ 943,325
Starsight Telecast, Inc.* 15,700 117,750
---------------
$198,478,519
--------------------------------------------- ------------ ---------------
Financial Institutions - 1.2%
Accident Consumer Finance Corp.* 35,000 $ 319,375
Advanta Corp., "B" 13,000 546,000
Amresco, Inc.* 70,000 1,505,000
Contifinancial Corp.* 52,050 2,042,962
Corporate Express, Inc.* 348,000 9,744,000
Credit Acceptance Corp.* 165,000 4,269,375
Delta Financial Corp.* 27,400 626,775
Dignity Partners, Inc.* 78,100 205,013
Emergent Group, Inc.* 149,700 1,777,687
Everen Capital Corp. 90,000 2,025,000
Finova Group, Inc. 10,900 719,400
First Investment Financial Services Group* 78,300 704,700
First Merchants Acceptance Corp.* 45,000 945,000
Franklin Resources, Inc. 335,200 23,966,800
Hambrecht & Quist Group, Inc.* 18,000 441,000
Harrington Financial Group, Inc.* 20,000 202,500
Healthcare Financial Partners, Inc.* 44,900 561,250
IMC Mortgage Co.* 60,000 1,950,000
Jayhawk Acceptance Corp.* 270,000 3,307,500
Mego Mortgage Corp.* 30,000 356,250
Metris Cos., Inc.* 31,200 733,200
National Auto Credit, Inc.* 848,100 8,693,025
RAC Financial Group, Inc.* 90,000 4,837,500
Schwab (Charles) Corp. 25,000 753,125
Southern Pacific Funding Corp.* 58,000 1,841,500
---------------
$ 73,073,937
--------------------------------------------- ------------ ---------------
Food and Beverage Products - 0.1%
Einstein Noah Bagel Corp.* 33,100 $ 988,863
Nuco2, Inc.* 5,000 67,500
Rocky Mountain Chocolate Factory* 67,100 452,925
Suiza Foods Corp.* 190,000 3,467,500
---------------
$ 4,976,788
--------------------------------------------- ------------ ---------------
Insurance - 0.2%
Amerin Corp.* 117,100 $ 2,664,025
Capmac Holdings, Inc. 53,000 1,768,875
Compdent Corp.* 159,300 4,380,750
Equitable of Iowa Cos. 18,500 827,875
---------------
$ 9,641,525
--------------------------------------------- ------------ ---------------
Machinery - 0.1%
Prime Service, Inc.* 112,600 $ 3,096,500
Rental Service Corp.* 57,500 1,480,625
---------------
$ 4,577,125
- --------------------------------------------------------------------------------
16
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Medical and Health Products - 1.1%
AmeriSource Health Corp.* 33,800 $ 1,330,875
Arterial Vascular Engineering, Inc.* 24,800 421,600
Biosource International, Inc.* 144,400 1,019,825
Boston Scientific Corp.* 260,000 15,177,500
Cohr, Inc.* 56,800 1,192,800
Digene Corp.* 24,500 248,063
Guidant Corp.* 382,600 20,229,975
Housecall Medical Resources, Inc.* 75,000 346,875
Innovasive Devices, Inc.* 29,000 224,750
Iridex Corp.* 30,000 247,500
Lanvision Systems, Inc.* 15,000 114,375
Matria Healthcare, Inc.* 578,500 3,471,000
MedCath, Inc.* 30,000 446,250
NCS Healthcare, Inc.* 36,200 995,500
Orthofix International N.V.* 473,749 4,086,085
Parexel International Corp.* 19,500 1,009,125
Physician Sales and Service, Inc.* 42,000 850,500
Seamed Corp.* 30,000 311,250
Sofamor Danek Group, Inc.* 20,000 562,500
Uromed Corp.* 48,765 444,981
Ventritex, Inc.* 148,900 3,461,925
Vitalcom, Inc.* 15,000 80,625
Waters Corp.* 423,500 11,487,437
Xomed Surgical Products, Inc.* 50,000 962,500
Zoll Medical Corp.* 107,500 1,384,062
---------------
$70,107,878
--------------------------------------------- ------------ ---------------
Medical and Health Technology and Services - 11.9%
Access Health, Inc.* 37,500 $ 1,471,875
Advanced Health Corp.* 72,600 1,034,550
AHI Healthcare Systems, Inc.* 47,700 369,675
American Homepatient, Inc.* 420,750 9,729,844
American Medical Response* 44,500 1,335,000
American Medserve Corp.* 47,600 773,500
American Oncology Resources, Inc.* 100,000 975,000
Applied Analytical Industries, Inc.* 12,300 261,375
Carematrix Corp.* 473,500 6,510,625
ClinTrials Research, Inc.* 45,000 978,750
Columbia/HCA Healthcare Corp. 708,184 28,327,360
Community Care of America, Inc.* 100,000 400,000
Coventry Corp.* 502,700 4,964,162
CRA Managed Care, Inc.* 31,900 1,451,450
Equimed, Inc.* 200,000 837,500
First Commonwealth, Inc.* 12,600 207,900
Foundation Health Corp.* 1,146,500 33,535,125
FPA Medical Management, Inc.* 360,425 6,938,181
Genesis Health Ventures, Inc.* 181,150 5,049,556
17
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Medical and Health Technology and Services - continued
HBO & Company 5,900 $ 335,563
Health Management Associates, Inc., "A"* 58,500 1,294,312
Healthdyne Information Enterprises, Inc.* 378,500 1,750,562
Healthdyne, Inc.* 190,000 1,733,750
HealthPlan Services Corp.* 58,000 1,131,000
Healthsource, Inc.+++* 5,070,210 57,039,862
HEALTHSOUTH Corp.* 945,110 35,559,764
Heartport, Inc.* 23,600 542,800
ICU Medical, Inc.* 50,000 412,500
Integrated Health Services, Inc.+++* 1,296,000 28,512,000
Integrated Living Communities, Inc.* 250,000 1,562,500
Kapson Senior Quarters Corp.* 240,000 1,740,000
Lincare Holdings, Inc.* 206,900 8,224,275
Living Centers of America* 96,600 2,451,225
Manor Care, Inc. 78,600 1,984,650
Mariner Health Group, Inc.* 1,048,900 7,866,750
Medpartners, Inc.* 35,765 813,654
Mid Atlantic Medical Services, Inc.* 2,467,600 28,994,300
Multicare Cos., Inc.* 121,350 2,396,662
National Surgery Centers, Inc.* 28,200 895,350
Occusystems, Inc.* 13,100 379,900
Option Care, Inc.* 140,000 682,500
Orthodontic Centers America, Inc.* 1,990,000 25,123,750
Owen Healthcare, Inc.* 732,200 18,762,625
Oxford Health Plans, Inc.* 491,800 28,524,400
Pacificare Health Systems, Inc., "A"* 364,900 28,827,100
Pacificare Health Systems, Inc., "B"* 672,546 55,821,318
Pediatric Services America, Inc.* 30,000 570,000
Pediatrix Medical Group* 37,400 1,444,575
Pharmaceutical Product Development, Inc.* 16,200 356,400
Phymatrix Corp.* 98,200 1,509,825
Physician Corp. America* 23,500 249,688
Physician Reliance Network, Inc.* 510,000 3,570,000
Physician Support Systems, Inc.* 38,100 657,225
Physicians Resource Group, Inc.* 300,000 6,225,000
Physio-Control International Corp.* 212,300 3,927,550
Quorum Health Group, Inc.* 66,100 1,859,062
Renal Care Group, Inc.* 29,100 923,925
Renal Treatment Centers, Inc.* 820,000 21,320,000
Renal Treatment Centers, Inc.+* 35,302 917,852
Riscorp, Inc., "A"* 117,900 515,813
Schein (Henry), Inc.* 26,850 1,094,137
Sierra Health Services, Inc.* 27,700 682,113
Sola International, Inc.* 43,000 1,510,375
St. Jude Medical, Inc.* 500,000 20,875,000
Sterling House Corp.* 22,000 187,000
Summit Medical Systems, Inc.* 26,900 225,288
18
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Medical and Health Technology and Services - continued
Sunrise Assisted Living, Inc.* 40,000 $ 970,000
Total Renal Care Holdings, Inc.* 200,000 6,850,000
Ultratech Stepper, Inc.* 104,800 2,384,200
United Dental Care, Inc.* 25,400 711,200
United Healthcare Corp. 4,939,654 213,022,579
United Payors and United Providers, Inc.* 175,000 2,100,000
Urocor, Inc.* 21,200 196,100
Vivra, Inc.* 200,000 6,150,000
WellCare Management Group, Inc.* 77,700 689,588
---------------
$750,208,995
--------------------------------------------- ------------ ---------------
Metals and Minerals - 0.1%
Titanium Metals Corp.* 110,000 $ 3,685,000
--------------------------------------------- ------------ ---------------
Pollution Control - 2.6%
Allied Waste Industries, Inc.* 208,000 $ 1,872,000
Laidlaw, Inc. 500,000 6,125,000
Philip Environmental, Inc.* 183,300 2,382,900
Republic Industries+@* 507,900 16,951,162
Republic Industries, Inc.##* 4,000,000 133,000,000
USA Waste Services, Inc.* 137,360 4,429,860
---------------
$164,760,922
--------------------------------------------- ------------ ---------------
Printing and Publishing - 0.1%
Applied Graphics Technologies* 41,200 $ 782,800
Educational Insights, Inc.* 46,500 104,625
Mail Well Holdings, Inc.* 414,000 5,847,750
---------------
$ 6,735,175
--------------------------------------------- ------------ ---------------
Railroads
Wisconsin Central Transportation Corp.* 32,700 $ 1,332,525
--------------------------------------------- ------------ ---------------
Real Estate - 0.2%
CB Commercial Real Estate Services Group* 188,000 $ 3,384,000
NHP, Inc.* 444,700 7,726,663
---------------
$ 11,110,663
--------------------------------------------- ------------ ---------------
Restaurants and Lodging - 12.6%
Amerihost Properties, Inc.+++* 522,000 $ 3,458,250
Apple South, Inc. 412,150 6,079,213
Applebee's International, Inc.+++* 3,126,500 91,059,312
Back Bay Restaurant Group, Inc.* 157,600 433,400
Bertucci's, Inc.* 369,700 1,964,031
Brinker International, Inc.* 440,000 8,140,000
Bristol Hotel Co.* 47,100 1,265,813
Buffets, Inc.+++* 2,953,050 27,500,278
Candlewood Hotel Company, Inc.* 250,000 2,531,250
Capstar Hotel Co.* 500,000 9,187,500
Cheesecake Factory* 10,000 202,500
Choice Hotels Holdings, Inc.* 78,600 1,208,475
Extended Stay America, Inc.* 804,000 16,683,000
19
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Restaurants and Lodging - continued
Hammons John Q Hotels, Inc.+++* 549,300 $ 4,394,400
HFS, Inc.+++* 6,441,610 417,094,247
IHOP Corp.+++* 612,200 14,845,850
Interstate Hotels Co.* 82,600 2,116,625
LA Quinta Inns, Inc. 114,000 2,194,500
Lone Star Steakhouse & Saloon, Inc.* 370,500 10,605,562
MGM Grand, Inc.* 640,000 24,720,000
Morton's Restaurant Group, Inc.+++* 553,200 8,298,000
Outback Steakhouse, Inc.* 120,000 3,465,000
Papa John's International, Inc.* 132,300 4,266,675
PJ America, Inc.* 14,100 264,375
Promus Hotel Corp.* 1,602,501 51,680,657
Rainforest Cafe, Inc.* 115,000 3,363,750
Red Roof Inns, Inc.* 171,400 2,699,550
Renaissance Hotel Group* 1,402,800 23,496,900
Roadhouse Grill, Inc.* 150,000 900,000
Schlotzskys, Inc.* 33,700 370,700
ShoLodge, Inc.* 375,600 5,070,600
Showbiz Pizza Time, Inc.+++* 1,030,000 16,866,250
Signature Resorts, Inc.* 100,000 3,425,000
Sonic Corp.* 464,450 10,624,294
Studio Plus Hotels, Inc.* 31,050 543,375
Suburban Lodges America, Inc.* 20,000 345,000
Sun International Hotels Ltd.* 121,800 6,044,325
Taco Cabana, Inc.+++* 962,395 6,375,867
United States Franchise Services, Inc.* 37,600 394,800
Wyndham Hotel Corp.* 40,550 795,794
---------------
$794,975,118
--------------------------------------------- ------------ ---------------
Retail - 0.3%
American Pad & Paper Co.* 940,000 $ 18,565,000
Oakley, Inc.* 30,000 416,250
---------------
$ 18,981,250
--------------------------------------------- ------------ ---------------
Special Products and Services - 0.7%
Central Parking Corp. 66,600 $ 2,231,100
Childrens Discovery Centers America* 220,000 1,237,500
Columbus Mckinnon Corp.* 155,000 2,421,875
Consolidated Cigar Holdings, Inc.* 10,000 243,750
Cooper & Chyan Technology, Inc.* 69,400 2,290,200
Firearms Training Systems, Inc.* 65,800 908,863
FY I, Inc.* 193,300 4,155,950
Gargoyles, Inc.* 38,100 371,475
ITT Educational Services, Inc.* 247,500 4,795,312
Staffmark, Inc.* 125,000 1,578,125
Stewart Enterprises, Inc.* 401,100 13,537,125
Strayer Education, Inc.* 145,000 3,262,500
Wackenhut Corp. 200,000 2,800,000
20
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Special Products and Services - continued
West Marine, Inc.* 10,000 $ 335,000
Wilmar Industries, Inc.* 66,600 1,515,150
---------------
$ 41,683,925
--------------------------------------------- ------------ ---------------
Steel - 0.1%
Citation Corp.* 640,000 $ 6,440,000
--------------------------------------------- ------------ ---------------
Stores - 8.2%
Abercrombie And Fitch Co.* 34,100 $ 626,588
Alrenco, Inc.* 200,000 2,075,000
AutoZone, Inc.* 21,487 529,117
Bed Bath & Beyond, Inc.* 240,000 6,285,000
Boise Cascade Office Products Corp.* 341,400 6,358,575
Borders Group, Inc.* 200,000 7,300,000
BT Office Products International, Inc.* 771,800 7,139,150
CompUSA, Inc.* 220,000 9,900,000
Consolidated Stores Corp.* 802,000 29,674,000
Creative Computers, Inc.* 76,000 798,000
Dollar Tree Stores, Inc.* 175,000 6,693,750
Doubletree Corp.* 329,600 13,843,200
Duty Free International, Inc. 687,800 10,832,850
Friedman's, Inc.* 125,000 1,718,750
Garden Botanika, Inc.* 13,400 120,600
General Nutrition Cos., Inc.* 1,964,108 33,880,863
Global Directmail Corp.* 313,300 14,098,500
Globe Business Resources, Inc.* 70,000 577,500
Grow Biz International, Inc.* 60,000 525,000
Gymboree Corp.* 630,550 17,813,037
Hello Direct, Inc.* 42,000 183,750
Home Depot, Inc. 125,000 6,515,625
Linens N Things, Inc.* 227,600 3,556,250
Mazel Stores, Inc.* 27,700 547,075
Micro Warehouse, Inc.+++* 2,565,200 63,488,700
Mothers Work, Inc.+++* 211,500 2,220,750
Movie Gallery, Inc.* 378,100 5,293,400
MSC Industrial Direct, Inc.* 150,800 5,636,150
Office Depot, Inc.* 6,862,200 133,812,900
Officemax, Inc.* 1,108,650 16,075,425
Pacific Sunwear of California* 43,083 1,163,241
Party City Corp.* 30,900 463,983
PETsMART, Inc.* 134,974 3,441,837
Renters Choice, Inc.* 321,000 5,858,250
Saks Holdings, Inc.* 60,500 1,966,250
Shoe Carnival, Inc.* 487,000 2,556,750
Sports Club, Inc.* 196,000 490,000
Staples, Inc.* 2,256,000 44,556,000
Sunglass Hut International, Inc.* 500,000 3,687,500
Thrifty Payless Holdings, Inc., "B"* 910,000 23,318,750
21
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Stores - continued
Travis Boats and Motors, Inc.* 90,000 $ 1,136,250
US Office Products Co.* 453,200 14,049,200
Welcome Home, Inc.* 88,900 66,675
West Coast Entertainment Corp.+++* 605,000 6,050,000
Wild Oats Markets, Inc.* 14,800 284,900
---------------
$517,209,091
--------------------------------------------- ------------ ---------------
Technology
Spectrum Holobyte, Inc.* 65,600 $ 328,000
--------------------------------------------- ------------ ---------------
Telecommunications - 10.9%
ACC Corp. 90,000 $ 2,688,750
Advanced Fibre Communications* 22,200 1,085,025
APAC Teleservices, Inc.* 391,400 18,493,650
Ascend Communications, Inc.* 406,400 28,905,200
Bay Networks, Inc.* 1,076,128 28,786,424
Brooks Fiber Properties, Inc.* 66,500 2,086,437
Cable Design Technologies Corp.* 636,800 18,626,400
Cabletron Systems, Inc.* 3,069,000 123,910,875
Call-Net Enterprises, Inc.##* 80,000 936,782
Celeritek, Inc.* 20,000 315,000
Cisco Systems, Inc.* 3,244,650 220,230,619
DSP Communications , Inc.* 120,000 4,665,000
Equalnet Holding Corp.+++* 520,400 1,138,375
Excel Communication, Inc.* 104,700 2,617,500
Glenayre Technologies, Inc.* 2,349,600 56,096,700
International Telecommunication
Data Systems, Inc.* 30,100 714,875
LCC International, Inc.* 33,400 534,400
Lightbridge, Inc.* 39,300 363,525
McLeod, Inc., "A"* 81,200 2,314,200
Metro One Telecommunications, Inc.* 34,500 284,625
Omnipoint Corp.* 40,400 1,060,500
Orckit Communications Ltd.* 23,300 262,125
Pagemart Wireless, Inc.* 69,300 511,088
Paging Network, Inc.* 44,000 715,000
Premiere Technologies , Inc.* 35,200 818,400
Premisys Communications, Inc.* 29,800 1,538,425
RMH Teleservices , Inc.* 208,000 1,768,000
Shiva Corp.* 59,400 2,450,250
Sitel Corp.* 276,400 5,458,900
Snyder Communications, Inc.* 63,300 1,542,938
Sterling Commerce, Inc.* 59,826 1,884,519
Tel-Save Holdings, Inc.+++* 1,827,350 39,744,862
Telespectrum Worldwide, Inc.* 560,000 9,940,000
Teletech Holdings, Inc.* 194,500 6,126,750
Tellabs, Inc.* 100,000 3,975,000
Transaction Network Services, Inc.* 255,700 3,196,250
Trescom International, Inc.* 46,100 478,288
22
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
U.S. Stocks - continued
Telecommunications - continued
Univision Communications, Inc.* 35,700 $ 1,419,075
West Teleservices Corp.* 60,950 1,516,131
Westell Technologies, Inc.* 67,800 1,686,525
WorldCom, Inc.* 3,587,370 82,957,931
Xlconnect Solutions, Inc.* 10,200 288,150
Xpedite Systems, Inc.* 35,000 647,500
Xylan Corp.* 21,100 780,700
---------------
$ 685,561,669
--------------------------------------------- ------------ ---------------
Transportation - 0.1%
Coach USA, Inc.* 46,300 $ 1,169,075
Hub Group, Inc.* 50,000 1,256,250
Team Rental Group, Inc.* 40,000 650,000
U. S. Xpress Enterprises, Inc.* 34,200 299,250
---------------
$ 3,374,575
--------------------------------------------- ------------ ---------------
Utilities - Telephone - 0.7%
MCI Communications Corp. 200,000 $ 6,100,000
MFS Communications Co., Inc.* 357,244 17,237,023
Telco Communications Group* 516,200 8,420,513
Teleport Communications Group, Inc.* 468,300 15,512,437
---------------
$ 47,269,973
--------------------------------------------- ------------ ---------------
Total U.S. Stocks (Identified Cost, $3,961,585,474) $5,848,836,457
--------------------------------------------- ------------ ---------------
Foreign Stocks - 4.6%
Australia - 0.2%
Sydney Harbor Casino Holdings Ltd., Preferred
(Entertainment) 7,500,000 $ 11,310,898
--------------------------------------------- ------------ ---------------
Belgium
Xeikon, N.V., ADR (Printing and
Publishing)## 43,000 $ 408,500
--------------------------------------------- ------------ ---------------
Canada - 0.9%
Loewen Group, Inc. (Business Services) 585,800 $ 23,651,675
Loewen Group, Inc. (Business Services)## 857,200 34,464,611
---------------
$ 58,116,286
--------------------------------------------- ------------ ---------------
France - 0.1%
Dassault Systems S.A., ADR (Computer
Software - Systems) 49,100 $ 2,350,663
--------------------------------------------- ------------ ---------------
Germany - 1.1%
Sap AG, Preferred (Computer
Software - Systems) 406,625 $ 55,891,109
Sap Aktiengesellschsft, ADR
(Computer Software - Systems) 312,200 14,166,075
---------------
$ 70,057,184
--------------------------------------------- ------------ ---------------
Ireland - 0.1%
Cbt Group Public Limited (Publishing) 124,000 $ 7,130,000
--------------------------------------------- ------------ ---------------
Italy - 0.8%
Gucci Group NV (Apparel and Textiles) 652,600 $ 47,884,525
- --------------------------------------------------------------------------------
23
<PAGE>
Portfolio of Investments - continued
Common Stocks - continued
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
Foreign Stocks - continued
Mexico
Banca Quadrum S.A. (Banks and Credit
Companies) 90,000 $ 382,500
--------------------------------------------- ------------ ---------------
Netherlands
Baan Company N.V. (Computer
Software - Systems) 58,400 $ 2,080,500
--------------------------------------------- ------------ ---------------
New Zealand - 0.2%
Sky City Ltd. (Entertainment) 1,668,900 $ 9,517,773
--------------------------------------------- ------------ ---------------
Turkey
Turkiye Garanti Bankasi, ADR (Banks and
Credit Companies)## 72,000 $ 334,800
--------------------------------------------- ------------ ---------------
United Kingdom - 1.2%
Danka Business Systems, ADR
(Business Services) 1,710,000 $ 71,820,000
Dr Solomons Group PLC (Computer
Software - Personal Computers) 100,000 1,725,000
Insignia Solutions PLC (Computer
Software - Personal Computers) 457,700 2,231,288
Pace Micro Technology (Electronics) 328,200 1,307,539
Jarvis Hotels PLC (Restaurants and Lodging)+ 98,300 279,259
---------------
$ 77,363,086
--------------------------------------------- ------------ ---------------
Total Foreign Stocks (Identified Cost, $227,684,420) $ 286,936,715
--------------------------------------------- ------------ ---------------
Total Common Stocks (Identified Cost, $4,189,269,894) $6,135,773,172
- ------------------------------------------------ ------------ ---------------
Convertible Preferred Stocks - 0.1%
- -----------------------------------------------------------------------------
American Radio Systems Corp., 7s##
(Identified Cost, $4,555,000) 91,100 $ 4,190,600
- ------------------------------------------------ ------------ ---------------
Warrants - 0.3%
- -----------------------------------------------------------------------------
Intel Corp. (Electronics)
(Identified Cost, $11,537,522) 203,000 $ 17,813,250
- ------------------------------------------------ ------------ ---------------
Convertible Bonds - 0.1%
- -----------------------------------------------------------------------------
Principal Amount
(000 Omitted)
---------------------------------------------------------- ---------------
Midcom Communications Inc., 8.25s, 2003## $ 4,600 $ 4,726,500
Sholodge, Inc., 7.5s, 2004 2,000 1,800,000
Ventritex, Inc., 5.75s, 2001 1,810 2,739,887
--------------------------------------------- ------------ ---------------
Total Convertible Bonds (Identified Cost, $8,410,000) $ 9,266,387
--------------------------------------------- ------------ ---------------
Limited Partnership Units - 0.1% Units
Copley Partners 1@+ 3,000,000 $ 808,110
Copley Partners 2@+ 3,000,000 1,106,460
Highland Capital Partners@+ 7,500,000 5,015,700
- ------------------------------------------------ ------------ ---------------
Total Limited Partnership Units (Identified Cost, $4,585,249) $ 6,930,270
- -----------------------------------------------------------------------------
24
<PAGE>
Portfolio of Investments - continued
Short-Term Obligations - 1.1%
-----------------------------------------------------------------------------
Issuer Shares Value
----------------------------------------------- ------------ ---------------
Federal Home Loan Mortgage, due 12/11/96 $ 840 $ 838,790
Federal Home Loan Mortgage Corp., due 12/02/96 67,300 67,289,344
Federal National Mortgage Assn., due 12/06/96 2,900 2,897,894
Student Loan Marketing Assn., due 12/18/96 1,185 1,182,098
--------------------------------------------- ------------ ---------------
Total Short-Term Obligations, at Amortized Cost and Value $ 72,208,126
--------------------------------------------- ------------ ---------------
Total Investments (Identified Cost, $4,290,565,791) $6,246,181,805
Other Assets, Less Liabilities - 0.9% 54,973,751
- -----------------------------------------------------------------------------
Net Assets - 100.0% $6,301,155,556
- ------------------------------------------------ ------------ ---------------
*Non-income producing security.
##SEC Rule 144A Restriction.
@Security valued by or at the direction of the Trustees.
+Restricted security.
+++Affiliated issuers are those in which the Fund's holdings of an issuer
represent 5% or more of the outstanding voting shares of the issuer.
See notes to financial statements
25
<PAGE>
Financial Statements
Statement of Assets and Liabilities
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
November 30, 1996
- -------------------------------------------------------------------- --------------
<S> <C>
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $3,784,568,546) $5,183,811,695
Affiliated issuer (identified cost, $505,997,245) 1,062,370,110
--------------
Total investments, at value (identified cost, $4,290,565,791) $6,246,181,805
Cash 938,636
Receivable for investments sold 59,947,253
Receivable for Fund shares sold 30,842,383
Interest and dividends receivable 460,152
Other assets 67,620
--------------
Total assets $6,338,437,849
--------------
Liabilities:
Payable for investments purchased $ 27,315,881
Payable for Fund shares reacquired 5,587,855
Payable to affiliates -
Management fee 375,529
Shareholder servicing agent fee 78,241
Distribution fee 2,962,102
Accrued expenses and other liabilities 962,685
--------------
Total liabilities $ 37,282,293
--------------
Net assets $6,301,155,556
--------------
Net assets consist of:
Paid-in capital $4,299,522,703
Unrealized appreciation on investments 1,955,615,519
Accumulated undistributed net realized gain on investments and
foreign currency transactions 46,092,532
Accumulated net investment loss (75,198)
--------------
Total $6,301,155,556
--------------
Shares of beneficial interest outstanding 198,843,744
-----------
Class A shares:
Net asset value per share
(net assets of $2,523,794,588 / 78,833,157 shares of beneficial
interest outstanding) $32.01
------
Offering price per share (100/94.25) $33.96
------
Class B shares:
Net asset value and offering price per share
(net assets $3,658,388,298 / 116,231,548 shares of beneficial
interest outstanding) $31.48
------
Class C shares:
Net asset value and offering price per share
(net assets of $118,972,670 / 3,779,039 shares of beneficial
interest outstanding) $31.48
------
</TABLE>
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
Class B, and Class C shares.
See notes to financial statements
26
<PAGE>
Financial Statements - continued
Statement of Operations
-----------------------------------------------------------------------------
Year Ended November 30, 1996
- ------------------------------------------------------------------------------
Net investment income:
Income -
Interest $ 5,451,041
Dividends (including $353,567 received from affiliated
issuers) 3,383,356
--------------
Total investment income $ 8,834,397
--------------
Expenses -
Management fee $ 34,371,549
Trustees' compensation 47,890
Shareholder servicing agent fee (Class A) 2,169,376
Shareholder servicing agent fee (Class B) 4,333,722
Shareholder servicing agent fee (Class C) 57,997
Distribution and service fee (Class A) 4,758,763
Distribution and service fee (Class B) 27,867,887
Distribution and service fee (Class C) 386,649
Custodian fee 1,115,624
Postage 675,417
Printing 315,399
Auditing fees 35,928
Legal fees 13,801
Miscellaneous 2,695,745
--------------
Total expenses $ 78,845,747
Fees paid indirectly (221,330)
--------------
Net expenses $ 78,624,417
--------------
Net investment loss $(69,790,020)
--------------
Realized and unrealized gain (loss) on investments:
Realized gain (identified cost basis) -
Investment transactions (including $1,546,735 net gain from
transactions with affiliated issuers) $116,119,140
Foreign currency transactions 5,021
--------------
Net realized gain on investments $116,124,161
--------------
Change in unrealized appreciation (depreciation) -
Investments $775,004,400
Translation of assets and liabilities in foreign currencies (495)
--------------
Net unrealized gain on investments $775,003,905
--------------
Net realized and unrealized gain on investments and
foreign currency $891,128,066
--------------
Increase in net assets from operations $821,338,046
--------------
See notes to financial statements
27
<PAGE>
Financial Statements - continued
Statement of Changes in Net Assets
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30, 1996 1995
- ----------------------------------------------- ---------------- ----------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (69,790,020) $ (32,364,501)
Net realized gain on investments and foreign
currency transactions 116,124,161 9,896,203
Net unrealized gain on investments and
foreign currency 775,003,905 847,013,830
---------------- ---------------
Increase in net assets from operations $ 821,338,046 $ 824,545,532
---------------- ---------------
Distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions (Class A) $ -- $ (9,533,382)
From net realized gain on investments and
foreign currency transactions (Class B) -- (10,006,703)
Tax return of capital -- (544,859)
---------------- ---------------
Total distributions declared to
shareholders $ -- $ (20,084,944)
---------------- ---------------
Fund share (principal) transactions -
Net proceeds from sale of shares $ 6,317,337,270 $ 3,022,835,060
Net asset value of shares issued to
shareholders in reinvestment of
distributions -- 17,796,191
Cost of shares reacquired (4,150,039,758) (1,771,034,994)
---------------- ---------------
Increase in net assets from Fund share
transactions $ 2,167,297,512 $ 1,269,596,257
---------------- ---------------
Total increase in net assets $ 2,988,635,558 $ 2,074,056,845
Net assets:
At beginning of period 3,312,519,998 1,238,463,153
---------------- ---------------
At end of period (including accumulated net
investment loss of $75,198 and $62,577,
respectively) $ 6,301,155,556 $ 3,312,519,998
---------------- ---------------
</TABLE>
See notes to financial statements
28
<PAGE>
Financial Highlights
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30, 1996 1995 1994 1993**
- ---------------------------------------------------- --------- --------- --------------------
Class A
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 26.79 $ 18.73 $ 17.68 $ 16.43
-------- -------- -------- --------
Income from investment operations# -
Net investment loss $ (0.29) $ (0.23) $ (0.20) $ (0.03)
Net realized and unrealized gain on investments 5.51 8.68 1.78 1.28
-------- -------- -------- --------
Total from investment operations $ 5.22 $ 8.45 $ 1.58 $ 1.25
-------- -------- -------- --------
Less distributions declared to shareholders -
From net realized gain on investments $ -- $ (0.38) $ (0.53) $ --
In excess of net realized gain on investments -- -- *** -- --
Tax return of capital -- (0.01) -- --
-------- -------- -------- --------
Total distributions declared to shareholders $ -- $ (0.39) $ (0.53) $ --
-------- -------- -------- --------
Net asset value - end of period $ 32.01 $ 26.79 $ 18.73 $ 17.68
-------- -------- -------- --------
Total return++ 19.52% 45.98% 9.06% 38.98%+
Ratios (to average net assets)/Supplemental data:
Expenses## 1.20% 1.28% 1.33% 1.19%+
Net investment loss (1.01)% (1.04)% (1.09)% (0.98)%+
Portfolio turnover 22% 20% 39% 58%
Average commission rate### $ 0.0498 -- -- --
Net assets at end of period (000,000 omitted) $ 2,524 $ 1,312 $ 470 $ 371
</TABLE>
+ Annualized.
** For the period from the date of issue of Class A shares, September 13, 1993
to November 30, 1993.
*** The per share distribution in excess of net realized gain on investments
was $0.0049.
# Per share data for the periods subsequent to December 1, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
++ 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
29
<PAGE>
Financial Statements - continued
Financial Highlights - continued
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30, 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------
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 $ 26.56 $ 18.57 $ 17.64 $ 14.93 $ 12.07 $ 6.89
--------- --------- --------- --------- --------- ----------
Income from investment
operations# -
Net investment loss $ (0.52) $ (0.41) $ (0.35) $ (0.33) $ (0.07) $ (0.13)
Net realized and
unrealized gain on
investments 5.44 8.65 1.78 3.19 3.52 5.31
--------- --------- --------- --------- --------- ----------
Total from investment
operations $ 4.92 $ 8.24 $ 1.43 $ 2.86 $ 3.45 $ 5.18
--------- --------- --------- --------- --------- ----------
Less distributions declared
to shareholders -
From net realized gain on
investments $ -- $ (0.24) $ (0.50) $ (0.15) $ (0.59) $ --
In excess of net realized
gain on investments -- -- *** -- -- -- --
Tax return of capital -- (0.01) -- -- -- --
--------- --------- --------- --------- --------- ----------
Total distributions
declared to
shareholders $ -- $ (0.25) $ (0.50) $ (0.15) $ (0.59) $ --
--------- --------- --------- --------- --------- ----------
Net asset value - end of
period $ 31.48 $ 26.56 $ 18.57 $ 17.64 $ 14.93 $ 12.07
--------- --------- --------- --------- --------- ----------
Total return 18.52% 44.89% 8.21% 19.36% 29.25% 75.18%
Ratios (to average net assets)/Supplemental data:
Expenses## 2.00% 2.08% 2.14% 2.19% 2.33% 2.50%
Net investment loss (1.80)% (1.83)% (1.90)% (1.61)% (2.00)% (1.98)%
Portfolio turnover 22% 20% 39% 58% 59% 112%
Average commission rate### $ 0.0498 -- -- -- -- --
Net assets at end of period
(000,000 omitted) $ 3,659 $ 2,001 $ 769 $ 602 $ 357 $ 145
</TABLE>
*** The per share distribution in excess of net realized gain on investments
was $0.0031.
# Per share data for the periods subsequent to December 1, 1993 is based on
average shares outstanding.
## For fiscal years ending after September 1, 1995, the Fund's expenses are
calculated without reduction for fees paid indirectly.
### Average commission rate is calculated for funds with fiscal years beginning
on or after September 1, 1995.
See notes to financial statements
30
<PAGE>
Financial Statements - continued
Financial Highlights - continued
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30, 1990 1989 1988 1987*
- ---------------------------------------------------- ----------- --------- --------- ------------
Class B
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 7.69 $ 5.91 $ 4.97 $ 5.50
----------- --------- --------- ------------
Income from investment operations -
Net investment loss $ (0.14) $ (0.13) $ (0.11) $ (0.06)
Net realized and unrealized gain (loss) on
investments (0.66) 1.91 1.05 (0.47)
----------- --------- --------- ------------
Total from investment operations $ (0.80) $ 1.78 $ 0.94 $ (0.53)
----------- --------- --------- ------------
Net asset value - end of period $ 6.89 $ 7.69 $ 5.91 $ 4.97
----------- --------- --------- ------------
Total return (10.40)% 30.12% 18.91% (10.44)%+
Ratios (to average net assets)/Supplemental data:
Expenses 2.75% 2.81% 2.30% 2.40%+
Net investment loss (1.86)% (1.91)% (1.65)% (1.50)%+
Portfolio turnover 86% 95% 57% 81%
Net assets at end of period (000,000 omitted) $ 73 $ 82 $ 61 $ 50
</TABLE>
* For the period from the commencement of investment operations, December
29, 1986 to November 30, 1987.
+ Annualized.
See notes to financial statements
31
<PAGE>
Financial Statements - continued
Financial Highlights - continued
-----------------------------------------------------------------------------
Year Ended November 30, 1996
- ----------------------------------------------------------------
Class C**
- ----------------------------------------------------------------
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $ 28.37
-----------
Income from investment operations# -
Net investment loss $ (0.38)
Net realized and unrealized gain on investments 3.49
-----------
Total from investment operations $ 3.11
-----------
Net asset value - end of period $ 31.48
-----------
Total return 10.96%+++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.35%+
Net investment loss (1.25)%+
Portfolio turnover 22%
Average commission rate### $ 0.0498
Net assets at end of period (000,000 omitted) $ 119
** For the period from the date of issue of Class C shares, April 1, 1996 to
November 30, 1996.
## For fiscal years ending after September 1, 1995, Fund's expenses are
calculated without reduction for fees paid indirectly.
+ Annualized.
+++ Not annualized.
# Per share distributions for the periods subsequent to December 1, 1993
are based on average shares outstanding.
### Average commission rate is calculated for funds with fiscal years
beginning on or after September 1, 1995.
See notes to financial statements
32
<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
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.
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. 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 at fair value as determined
in good faith by or at the direction of the Trustees.
Foreign Currency Translation - Investment valuations, other assets, and
liabilities initially expressed in foreign currencies are converted each
business day into U.S. dollars based upon current exchange rates. Purchases
and sales of foreign investments, income and expenses are converted into U.S.
dollars based upon currency exchange rates prevailing on the respective dates
of such transactions. Gains and losses attributable to foreign currency
exchange rates on sales of securities are recorded for financial statement
purposes as net realized gains and losses on investments. Gains and losses
attributable to foreign exchange rate movements on income and expenses are
recorded for financial statement purposes as foreign currency transaction
gains and losses. That portion of both realized and unrealized gains and
losses on investments that results from fluctuations in foreign currency
exchange rates is not separately disclosed.
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
33
<PAGE>
Notes to Financial Statements - continued
reporting purposes as required by federal income tax regulations. Dividend
income is recorded on the ex-dividend date for dividends received in cash.
Dividends 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 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 tax 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, 1996, $69,777,399 was
reclassified from accumulated net realized gain on investments and foreign
currency transactions to accumulated net investment loss due to differences
between book and tax accounting for currency transactions and the offset of
short-term capital gains against accumulated net investment loss. 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 Class A,
Class B and Class C shares. The classes of shares differ in their respective
shareholder servicing agent, distribution and service fees. All shareholders
bear the
34
<PAGE>
Notes to Financial Statements - continued
common expenses of the Fund pro rata based on average daily net assets of
each class, without distinction between share classes. Dividends are declared
separately for each class. No 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 0.73%
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 its independent Trustees and Mr.
Bailey. Included in Trustees' compensation is a net periodic pension expense
of $17,415 for the year ended November 30, 1996.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$2,019,102 for the year ended November 30, 1996, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted separate distribution plans 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 who 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 $485,527 for the year ended November 30, 1996. Payment of
the 0.10% per annum Class A distribution fee will commence on such date as
the Trustees may determine. Fees incurred under the distribution plan during
the year ended November 30, 1996 were 0.25% of average daily net assets
attributable to Class A shares on an annualized basis.
35
<PAGE>
Notes to Financial Statements - continued
The Class B and Class C distribution plan provides that the Fund will pay MFD
a 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 and
Class C shares. MFD will pay to securities dealers who enter into a sales
agreement with MFD all or a portion of the service fee attributable to Class
B and Class C shares, and will pay to such securities dealers all of the
distribution fee attributable to Class C shares. The service fee is intended
to be additional consideration for services rendered by the dealer with
respect to Class B and Class C shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $465,341
and $228 for Class B and Class C shares for the year ended November 30, 1996.
Fees incurred under the distribution plans during the year ended November 30,
1996 were 1.00% of average daily net assets attributable to Class B and Class
C shares on an annualized basis.
Purchases over $1 million of Class A shares and certain purchases into
retirement plans are subject to a contingent deferred sales charge in the
event of a shareholder redemption within 12 months following such 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. A contingent deferred sales charge is imposed on shareholder
redemptions of Class C shares in the event of a shareholder redemption within
twelve months of purchases made on or after April 1, 1996. MFD receives all
contingent deferred sales charges. Contingent deferred sales charges imposed
during the year ended November 30, 1996 were $96,069, $3,455,966, and $25,307
for Class A, Class B and Class C 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
effective annual rate of up to 0.15% and up to 0.22% and up to 0.15%
attributable to Class A, Class B and Class C shares, respectively.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions and short-term obligations aggregated
$3,045,816,546 and $1,009,831,710, 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 $4,291,516,852
---------------
Gross unrealized appreciation $2,194,361,178
Gross unrealized depreciation (239,696,225)
---------------
Net unrealized appreciation $1,954,664,953
---------------
36
<PAGE>
Notes to Financial Statements - continued
(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
<TABLE>
<CAPTION>
Year Ended November 30, 1996 Year Ended November 30, 1995
-------------------------------- --------------------------------
Shares Amount Shares Amount
------------------ --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
Shares sold 125,633,192 $ 3,667,675,756 67,800,740 $ 1,533,247,118
Shares issued to
shareholders in
reinvestment
of distributions -- -- 488,159 9,182,865
Shares reacquired (95,760,044) (2,803,650,694) (44,418,694) (1,017,261,903)
--------------- ---------------- --------------- ----------------
Net increase 29,873,148 $ 864,025,062 23,870,205 $ 525,168,080
--------------- ---------------- --------------- ----------------
Class B Shares
Year Ended November 30, 1996 Year Ended November 30, 1995
-------------------------------- --------------------------------
Shares Amount Shares Amount
------------------ --------------- ---------------- --------------- ----------------
Shares sold 86,922,156 $ 2,514,573,078 67,040,946 $ 1,489,587,942
Shares issued to
shareholders in
reinvestment
of distributions -- -- 458,635 8,613,326
Shares reacquired (46,040,180) (1,324,527,599) (33,540,206) (753,773,091)
--------------- ---------------- --------------- ----------------
Net decrease 40,881,976 $ 1,190,045,479 33,959,375 $ 744,428,177
--------------- ---------------- --------------- ----------------
Class C Shares
Year Ended November 30, 1996*
--------------------------------
Shares Amount
------------------ --------------- ----------------
Shares sold 4,515,421 $ 135,088,436
Shares issued to
shareholders in
reinvestment
of distributions -- --
Shares reacquired (736,382) (21,861,465)
--------------- ----------------
Net decrease 3,779,039 $ 113,226,971
--------------- ----------------
</TABLE>
*For the period from the commencement of offering of Class C shares,
April 1, 1996 to May 31, 1996.
(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, 1996 was $53,279.
37
<PAGE>
Notes to Financial Statements - continued
(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, 1996 is set forth below.
<TABLE>
<CAPTION>
Acquisitions Dispositions
---------------------------- ------------------------------
Beginning
Share/Par Shares/Par Shares/Par
Affiliate Amount Amount Cost Amount Cost
- ----------------------------------- ------------ ------------ --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Amerihost Properties 451,000 71,000 $ 468,375 0 $ 0
Applebees International Inc. 1,960,800 1,218,700 26,294,790 (53,000) (1,472,196)
Buffets Inc. 1,568,000 1,385,050 18,168,411 0 0
Cadence Design Systems 2,513,250 1,754,275 15,619,605
Equalnet Holding Corporation 447,000 113,400 969,300 (40,000) (81,250)
John Q. Hammons Hotels, Inc. 544,300 5,000 40,925 0 0
Health Source, Inc. 382,305 4,687,905 74,762,700
HFS, Inc. 3,220,805 3,220,805
Hollywood Entertainment Corp. 1,050,000 2,386,500 20,349,293
IHOP Corp. 612,200 0 0
Integrated Health Services, Inc. 1,404,927 11,073 233,063 (120,000) (3,134,524)
Micro Warehouse Inc. 1,730,600 856,200 24,357,978 (21,600) 807,622
Mortons Restaurant 553,200 0 0
Mothers Work Inc. 211,500 0 0 0 0
Showbiz Pizza Time Inc. 755,000 375,000 0 (100,000) (1,866,875)
System Software Associates, Inc. 2,045,100 456,850 7,271,405 (1,035,100) (15,794,637)
Taco Cabana, Inc. 962,395 0 0 0 0
Tel-Save Holdings, Inc. 704,900 1,127,450 11,990,043 (5,000) (105,000)
West Coast Entertainment Corp. 0 605,000 7,870,050 0 0
--------------- ---------------
$208,395,938 $(21,646,860)
--------------- ---------------
</TABLE>
38
<PAGE>
Notes to Financial Statements - continued
<TABLE>
<CAPTION>
Ending Realized
Share/Par Gain Dividend Ending
Affiliate Amount (Loss) Income Value
- ----------------------------------- ------------ -------------- ----------- ----------------
<S> <C> <C> <C> <C>
Amerihost Properties 522,000 $ $ $ 3,458,250
Applebees International Inc. 3,126,500 81,545 118,968 91,059,313
Buffets Inc. 2,953,050 27,500,278
Cadence Design Systems 4,267,525 170,167,559
Equalnet Holding Corporation 520,400 (521,432) 1,138,375
John Q. Hammons Hotels, Inc. 549,300 4,394,400
Health Source, Inc. 5,070,210 57,039,863
HFS, Inc. 6,441,610 417,094,248
Hollywood Entertainment Corp. 3,436,500 (263,175) 69,159,563
IHOP Corp. 612,200 14,845,850
Integrated Health Services, Inc. 1,296,000 (1,250,239) 28,099 28,512,000
Micro Warehouse Inc. 2,565,200 1,360,521 63,488,700
Mortons Restaurant 553,200 8,298,000
Mothers Work Inc. 211,500 2,220,750
Showbiz Pizza Time Inc. 1,030,000 (140,416) 16,866,250
System Software Associates, Inc. 2,519,350 2,228,787 206,500 34,955,981
Taco Cabana, Inc. 962,395 6,375,867
Tel-Save Holdings, Inc. 1,827,350 51,144 39,744,863
West Coast Entertainment Corp. 605,000 6,050,000
-------------- ----------- --------------
$ 1,546,735 $353,567 $1,062,370,110
-------------- ----------- --------------
</TABLE>
(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,
1996 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.
<TABLE>
<CAPTION>
Share
Description Date of Acquisition Amount Cost Value
------------------------------- -------------------------------- ------------- -----------
<S> <C> <C> <C> <C>
Jarvis Hotels 6/21/96 98,300 $ 264,282 $ 279,259
Copley Partners 1 12/6/86 3,000,000 1,437,794 808,110
Copley Partners 2 12/2/86-8/9/91 3,000,000 2,451,234 1,106,460
Highland Capital Partners 6/28/88-6/28/93 7,500,000 4,636,048 5,015,700
Republic Industries, Inc. 5/15/96 507,900 10,284,975 16,951,163
Renal Treatment Centers, Inc. 6/28/95 35,302 450,100 917,852
-----------
$25,078,544
-----------
</TABLE>
39
<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, 1996, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years November 30, 1996 and 1995, and the
financial highlights for each of the years in the ten-year period ended
November 30, 1996. These financial statements and financial highlights are
the responsibility of the Trust's management. Our responsibility is to
express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with 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 at November 30, 1996 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, 1996, 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 3, 1997
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.
40
<PAGE>
MFS(R) Emerging Growth Fund
Trustees
A. Keith Brodkin* - Chairman and President
Richard B. Bailey* - Private Investor;
Former Chairman and Director (until 1991),
Massachusetts Financial Services Company;
Director, Cambridge Bancorp; Director,
Cambridge Trust Company
Marshall N. Cohan - Private Investor
Lawrence H. Cohn, M.D. - Chief of Cardiac
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.;
Chairman, Bank of N.T. Butterfield & Son Ltd.
Abby M. O'Neill - Private Investor;
Director, Rockefeller Financial Services, Inc.
(investment advisers)
Walter E. Robb, III - President and Treasurer,
Benchmark Advisors, Inc. (corporate financial
consultants); President, Benchmark Consulting
Group, Inc. (office services); Trustee, Landmark
Funds (mutual funds)
Arnold D. Scott* - Senior Executive Vice
President, Director and Secretary, Massachusetts
Financial Services Company
Jeffrey L. Shames* - President and Director,
Massachusetts Financial Services Company
J. Dale Sherratt - President, Insight Resources,
Inc. (acquisition planning specialists)
Ward Smith - Former Chairman (until 1994),
NACCO Industries; Director, Sundstrand
Corporation
Investment Adviser
Massachusetts Financial Services Company
500 Boylston Street
Boston, MA 02116-3741
Distributor
MFS Fund Distributors, Inc.
500 Boylston Street
Boston, MA 02116-3741
Portfolio Manager
John W. Ballen*
Treasurer
W. Thomas London*
Assistant Treasurer
James O. Yost*
Secretary
Stephen E. Cavan*
*Affiliated with the Investment Adviser
Assistant Secretary
James R. Bordewick, Jr.*
Custodian
State Street Bank and Trust Company
Auditors
Deloitte & Touche LLP
Investor Information
For MFS stock and bond market outlooks,
call toll free: 1-800-637-4458 anytime from
a touch-tone telephone.
For information on MFS mutual funds,
call your financial adviser or, for an
information kit, call toll free:
1-800-637-2929 any business day from
9 a.m. to 5 p.m. Eastern time (or leave
a message anytime).
Investor Service
MFS Service Center, Inc.
P.O. Box 2281
Boston, MA 02107-9906
For general information, call toll free:
1-800-225-2606 any business day from
8 a.m to 8 p.m. Eastern time.
For service to speech- or hearing-impaired, call
toll free: 1-800-637-6576 any business day from
9 a.m. to 5 p.m. Eastern time. (To use this
service, your phone must be equipped with a
Telecommunications Device for the Deaf.)
For share prices, account balances and
exchanges, call toll free: 1-800-MFS-TALK
(1-800-637-8255) anytime from a touch-tone
telephone.
World Wide Web
www.mfs.com
[DALBAR LOGO]
For the third year in a row,
MFS earned a #1
ranking in the
DALBAR, Inc.
Broker/Dealer
Survey, Main Office
Operations Service
Quality Category. The
firm achieved a 3.48 overall score on a scale of 1
to 4 in the 1996 survey. A total of 110 firms
responded, offering input on the quality of service
they received from 29 mutual fund companies
nationwide. The survey contained questions
about service quality in 15 categories, including
"knowledge of phone service contacts," "accuracy
of transaction processing," and "overall ease of
doing business with the firm."
41
<PAGE>
MFS(R) Emerging
Growth Fund
500 Boylston Street
Boston, MA 02116
[DALBAR LOGO]
[MFS LOGO]
[10TH ANNIVERSARY LOGO]
Bulk Rate
U.S. Postage
P A I D
Permit #55638
Boston, MA
(C)1997 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116
MEG-2 1/97/585M 7/207/307
