<PAGE>
[Logo] M F S(R)
INVESTMENT MANAGEMENT
75 YEARS
WE INVENTED THE MUTUAL FUND(R)
[graphic omitted]
MFS(R) EMERGING
GROWTH FUND
ANNUAL REPORT O NOVEMBER 30, 1998
<PAGE>
TABLE OF CONTENTS
Letter from the Chairman .................................................. 1
Management Review and Outlook ............................................. 3
Performance Summary ....................................................... 8
Portfolio of Investments .................................................. 13
Financial Statements ...................................................... 27
Notes to Financial Statements ............................................. 34
Independent Auditors' Report .............................................. 42
MFS(R) PREPARES FOR THE YEAR 2000 ......................................... 44
TRUSTEES AND OFFICERS ..................................................... 45
MFS CELEBRATES ITS DIAMOND ANNIVERSARY!
MARCH 21, 1999, MARKS THE 75TH ANNIVERSARY OF MFS' INVENTION OF
THE MUTUAL FUND. THE MUTUAL FUND INDUSTRY HAS BROUGHT THE POWER
OF INVESTING TO EVERY AMERICAN, OFFERING THEM THE OPPORTUNITY FOR
COLLEGE DEGREES, HOME OWNERSHIP, AND COMFORTABLE RETIREMENT.
IMAGINE TODAY'S WORLD WITHOUT MUTUAL
FUNDS. WE COULDN'T. AND WHILE THE MFS 75 YEARS
YEARS AHEAD WILL BRING A NUMBER OF [graphic omitted]
CHALLENGES, OUR 75 YEARS OF EXPERIENCE EXPERIENCE THE FUTURE(SM)
WILL HELP GUIDE A NEW GENERATION OF
INVESTORS INTO THE FUTURE.
- ------------------------------------------------------------------------------
NOT FDIC INSURED MAY LOSE VALUE NO BANK GUARANTEE
- ------------------------------------------------------------------------------
<PAGE>
LETTER FROM THE CHAIRMAN
[Photo of Jeffrey L. Shames]
Jeffrey L. Shames
Dear Shareholders,
In 1999, MFS celebrates its 75th anniversary. The nation's first mutual fund --
our Massachusetts Investors Trust (MIT) -- was introduced to the public on March
21, 1924. Since then, MFS Investment Management(R), the company that grew out of
that original fund, has helped guide shareholders through many economic and
investment cycles, primarily by focusing on the long-term opportunities created
by an expanding global economy. As of November 30, 1998, MFS manages over $90
billion, and the firm's 2,000 people serve 3.9 million investors and their
financial advisers worldwide. Meanwhile, MIT's assets have grown to over $10
billion, and 56 mutual funds are offered in the MFS Family of Funds(R).
One of the elements in the success of MIT did not exist before our founders
invented it in 1924. That is daily redemption. This innovation means that if you
want to sell your investment in any MFS mutual fund, you have the security of
knowing that you may do so immediately by exchanging into another MFS fund. Or,
if you need your money for other purposes, it can quickly be wired or mailed to
you. This daily redemption feature, through which new shares were created when
people invested in MIT and were redeemed when people sold, brought another
important change to the industry. Now, the price of a mutual fund's shares
wasn't determined by supply and demand, but by the value of the securities owned
by each portfolio.
Another factor in our growth was the development of one of the industry's
first in-house research departments in 1932. Unlike companies that rely on
Wall Street research reports, which can be used by many investors at the same
time, MIT's managers built its long-term track record by visiting companies,
talking to managers and competitors, and "kicking the tires" so they could
judge the quality and potential of each company's products and services for
themselves. Today, MFS has more than 100 full-time portfolio managers, stock
analysts, and credit analysts who track the equity and bond markets. That
number includes over 35 equity analysts who specialize in industries such as
aviation, media, technology, automobiles, and utilities.
While MIT introduced liquidity, that was not our only invention. We also
established the nation's first global bond fund, first high-yield municipal
bond fund, and first high-yield municipal closed-end bond fund.
We are proud of the record of MIT and of the funds in the MFS Family of Funds,
but we are also proud of our long-standing relationship with financial
advisers. Not only do we believe investors can benefit from the advice of
these experts but, as was shown during the market volatility of 1998, people
who work with financial advisers are less likely to abandon their carefully
designed, long-term investment strategies.
Our ability to service your investment and information needs is also extremely
important to us. The MFS Service Center handles millions of transactions and
phone calls every year. Supporting the work of financial advisers, promptly
sending out statements and confirmations, and answering hundreds of investors'
questions every day are crucial elements in maintaining long-term relationships
with our fund shareholders. That link to our investors has also been enhanced by
our site on the World Wide Web: WWW.MFS.COM. Since 1996, this site has given
investors and the general public access to up-to-date information about MFS
products and services, as well as market outlooks and retirement information.
The site has rapidly become one of our primary vehicles for communicating with
our investors and educating the public about mutual funds in general and MFS in
particular.
If there is a common thread running through these milestones, it is our
always-increasing commitment to providing you with the best possible
investment management and shareholder service, just as we have done for the
past 75 years.
As we celebrate this anniversary, it is also a time for MFS to look ahead
and build on our 75 years of innovation and experience to help meet your
investment needs in the next century. We appreciate your confidence and
welcome any questions or comments you may have.
Respectfully,
/s/ Jeffrey L. Shames
Jeffrey L. Shames
Chairman and Chief Executive Officer
MFS Investment Management(R)
December 15, 1998
<PAGE>
MANAGEMENT REVIEW AND OUTLOOK
[Photo of John W. Ballen]
John W. Ballen
For the 12 months ended November 30, 1998, Class A shares of the Fund provided a
total return of 9.36%, Class B shares 8.55%, Class C shares 8.54%, Class I
shares 9.67%, and Class J shares 8.60%. These returns assume the reinvestment of
distributions but exclude the effects of any sales charges and compare to a
23.52% return for the Standard & Poor's 500 Composite Index (the S&P 500), a
popular, unmanaged index of common stock total return performance, and to a
- -6.59% return for the Russell 2000 Total Return Index (the Russell 2000), an
unmanaged index comprised of 2,000 of the smallest U.S.-domiciled company common
stocks that are traded on the New York Stock Exchange, the American Stock
Exchange, and NASDAQ.
Q. Please discuss some of the factors in the Fund's performance over the past
12 months.
A. The stock market's performance over the past 12 months was dominated by large
companies with established business franchises. Smaller, less well-known
companies suffered, even though in many cases they grew faster than their
large-cap counterparts. However, in late 1998 we saw a rebound in the
performance of small- and mid-cap stocks. Some of the portfolio's best
performing stocks during the past 12 months, such as Cisco, Microsoft, and
MCI WorldCom, were companies that we have owned for a long time and that have
grown to be large, established firms. As in the broader market, many of our
smaller companies were under pressure through mid-year. Cendant's shares were
hit after it revealed that a company it had purchased had engaged in
fraudulent accounting practices, which caused Cendant to significantly
restate its historical and projected earnings. Computer Associates came under
pressure over the summer when it missed its earnings forecast. Both companies
are rebounding well, and we continue to hold large positions in each,
reflecting our confidence in their business models, managements, and
long-term earnings growth prospects.
Q. Technology is your heaviest sector weighting by far. Why have you found these
companies so attractive?
A. In the current weak economy, companies have been able to drive earnings
growth by aggressively downsizing, restructuring, and outsourcing many
business functions. Technology allows companies to be more productive without
necessarily boosting investments in human resources. We believe these trends
will continue both domestically and internationally, where companies are well
behind in restructuring efforts and in technology investments. Within the
technology sector, the software industry in particular is benefiting from
these trends.
Q. Your second largest sector is conglomerates and special products/ services.
Could you provide some detail on what types of companies fall into that
category, and why you've found them attractive?
A. This category is mostly comprised of special services companies that have
recently sprung up to help larger organizations downsize and outsource. They
can range from information technology consulting companies to payroll
processing vendors. Most of these are small companies that may not appear
individually in our top holdings, but we have invested in a number of them.
For example, we own more than 10 different information technology consulting
organizations that are taking advantage of this trend.
Q. Regarding your leisure sector holdings, there is a perception among some
investors that the United States is overbuilt as far as hotels, restaurants,
and malls are concerned. Why do you find these stocks attractive?
A. After many years of overbuilding, there has been a substantial slowdown in
construction activity and new openings. The result has been that the well-
established companies have been able to gain market share as lesser players
have fallen by the wayside. In the current environment of strong consumer
confidence, we feel that many of the best franchises are poised to thrive,
and we have taken positions in many of them, such as Promus Hotels.
Q. What have been some of the more significant investment changes in the Fund
over the past 12 months?
A. As I noted earlier, this year has been a turbulent one for many companies,
but particularly for small companies, which came under extreme pressure in
mid-year. While there have not been big changes in the portfolio, we did add
to our positions in companies that we felt demonstrated good growth and
earnings potential and whose depressed share prices represented value. We
also added to our technology holdings because we expect a strong year in 1999
for technology, as companies around the world will continue to invest in
these products to improve productivity.
Q. Stephen Pesek will be added as a co-manager of the Fund as of December 15,
1998. What will be his role with the Fund?
A. Steve will be added to the portfolio because of his background and success on
our MFS(R) Large Cap Growth Fund. MFS Emerging Growth Fund's investment
discipline involves letting its winners run and, as a result, some of its
small companies have grown into large ones. I will remain the lead portfolio
manager responsible for most of the Fund and for the maintenance of its
overall investment principles. Steve will focus on some of the larger names
in the portfolio. It's important to note that we do not intend to change the
Fund's investment philosophy, which has made it one of the industry's most
successful funds over the long term. The Fund will continue to follow a
discipline of investing in companies of all market capitalizations that we
believe have growth potential well above the growth rate of the overall
economy.
Q. AFTER A ROUGH SIX MONTHS, SMALLER STOCKS ARE REBOUNDING WITH SOME STRENGTH.
TO WHAT DO YOU ATTRIBUTE THIS, AND WHAT ARE THE PROSPECTS FOR THESE COMPANIES
IN 1999?
A. For the most part, these stocks had been overlooked and underappreciated by
the market through most of 1998. As a result, valuations in the small- and
mid-cap areas are very cheap. This has spurred a number of buyouts and stock
repurchase programs, both of which can benefit shareholders. Generally, if
management is buying its own stock, that's a positive indicator of its growth
potential. As we head into the new year, I believe that large companies
cannot sustain their high earnings growth of recent years. Therefore,
investors should seek out smaller companies that can grow earnings at better
than 20% per year. While I'm confident of a sustained rebound in small- and
mid-cap stock prices, it's impossible to say exactly when that may begin.
Q. Looking ahead, what kind of economic environment do you see for the coming
year?
A. We think that the U.S. economy will continue to grow, albeit at a slower
rate, thanks in large part to the Federal Reserve Board's willingness to
lower interest rates. We believe that the general slowdown in earnings growth
that started in the latter half of 1998 will continue into 1999, which may
create further choppiness in the market. However, we see a more stable
environment and renewed growth beginning in the second half of 1999.
Q. MFS is celebrating its 75th anniversary in 1999. What is the significance of
this milestone to shareholders?
A. I'm convinced that there has been no better financial tool than mutual funds
to help investors meet their need for long- and short-term capital
appreciation and income. Within the universe of over 7,000 funds available
today, there is no other firm that can claim the long-term track record we
have developed at MFS. We are always cognizant of our responsibilities to
shareholders in terms of open communications and integrity, and in trying to
maintain the values and culture first established by our founders in 1924.
/s/ John W. Ballen
John W. Ballen
Portfolio Manager
The opinions expressed in this report are those of the portfolio manager and
are only through the end of the period of the report as stated on the cover.
The manager's views are subject to change at any time based on market and
other conditions, and no forecasts can be guaranteed.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S PROFILE
- --------------------------------------------------------------------------------
JOHN W. BALLEN IS PRESIDENT, CHIEF INVESTMENT OFFICER, AND A MEMBER OF THE
EXECUTIVE COMMITTEE AND BOARD OF DIRECTORS OF MFS INVESTMENT MANAGEMENT(R)
HE ALSO IS PORTFOLIO MANAGER OF MFS(R) EMERGING GROWTH FUND, MFS(R)
EMERGING GROWTH SERIES (PART OF MFS(R) VARIABLE INSURANCE TRUST(SM)), AND
THE EMERGING GROWTH SERIES OFFERED THROUGH MFS(R) /SUN LIFE ANNUITY
PRODUCTS.
MR. BALLEN JOINED THE MFS RESEARCH DEPARTMENT IN 1984 AS AN INDUSTRY
SPECIALIST. HE WAS NAMED INVESTMENT OFFICER IN 1986, VICE PRESIDENT --
INVESTMENTS IN 1987, DIRECTOR OF RESEARCH IN 1988, SENIOR VICE PRESIDENT
IN 1990, DIRECTOR OF EQUITY PORTFOLIO MANAGEMENT IN 1993, CHIEF EQUITY
OFFICER IN 1995, EXECUTIVE VICE PRESIDENT IN 1997, AND PRESIDENT AND A
MEMBER OF THE BOARD IN 1998.
MR. BALLEN IS A GRADUATE OF HARVARD COLLEGE AND EARNED A MASTER OF
COMMERCE DEGREE FROM THE UNIVERSITY OF NEW SOUTH WALES IN AUSTRALIA AND AN
M.B.A. FROM STANFORD UNIVERSITY.
- --------------------------------------------------------------------------------
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. A prospectus containing more information,
including the exchange privilege and all charges and expenses, for any other MFS
product is available from your financial adviser, or by calling MFS at
1-800-225-2606. Please read it carefully before investing or sending money.
<PAGE>
- --------------------------------------------------------------------------------
FUND FACTS
- --------------------------------------------------------------------------------
Objective: Seeks long-term growth of capital. Dividend
and interest income, if any, is incidental.
Commencement of
investment operations: December 29, 1986
Class inception: Class A September 13, 1993
Class B December 29, 1986
Class C April 1, 1996
Class I January 2, 1997
Class J September 24, 1998
Size: $11.5 billion net assets as of November 30, 1998
- --------------------------------------------------------------------------------
PERFORMANCE SUMMARY
The following information illustrates the historical performance of the Fund's
original share class in comparison to various market indicators. Performance
results include any applicable contingent deferred sales charges and reflect
the percentage change in net asset value, including reinvestment of dividends.
Benchmark comparisons are unmanaged and do not reflect any fees or expenses.
The performance of other share classes will be greater than or less than the
line shown. (See Notes to Performance Summary for more information.) It is not
possible to invest directly in an index.
Growth of a Hypothetical $10,000 Investment
(For the 5-year period ended November 30, 1998)
MFS Emerging Russell 2000 S&P 500 Consumer
Growth Fund Total Composite Price Index
- Class B Return Index Index - U.S.
- ---------------------------------------------------------------------
11/93 $ 9,800 $10,000 $10,000 $10,000
11/94 10,605 9,889 10,105 10,268
11/95 15,365 12,705 13,841 10,531
11/96 18,212 14,804 17,698 10,878
11/97 21,450 18,269 22,744 11,077
11/98 23,283 17,059 28,125 11,262
Growth of a Hypothetical $10,000 Investment
(For the 10-year period ended November 30, 1998)
MFS Emerging S&P 500 Russell 2000 Consumer
Growth Fund Composite Total Price Index
- Class B Index Return Index - U.S.
- -----------------------------------------------------------------------
11/88 $10,000 $10,000 $10,000 $10,000
11/90 11,658 12,630 9,356 11,122
11/92 26,396 18,007 16,277 11,804
11/94 34,092 20,033 19,150 12,444
11/96 58,547 35,087 28,668 13,184
11/98 74,851 55,760 33,036 13,649
AVERAGE ANNUAL TOTAL RETURNS THROUGH NOVEMBER 30, 1998
CLASS A
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 9.36% +15.76% +19.82% +22.72%
- --------------------------------------------------------------------------------
SEC Results + 3.08% +13.50% +18.41% +21.99%
- --------------------------------------------------------------------------------
CLASS B
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 8.55% +14.86% +18.89% +22.30%
- --------------------------------------------------------------------------------
SEC Results + 4.55% +14.10% +18.69% +22.30%
- --------------------------------------------------------------------------------
CLASS C
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 8.54% +14.85% +18.89% +22.30%
- --------------------------------------------------------------------------------
SEC Results + 7.54% +14.85% +18.89% +22.30%
- --------------------------------------------------------------------------------
CLASS I
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 9.67% +15.60% +19.35% +22.53%
- --------------------------------------------------------------------------------
CLASS J
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average Annual Total Return + 8.60% +14.88% +18.91% +22.30%
- --------------------------------------------------------------------------------
SEC Results + 5.35% +13.72% +18.18% +21.93%
- --------------------------------------------------------------------------------
COMPARATIVE INDICES
1 Year 3 Years 5 Years 10 Years/Life
- --------------------------------------------------------------------------------
Average mid-cap fund* + 3.34% +13.01% +13.62% +14.99%
- --------------------------------------------------------------------------------
Standard & Poor's 500 Composite
Index+ +23.52% +26.66% +22.98% +18.75%
- --------------------------------------------------------------------------------
Russell 2000 Total Return Index+ - 6.59% +10.32% +11.27% +12.69%
- --------------------------------------------------------------------------------
Consumer Price Index+# + 1.67% + 2.26% + 2.41% + 3.16%
- --------------------------------------------------------------------------------
* Source: Lipper Analytical Services, Inc.
+ Source: CDA/Wiesenberger.
# The Consumer Price Index is published by the U.S. Bureau of Labor Statistics
and measures the cost of living (inflation).
NOTES TO PERFORMANCE SUMMARY
Class A share ("A") SEC results include the maximum 5.75% sales charge. Class
J share ("J") SEC results include the maximum 3% sales charge. Class B share
("B") SEC results reflect the applicable contingent deferred sales charge
(CDSC), which declines over six years from 4% to 0%. Class C shares ("C") have
no initial sales charge but, like B, have higher annual fees and expenses than
A. C SEC results reflect the 1% CDSC applicable to shares redeemed within 12
months. Class I shares ("I") have no sales charge or Rule 12b-1 fees and are
only available to certain institutional investors. Class J shares are only
available to certain Japanese investors.
A, C, and J results include the performance and the operating expenses
(e.g., Rule 12b-1 fees) of B for periods prior to the inception of A, C, and
J. Because operating expenses of both A and J are lower than those of B, A and
J performance generally would have been higher than B performance. Operating
expenses of C are not significantly different from those of B. The B
performance included in the A SEC performance has been adjusted to reflect the
maximum initial sales charge generally applicable to A rather than the CDSC
generally applicable to B. The B performance included in the J SEC performance
has been adjusted to reflect the maximum initial sales charge generally
applicable to J rather than the CDSC generally applicable to B. The C SEC
performance has been adjusted to reflect the lower CDSC generally applicable
to C rather than the CDSC generally applicable to B.
I results include the performance and the operating expenses (e.g., Rule 12b-1
fees) of B for periods prior to the inception of I. Because operating expenses
of B are greater than those of I, I performance generally would have been
higher than B performance. The B performance included in the I performance has
been adjusted to reflect the fact that I have no CDSC.
Performance results reflect any applicable expense subsidies and waivers,
without which the results would have been less favorable. Subsidies and
waivers may be rescinded at any time. See the prospectus for details. All
results are historical and assume the reinvestment of dividends and
capital gains.
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.
Investing in small or emerging growth companies involves greater risk than is
customarily associated with more established companies. These risks may
increase share price volatility.
<PAGE>
PORTFOLIO CONCENTRATION AS OF NOVEMBER 30, 1998
FIVE LARGEST STOCK SECTORS
TECHNOLOGY 40.5%
CONGLOMERATES, SPECIAL
PRODUCTS/SERVICES 16.8%
LEISURE 15.0%
HEALTH CARE 8.4%
RETAILING 7.7%
<TABLE>
TOP 10 STOCK HOLDINGS
<S> <C>
CISCO SYSTEMS, INC. 7.2% COMPUWARE CORP. 4.7%
Computer network developer Computer software company
ORACLE CORP. 6.4% COMPUTER ASSOCIATES INTERNATIONAL, INC. 4.5%
Database software developer and manufacturer Computer software company
CENDANT CORP. 5.9% BMC SOFTWARE, INC. 4.2%
Hotel, real estate, and consumer services company Computer software company
franchiser
MICROSOFT CORP. 4.1%
TYCO INTERNATIONAL LTD. 5.7% Computer software and systems company
Fire protection, packaging, and electronic
equipment manufacturer CADENCE DESIGN SYSTEMS, INC. 2.9%
Computer software and systems company
MCI WORLDCOM, INC. 4.7%
Telecommunications company
</TABLE>
Portfolio information is as of November 30, 1998. The portfolio is actively
managed, and current holdings may vary.
<PAGE>
<TABLE>
PORTFOLIO OF INVESTMENTS -- November 30, 1998
Stocks - 100.0%
<CAPTION>
- ------------------------------------------------------------------------------------------------------
ISSUER SHARES VALUE
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Stocks - 97.0%
Advertising - 0.4%
Lamar Advertising Co., "A"* 142,500 $ 4,880,625
Outdoor Systems, Inc.* 1,246,182 33,646,914
Snyder Communications, Inc.* 212,100 7,542,806
---------------
$ 46,070,345
- ------------------------------------------------------------------------------------------------------
Aerospace - 0.3%
Gulfstream Aerospace Corp.* 468,700 $ 24,079,462
Howmet International, Inc.* 285,000 4,381,875
Ladish Co., Inc.* 55,000 550,000
---------------
$ 29,011,337
- ------------------------------------------------------------------------------------------------------
Airlines - 0.1%
Airnet Systems, Inc.* 125,800 $ 1,887,000
Atlas Air, Inc.* 310,000 14,337,500
---------------
$ 16,224,500
- ------------------------------------------------------------------------------------------------------
Apparel and Textiles - 0.1%
Nine West Group, Inc.* 407,316 $ 5,091,450
- ------------------------------------------------------------------------------------------------------
Automotive - 0.2%
Dura Automotive Systems, Inc.* 53,400 $ 1,548,600
Federal-Mogul Corp. 364,900 20,708,075
Hayes Lemmerz International, Inc.* 29,000 913,500
National Equipment Services, Inc.* 203,700 1,935,150
---------------
$ 25,105,325
- ------------------------------------------------------------------------------------------------------
Biotechnology - 0.2%
Waters Corp.* 350,000 $ 26,993,750
- ------------------------------------------------------------------------------------------------------
Building Materials
White Cap Industries Corp.* 16,000 $ 212,000
- ------------------------------------------------------------------------------------------------------
Business Machines - 0.4%
Affiliated Computer Services, Inc., "A"* 1,129,500 $ 43,273,969
Aztec Technology Partners, Inc.* 907,203 3,458,711
Sun Microsystems, Inc.* 9,700 718,406
---------------
$ 47,451,086
- ------------------------------------------------------------------------------------------------------
Business Services - 4.9%
A Consulting Team, Inc.* 20,000 $ 152,500
ACSYS, Inc.* 69,400 555,200
Answerthink Consulting Group, Inc.* 31,100 602,563
BISYS Group, Inc.* 470,000 22,618,750
Bridgestreet Accomodations, Inc.* 37,600 126,900
Bright Horizons Family Solutions, Inc.* 43,744 1,033,452
Building One Services Corp.* 2,114,700 35,949,900
Caribiner International, Inc.* 56,400 525,225
Ceridian Corp.* 258,400 16,812,150
Command Systems, Inc.* 42,900 108,591
Compass International Services Corp.* 212,600 2,046,275
Complete Business Solutions, Inc. 113,500 2,794,937
Computer Learning Centers, Inc.* 4,600 29,613
Computer Sciences Corp. 482,000 27,534,250
Cornell Corrections, Inc.* 301,700 5,392,887
Cotelligent Group, Inc.* 589,800 10,800,712
Data Processing Corp.* 229,000 5,438,750
Dendrite International, Inc.* 95,000 1,828,750
DST Systems, Inc.* 483,350 26,161,319
Employee Solutions, Inc.* 793,200 2,032,575
F.Y.I., Inc.* 333,400 10,502,100
Fine Host Corp.* 226,500 290,203
First Data Corp. 2,649,604 70,711,307
Fiserv, Inc.* 496,714 21,948,550
Forrester Research, Inc.* 21,000 664,125
Global Directmail Corp.* 333,300 6,541,012
Hagler Bailly, Inc.* 72,000 1,305,000
Hall Kinion & Associates, Inc.* 15,600 114,075
ICT Group, Inc.* 311,200 778,000
Ikon Office Solutions, Inc. 2,500,000 24,375,000
IMRglobal Corp.* 195,000 4,143,750
Innovative Valve Technologies, Inc.* 60,000 108,750
Insight Enterprises, Inc.* 366,150 15,424,069
IntelliQuest Information Group, Inc.* 53,800 430,400
Interim Services, Inc.* 1,231,600 25,555,700
International Network Services* 90,000 4,916,250
ITT Educational Services, Inc.* 79,400 2,610,275
Labor Ready, Inc.* 97,500 2,126,719
Learning Tree International, Inc.* 86,850 721,941
Mecon, Inc.* 33,600 256,200
MedQuist, Inc.* 312,500 9,492,187
Meta Group, Inc.* 18,750 465,234
Metamor Worldwide, Inc.* 1,203,600 28,510,275
Modis Professional Services, Inc.*++ 7,210,150 86,071,166
National Data Corp. 87,273 3,261,828
National Processing, Inc.* 215,900 1,308,894
NCO Group, Inc.* 55,950 2,063,156
NOVA Corp.* 364,400 11,592,475
Outsource International, Inc.* 151,900 759,500
Paymentech, Inc.* 281,900 4,475,162
Personnel Group of America, Inc.* 393,700 6,496,050
Policy Management Systems Corp.* 116,900 5,976,512
Precision Response Corp.* 100,000 850,000
PRT Group, Inc.* 361,500 1,197,469
Radiant Systems, Inc.* 151,500 1,079,438
RCM Technologies, Inc.* 482,500 8,745,312
RemedyTemp, Inc., "A"* 80,000 1,160,000
Renaissance Worldwide, Inc.* 1,862,000 13,266,750
Romac International, Inc.* 120,200 1,675,287
Rural/Metro Corp.* 420,100 4,306,025
Service Experts, Inc.* 160,000 4,740,000
Sitel Corp.* 276,400 691,000
SPR, Inc.* 25,500 452,625
Staff Leasing, Inc.* 54,800 493,200
Staffmark, Inc.* 469,700 10,920,525
Syntel, Inc.* 127,500 1,721,250
Technology Solutions Co.* 129,000 1,201,313
UBICS, Inc.* 110,000 522,500
Vestcom International, Inc.* 142,100 1,047,988
Waterlink, Inc.* 225,000 843,750
---------------
$ 571,455,596
- ------------------------------------------------------------------------------------------------------
Chemicals
Polymer Group, Inc.* 167,700 $ 1,781,813
- ------------------------------------------------------------------------------------------------------
Computer Hardware - Systems - 0.3%
Compaq Computer Corp. 642,900 $ 20,894,250
Dell Computer Corp.* 250,000 15,203,125
---------------
$ 36,097,375
- ------------------------------------------------------------------------------------------------------
Computer Software - Personal Computers - 4.6%
Autodesk, Inc. 1,395,637 $ 50,766,296
Microsoft Corp.* 3,940,500 480,741,000
Verio, Inc.* 40,800 775,200
---------------
$ 532,282,496
- ------------------------------------------------------------------------------------------------------
Computer Software - Services - 0.2%
EMC Corp.* 160,000 $ 11,600,000
Ingram Micro, Inc.* 162,900 6,923,250
International Integration, Inc.* 27,400 400,725
---------------
$ 18,923,975
- ------------------------------------------------------------------------------------------------------
Computer Software - Systems - 25.7%
Acxiom Corp.* 64,000 $ 1,512,000
Alphanet Solutions, Inc.* 160,000 720,000
Aspec Technology* 19,600 42,875
Aspen Technology, Inc.* 227,600 3,200,625
BMC Software, Inc.* 9,550,160 487,655,045
Boole & Babbage, Inc.* 375,700 11,881,512
Cadence Design Systems, Inc.*++ 11,529,670 324,271,969
Cambridge Technology Partners, Inc.* 1,924,700 40,178,112
CCC Information Services Group, Inc.* 185,000 2,035,000
CHS Electronics, Inc.* 446,450 6,613,041
Computer Associates International, Inc. 11,770,900 520,862,325
Compuware Corp.* 8,754,846 544,989,163
Factset Research Systems, Inc.* 24,000 975,000
Keane, Inc.* 400,000 11,500,000
Larscom, Inc., "A"* 80,000 170,000
Learning Co., Inc.* 379,500 11,029,219
Micro Focus Group, Inc.* 68,750 739,063
Network Associates, Inc.* 330,400 16,809,087
Oracle Corp.* 21,736,250 744,466,562
Parametric Technology Corp.* 100,000 1,700,000
Peoplesoft, Inc.* 224,400 4,614,225
Radisys Corp.* 55,000 1,251,250
Rational Software Corp.* 185,200 4,201,725
Remedy Corp.* 41,400 432,113
Security Dynamics Technologies, Inc.* 133,800 2,040,450
Siebel Systems, Inc.* 993,831 24,100,402
SunGard Data Systems, Inc.* 189,200 6,054,400
Synopsys, Inc.* 2,912,394 137,974,666
System Software Associates, Inc.* 2,367,251 16,274,851
Transaction System Architects, Inc., "A"* 222,800 8,466,400
Unigraphics Solutions, Inc.* 147,900 2,200,012
USCS International, Inc.* 595,000 19,188,750
Vantive Corp.* 15,000 127,500
Veritas Software Co.* 19,693 1,176,657
Versatility, Inc.* 37,000 55,500
Whittman-Hart, Inc.* 210,000 4,633,125
---------------
$ 2,964,142,624
- ------------------------------------------------------------------------------------------------------
Construction Services
American Residential Services, Inc.* 47,000 $ 164,500
Shaw Group, Inc.* 113,000 1,002,875
---------------
$ 1,167,375
- ------------------------------------------------------------------------------------------------------
Consumer Goods and Services - 6.0%
Avis Rent A Car, Inc.* 100,400 $ 2,114,675
Blyth Industries, Inc.* 305,000 10,350,937
Carson, Inc., "A"* 132,100 379,788
Cole National Corp., "A"* 47,100 727,106
Dollar Thrifty Automotive Group, Inc.* 506,600 6,332,500
Hertz Corp., "A" 30,000 1,102,500
Industrial Distribution Group, Inc.* 15,150 105,103
Service Corp. International 18,500 691,438
Sportsline USA, Inc.* 20,000 345,000
Swisher International Group, Inc., "A"* 210,000 1,312,500
Tyco International Ltd. 10,132,248 666,828,571
United Rentals, Inc.* 215,362 5,653,253
---------------
$ 695,943,371
- ------------------------------------------------------------------------------------------------------
Containers
Silgan Holdings, Inc.* 75,200 $ 2,068,000
- ------------------------------------------------------------------------------------------------------
Electrical Equipment - 0.1%
AFC Cable Systems, Inc.* 79,000 $ 2,340,375
Barnett, Inc.* 100,000 1,250,000
JPM Co.* 160,000 2,020,000
Kuhlman Corp. 52,300 1,457,862
Micrel, Inc.* 59,600 2,417,525
---------------
$ 9,485,762
- ------------------------------------------------------------------------------------------------------
Electronics - 3.6%
Actel Corp.* 40,000 $ 677,500
ADE Corp.* 65,300 840,738
Altera Corp.* 2,801,500 137,448,594
Amkor Technology, Inc.* 449,400 2,836,838
Analog Devices, Inc.* 1,701,700 34,778,494
Applied Materials, Inc.* 50,000 1,937,500
Atmel Corp.* 861,000 10,439,625
Burr-Brown Corp.* 896,175 21,172,134
Cable Design Technologies Corp.* 1,048,800 19,337,250
CP Clare Corp.* 90,000 641,250
Intel Corp. 676,700 72,829,837
Lattice Semiconductor Corp.* 141,600 5,221,500
Linear Technology Corp. 292,900 20,521,306
Maxim Integrated Products, Inc.* 271,800 10,668,150
Micro Linear Corp.* 198,000 965,250
Novellus Systems, Inc.* 167,470 8,310,699
Peak International Ltd.* 150,000 1,762,500
Teradyne, Inc.* 104,800 3,360,150
Xilinx, Inc.* 1,124,782 57,082,686
---------------
$ 410,832,001
- ------------------------------------------------------------------------------------------------------
Entertainment - 4.9%
CBS Corp. 1,124,721 $ 33,530,745
Chancellor Media Corp.* 302,500 11,400,469
Citadel Communications Corp.* 158,800 3,811,200
Clear Channel Communications, Inc.* 2,418,564 113,067,867
Cox Radio, Inc., "A"* 380,500 14,530,344
Fox Entertainment Group, Inc.* 723,100 17,083,237
Gametech International, Inc.*++ 515,000 1,351,875
Gemstar International Group Ltd.* 59,000 3,584,250
Harrah's Entertainment, Inc.* 1,674,900 26,065,631
Hearst-Argyle Television, Inc.* 459,800 12,098,487
Heftel Broadcasting Corp., "A"* 186,020 8,673,182
Jacor Communications, Inc.* 1,143,800 66,554,862
MediaOne Group, Inc.* 119,200 4,827,600
Premier Parks, Inc.* 1,501,400 40,725,475
Silverleaf Resorts, Inc.* 54,000 614,250
Sinclair Broadcast Group, Inc., "A"* 77,800 957,913
Time Warner, Inc. 1,409,500 149,054,625
Univision Communications, Inc., "A"* 1,614,200 45,197,600
USA Networks, Inc.* 59,450 1,876,391
Viacom, Inc., "B"* 20,000 1,331,250
Vistana, Inc.* 277,500 3,919,688
West Coast Entertainment Corp.* 605,000 321,406
---------------
$ 560,578,347
- ------------------------------------------------------------------------------------------------------
Financial Institutions - 1.9%
American Express Co. 20,600 $ 2,061,288
ARM Financial Group, Inc., "A" 357,100 7,677,650
Associates First Capital Corp., "A" 1,016,020 79,122,557
BA Merchants Services, Inc., "A"* 219,900 3,683,325
CIT Group, Inc., "A" 332,700 9,336,394
Federated Investors, Inc., "A" 166,500 2,799,281
Franklin Resources, Inc. 1,975,700 84,461,175
Healthcare Financial Partners, Inc.* 226,500 7,446,187
Heller Financial, Inc., "A" 196,100 5,135,369
Liberty Financial Cos., Inc. 145,000 4,214,062
Morgan Stanley Dean Witter & Co. 115,000 8,021,250
Schwab (Charles) Corp. 50,000 2,818,750
Waddell & Reed Financial, Inc., "A" 74,700 1,783,463
WMF Group Ltd.* 92,000 552,000
---------------
$ 219,112,751
- ------------------------------------------------------------------------------------------------------
Food and Beverage Products - 0.2%
International Home Foods, Inc.* 127,200 $ 2,496,300
Suiza Foods Corp.* 485,800 23,014,775
---------------
$ 25,511,075
- ------------------------------------------------------------------------------------------------------
Insurance - 0.4%
Annuity & Life Re Holdings Ltd. 55,300 $ 1,403,238
Compdent Corp.* 275,800 2,878,663
Conseco, Inc. 600,244 19,883,082
Frontier Insurance Group, Inc. 99,000 1,404,563
Hartford Life, Inc., "A" 70,500 3,864,281
Life Re Corp. 150,600 14,184,637
MONY Group, Inc.* 50,700 1,568,531
Nationwide Financial Services, Inc., "A" 108,400 5,216,750
---------------
$ 50,403,745
- ------------------------------------------------------------------------------------------------------
Machinery
ITEQ, Inc.* 300,000 $ 712,500
JLK Direct Distribution, Inc., "A"* 17,000 185,938
---------------
$ 898,438
- ------------------------------------------------------------------------------------------------------
Medical and Health Products - 0.9%
Allergan, Inc. 20,000 $ 1,217,500
American Home Products Co. 98,500 5,245,125
Arterial Vascular Engineering, Inc.* 49,600 2,424,200
Boston Scientific Corp.* 699,600 34,630,200
Coast Dental Services, Inc.* 55,000 639,375
Eli Lilly & Co. 41,800 3,748,937
King Pharmaceuticals, Inc.* 200,000 3,000,000
Matria Healthcare, Inc.* 578,500 1,138,922
McKesson Corp. 140,000 9,966,250
Orthofix International N.V.* 473,749 5,655,379
Pfizer, Inc. 108,200 12,077,825
PSS World Medical, Inc.* 542,000 11,246,500
Renex Corp.* 262,200 1,507,650
Warner-Lambert Co. 60,000 4,530,000
Wesley Jessen Visioncare, Inc.* 185,000 4,347,500
---------------
$ 101,375,363
- ------------------------------------------------------------------------------------------------------
Medical and Health Technology and Services - 7.6%
American Dental Partners, Inc.* 17,800 $ 222,500
American Homepatient, Inc.* 410,750 872,844
American Oncology Resources, Inc.* 75,000 839,063
Ameripath, Inc.* 26,000 117,000
Balanced Care Corp.* 351,700 2,461,900
Capital Senior Living Corp.* 457,200 5,657,850
Cardinal Health, Inc. 494,235 33,916,877
Carematrix Corp.* 367,000 10,276,000
Castle Dental Centers, Inc.* 20,100 128,138
ClinTrials Research, Inc.* 45,000 151,875
Columbia/HCA Healthcare Corp. 728,184 17,931,531
Concentra Managed Care, Inc.* 496,200 5,861,363
Dental Care Alliance, Inc.* 47,500 513,594
Foundation Health Systems, Inc.* 1,000,409 13,818,149
Genesis Health Ventures, Inc.* 266,150 2,545,059
Guidant Corp. 843,600 72,391,425
HBO & Co. 1,297,000 32,343,937
HCIA, Inc.* 565,000 2,666,094
Health Management Associates, Inc., "A"* 461,625 10,011,492
HealthSouth Corp.* 3,663,898 49,233,629
Humana, Inc. 80,700 1,598,869
Integrated Health Services, Inc. 1,166,200 13,046,862
Lincare Holdings, Inc.* 46,100 1,590,450
Mariner Post-Acute Network, Inc.* 1,634,200 7,047,487
Medtronic, Inc. 210,000 14,214,375
Mid Atlantic Medical Services, Inc.* 2,359,888 20,944,006
NCS Healthcare, Inc., "A"* 36,200 733,050
Ocular Sciences, Inc.* 95,400 2,146,500
Orthalliance, Inc., "A"* 33,500 381,063
Orthodontic Centers of America, Inc.* 2,205,000 42,170,625
Oxford Health Plans, Inc.* 450,000 4,978,125
PacifiCare Health Systems, Inc., "A"* 364,900 25,406,162
PacifiCare Health Systems, Inc., "B"* 668,546 50,349,871
Pediatrix Medical Group, Inc.* 27,400 1,471,038
Phymatrix Corp.* 98,200 257,775
Physician Reliance Network, Inc.* 152,500 1,410,625
Premier Research Worldwide Ltd.* 16,500 99,000
Province Healthcare Co.* 15,200 486,400
Quorum Health Group, Inc.* 60,000 997,500
Renal Care Group, Inc.* 65,475 1,759,641
Schein (Henry), Inc. 14,350 509,425
Shared Medical Systems Corp. 30,000 1,571,250
St. Jude Medical, Inc.* 172,933 5,025,865
Total Renal Care Holdings, Inc.* 1,660,328 44,102,462
Trigon Healthcare, Inc.* 110,000 4,076,875
United Healthcare Corp. 6,767,154 305,367,824
United Payors & United Providers, Inc.* 165,000 4,290,000
Wellpoint Health Networks, Inc., "A"* 675,000 55,392,187
---------------
$ 873,385,632
- ------------------------------------------------------------------------------------------------------
Metals and Minerals
NS Group, Inc.* 450,000 $ 2,446,875
- ------------------------------------------------------------------------------------------------------
Office Equipment
Steelcase, Inc. 53,100 $ 945,844
- ------------------------------------------------------------------------------------------------------
Oil Services
Bayard Drilling Technologies, Inc.* 20,000 $ 100,000
Global Industries, Inc.* 245,000 1,393,438
IRI International Corp.* 27,000 118,125
Transcoastal Marine Services, Inc.* 65,000 243,750
---------------
$ 1,855,313
- ------------------------------------------------------------------------------------------------------
Pharmaceuticals
Sepracor, Inc.* 7,500 $ 622,500
- ------------------------------------------------------------------------------------------------------
Pollution Control - 0.54%
Allied Waste Industries, Inc.* 554,500 $ 11,297,938
Casella Waste Systems, Inc., "A"* 61,200 1,912,500
Republic Services, Inc.* 1,076,500 20,049,812
Superior Services, Inc.* 110,700 2,034,113
Waste Industries, Inc.* 16,400 285,975
Waste Management, Inc. 622,862 26,705,208
---------------
$ 62,285,546
- ------------------------------------------------------------------------------------------------------
Printing and Publishing - 0.2%
Applied Graphics Technologies, Inc.* 148,000 $ 1,896,250
Mail-Well, Inc.* 1,640,000 21,217,500
Workflow Management, Inc. 604,801 4,384,807
---------------
$ 27,498,557
- ------------------------------------------------------------------------------------------------------
Railroads - 0.1%
Kansas City Southern Industries, Inc. 50,000 $ 2,134,375
Wisconsin Central Transportation Corp.* 232,500 4,214,063
---------------
$ 6,348,438
- ------------------------------------------------------------------------------------------------------
Real Estate Investment Trusts - 0.2%
MeriStar Hospitality Corp.* 884,000 $ 17,182,750
Patriot American Hospitality, Inc. 262,920 1,939,035
---------------
$ 19,121,785
- ------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 9.4%
Amerihost Properties, Inc.*++ 527,000 $ 2,042,125
Applebee's International, Inc.++ 3,139,500 64,555,969
Avado Brands, Inc.## 370,000 2,844,375
Brinker International, Inc.* 315,000 8,012,812
Buffets, Inc.*++ 3,124,450 36,712,287
Candlewood Hotel Co., Inc.* 210,000 892,500
Cavanaughs Hospitality Corp.* 41,000 440,750
CEC Entertainment, Inc.*++ 1,062,000 31,461,750
Cendant Corp.* 36,039,148 684,743,812
Choice Hotels, Inc.* 78,600 898,988
CKE Restaurants, Inc. 50,000 1,221,875
ExecuStay Corp.* 100,000 1,175,000
Extended Stay America, Inc.* 401,904 4,019,040
Extended Stay America, Inc.*##(+) 1,000,000 10,000,000
Four Seasons Hotels, Inc. 162,400 4,334,050
Friendly Ice Cream Corp.* 315,000 2,480,625
Hammons (John Q) Hotels, Inc., "A"* 168,000 724,500
Hilton Hotels Corp. 300,000 6,525,000
IHOP, Corp.* 440,000 17,490,000
Lone Star Steakhouse & Saloon, Inc.* 370,500 2,825,063
Marriott International, Inc., "A" 200,000 5,875,000
Meristar Hotels and Resorts, Inc. 884,000 2,375,750
MGM Grand, Inc.* 101,389 2,604,430
Mortons Restaurant Group, Inc.*++ 440,000 8,745,000
Outback Steakhouse, Inc.* 95,900 3,404,450
Papa John's International, Inc.* 142,300 5,967,706
Promus Hotel Corp.* 4,108,413 137,118,284
Rainforest Cafe, Inc.* 172,500 1,196,719
Schlotzskys, Inc.* 238,100 2,470,288
ShoLodge, Inc.*++ 375,600 2,676,150
Sonic Corp.* 660,000 12,952,500
Star Buffet, Inc.* 35,000 210,000
Sunterra Corp.* 140,000 1,636,250
Taco Cabana, Inc.*++ 825,000 5,723,437
Total Entertainment Restaurant Corp.* 66,500 195,344
Trendwest Resorts, Inc.* 32,000 460,000
U.S. Franchise Systems, Inc., "A"* 646,900 5,256,062
---------------
$ 1,082,267,891
- ------------------------------------------------------------------------------------------------------
Special Products and Services - 0.5%
Ballantyne of Omaha, Inc.* 130,500 $ 995,063
Central Parking Corp. 218,900 6,430,188
Columbus McKinnon Corp. 108,500 1,973,344
Equity Corp. International* 312,000 8,073,000
Flanders Corp.* 117,000 475,313
Gartner Group, Inc.* 57,700 1,247,763
Navigant International, Inc. 453,601 2,891,706
ResortQuest International, Inc.* 68,400 897,750
Royal Caribbean Cruises Ltd. 255,500 7,760,812
School Specialty, Inc. 485,100 8,186,062
Stewart Enterprises, Inc., "A" 675,000 15,060,937
Stratesec, Inc.* 50,000 81,250
Wackenhut Corp. 200,000 4,075,000
Wilmar Industries, Inc.* 66,600 1,182,150
---------------
$ 59,330,338
- ------------------------------------------------------------------------------------------------------
Steel - 0.1%
Citation Corp.* 515,000 $ 7,145,625
- ------------------------------------------------------------------------------------------------------
Stores - 8.06%
American Pad & Paper Co.* 840,000 $ 1,312,500
Bed Bath & Beyond, Inc.* 80,000 2,495,000
Boise Cascade Office Products Corp.* 341,400 3,798,075
Borders Group, Inc.* 390,000 9,457,500
CompUSA, Inc.* 540,500 8,006,156
Consolidated Stores Corp.* 1,193,125 25,652,187
Corporate Express, Inc.* 3,662,100 21,514,838
CVS Corp. 340,000 16,787,500
Dayton-Hudson Corp. 53,800 2,421,000
Dollar General Corp. 25,000 595,313
Friedmans, Inc., "A"* 150,000 1,500,000
General Nutrition Cos., Inc.* 1,543,288 27,393,362
Gymboree Corp.* 131,200 877,400
Home Choice Holdings, Inc.* 115,000 1,825,625
Lowes Co., Inc. 13,700 578,825
Micro Warehouse, Inc.*++ 2,918,500 79,893,937
Mothers Work, Inc.*++ 202,000 2,424,000
Movie Gallery, Inc.* 358,000 1,790,000
MSC Industrial Direct, Inc., "A"* 301,600 7,181,850
Office Depot, Inc.* 7,667,300 249,187,250
OfficeMax, Inc.* 893,000 9,488,125
Rental Service Corp.* 112,800 2,389,950
Renters Choice, Inc.* 301,000 7,261,625
Republic Industries, Inc.* 3,340,800 56,793,600
Republic Industries, Inc.*+(+) 6,505,000 110,585,000
Rite Aid Corp. 4,306,000 199,690,750
Shoe Carnival, Inc.* 145,000 1,450,000
Sports Club, Inc.* 170,000 828,750
Sunglass Hut International, Inc.* 405,000 2,430,000
The Home Depot, Inc. 1,212,300 60,311,925
TJX Cos., Inc. 265,000 6,790,625
U.S. Office Products Co. 1,134,003 6,237,017
---------------
$ 928,949,685
- ------------------------------------------------------------------------------------------------------
Supermarkets - 0.4%
Meyer (Fred), Inc.* 857,200 $ 43,610,050
- ------------------------------------------------------------------------------------------------------
Telecommunications - 14.2%
Amdocs Ltd.* 230,600 $ 3,545,475
American Tower Corp., "A"* 100,000 2,312,500
APAC Teleservices, Inc.* 450,000 2,925,000
Ascend Communications, Inc.* 722,400 40,589,850
Aspect Telecommunications Corp.* 408,800 7,741,650
Boston Communications Group, Inc.* 155,757 1,577,040
Cisco Systems, Inc.* 11,090,987 835,983,145
Glenayre Technologies, Inc.* 1,430,000 8,848,125
Global TeleSystems Group, Inc.* 268,685 11,662,608
Hypercom Corp.* 321,200 3,774,100
Hyperion Telecommunications, Inc., "A"* 96,800 1,052,700
Intermedia Communications, Inc.* 120,000 2,070,000
IXC Communications, Inc.* 55,000 1,505,625
Lucent Technologies, Inc. 418,000 35,974,125
MCI WorldCom, Inc.* 9,259,723 546,323,657
Metromedia Fiber Network, Inc., "A"* 143,400 7,438,875
Nextlink Communications, Inc., "A"* 45,000 1,361,250
Qwest Communications International, Inc.* 246,188 9,847,520
RMH Teleservices, Inc.* 238,000 386,750
SCC Communications Corp.* 300,000 1,425,000
Sterling Commerce, Inc.* 59,826 2,168,693
Tel-Save.com, Inc.*++ 6,471,100 77,248,756
TeleCommunications, Inc. 80,000 3,225,000
Tellabs, Inc.* 226,800 12,261,375
Transaction Network Services, Inc.* 245,700 5,927,512
VDI Media* 290,000 2,320,000
---------------
$ 1,629,496,331
- ------------------------------------------------------------------------------------------------------
Transportation - 0.2%
Budget Group, Inc., "A"* 302,700 $ 3,783,750
Carey International, Inc.* 110,000 1,870,000
Coach USA, Inc.* 303,200 8,603,300
Dispatch Management Services Corp.* 215,600 1,212,750
Dynamex, Inc.* 89,600 448,000
Hub Group, Inc., "A"* 30,000 547,500
United Road Services, Inc.* 32,000 576,000
---------------
$ 17,041,300
- ------------------------------------------------------------------------------------------------------
Utilities - Electric - 0.1%
CalEnergy Co., Inc.* 290,000 $ 9,080,625
- ------------------------------------------------------------------------------------------------------
Venture Capital
Copley Partners 1*+(+) 3,000,000 $ 439,350
Copley Partners 2*+(+) 3,000,000 1,262,100
Highland Capital Partners*+(+) 7,500,000 937,500
---------------
$ 2,638,950
- ------------------------------------------------------------------------------------------------------
Total U.S. Stocks $11,172,291,185
- ------------------------------------------------------------------------------------------------------
Foreign Stocks - 3.8%
Bermuda - 0.3%
Ace Ltd. (Insurance) 950,000 $ 30,400,000
Global Crossing Ltd. (Telecommunications)* 102,700 3,889,762
---------------
$ 34,289,762
- ------------------------------------------------------------------------------------------------------
Canada - 0.2%
Laidlaw, Inc. (Pollution Control) 480,000 $ 4,770,000
Legacy Hotels Real Estate Investment Trust (Real
Estate Investment Trust)*## 773,000 3,457,427
Loewen Group, Inc. (Business Services) 1,263,100 11,841,563
Loewen Group, Inc. (Business Services)## 857,200 7,975,906
---------------
$ 28,044,896
- ------------------------------------------------------------------------------------------------------
France
Alcatel Alsthom Compagnie, ADR
(Telecommunications) 100,000 $ 2,587,500
- ------------------------------------------------------------------------------------------------------
Germany - 2.7%
Galileo International, Inc. (Consumer Goods and
Services) 288,000 $ 11,520,000
SAP AG, ADR (Computer Software - Systems) 174,300 78,918,996
SAP AG, ADR (Computer Software - Systems)## 1,248,800 54,010,600
SAP AG, Preferred (Computer Software - Systems) 311,625 162,224,310
---------------
$ 306,673,906
- ------------------------------------------------------------------------------------------------------
Ireland - 0.1%
Elan Corp. PLC, ADR (Health Products)* 76,800 $ 5,232,000
- ------------------------------------------------------------------------------------------------------
Italy - 0.2%
Gucci Group N.V. (Apparel and Textiles) 580,000 $ 26,136,250
- ------------------------------------------------------------------------------------------------------
Mexico
TV Azteca, S.A. de C.V., ADR (Broadcasting) 41,000 $ 307,500
- ------------------------------------------------------------------------------------------------------
Netherlands - 0.1%
Benckiser N.V., "B" (Consumer Goods and Services) 137,000 $ 8,094,217
- ------------------------------------------------------------------------------------------------------
Sweden
Munters AB (Consumer Goods and Services) 25,250 $ 211,123
- ------------------------------------------------------------------------------------------------------
United Kingdom - 0.2%
CBT Group PLC, ADR (Computer Software - Personal
Computers)* 1,043,100 $ 10,952,550
Danka Business Systems, ADR (Business Services)++ 4,210,300 14,472,906
Jarvis Hotels PLC (Restaurants and Lodging)+ 98,300 200,903
Taylor Nelson Sofres PLC (Market Research) 1,286,800 1,633,097
Thomson Travel Group PLC (Travel Services)* 250,000 601,593
---------------
$ 27,861,049
- ------------------------------------------------------------------------------------------------------
Total Foreign Stocks $ 439,438,203
- ------------------------------------------------------------------------------------------------------
Total Stocks (Identified Cost, $7,522,243,795) $11,611,729,388
- ------------------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCK - 0.1%
- ------------------------------------------------------------------------------------------------------
Agriculture
Monsanto Co.* 33,000 $ 1,493,250
- ------------------------------------------------------------------------------------------------------
Restaurants and Lodging - 0.1%
Avado Financing, "A", 7s *## 100,000 $ 3,562,500
- ------------------------------------------------------------------------------------------------------
Total Convertible Preferred Stock (Identified Cost, $6,320,000) $ 5,055,750
- ------------------------------------------------------------------------------------------------------
Convertible Bond - 0.1%
- ------------------------------------------------------------------------------------------------------
PRINCIPAL
AMOUNT
ISSUER (000 OMITTED) VALUE
- ------------------------------------------------------------------------------------------------------
U.S. Bonds - 0.1%
Construction Services
American Residential Services, Inc., 7.25s, 2004## $ 4,000 $ 1,600,000
- ------------------------------------------------------------------------------------------------------
Entertainment - 0.1%
CBS Radio, Inc., 7s, 2011## $ 4,555 $ 7,174,125
- ------------------------------------------------------------------------------------------------------
Medical and Health Products
Ventritex, Inc., 5.75s, 2001 $ 1,230 $ 1,319,175
- ------------------------------------------------------------------------------------------------------
Restaurants and Lodging
ShoLodge, Inc., 7.5s, 2004 $ 2,000 $ 1,240,000
- ------------------------------------------------------------------------------------------------------
Telecommunications
Midcom Communications, Inc., 8.25s, 2003**## $ 4,600 $ 920,000
- ------------------------------------------------------------------------------------------------------
Total Convertible Bond (Identified Cost, $16,385,000) $ 12,253,300
- ------------------------------------------------------------------------------------------------------
SHORT-TERM OBLIGATIONS - 1.8%
- ------------------------------------------------------------------------------------------------------
Federal Farm Credit Bank, due 12/08/98 $ 1,000 $ 999,073
Ford Motor Credit Corp., due 12/01/98 100,000 100,000,000
General Electric Capital Corp., due 12/01/98 109,185 109,185,000
- ------------------------------------------------------------------------------------------------------
Total Short-Term Obligations, at Amortized Cost $ 210,184,073
- ------------------------------------------------------------------------------------------------------
Total Investments (Identified Cost, $7,755,132,868) $11,839,222,511
OTHER ASSETS, LESS LIABILITIES - (2.8)% (319,683,939)
- ------------------------------------------------------------------------------------------------------
Net Assets - 100.0% $11,519,538,572
- ------------------------------------------------------------------------------------------------------
* Non-income producing security.
** Non-income producing security -- in default.
+ 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.
(+) Security valued by or at the direction of the Trustees.
## SEC Rule 144A restriction.
See notes to financial statements
</TABLE>
<PAGE>
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
- -----------------------------------------------------------------------------
NOVEMBER 30, 1998
- -----------------------------------------------------------------------------
Assets:
Investments, at value -
Unaffiliated issuers (identified cost, $7,290,781,029) $11,187,642,350
Affiliated issuer (identified cost, $464,351,839) 651,580,161
---------------
Total investments, at value (identified
cost, $7,755,132,868) $11,839,222,511
Cash 764,212
Receivable for investments sold 48,499,896
Receivable for Fund shares sold 21,260,280
Interest and dividends receivable 1,940,580
Other assets 81,245
---------------
Total assets $11,911,768,724
---------------
Liabilities:
Payable for investments purchased $ 44,663,692
Payable for Fund shares reacquired 339,508,062
Payable to affiliates -
Management fee 689,189
Shareholder servicing agent fee 112,526
Distribution and service fee 5,361,231
Accrued expenses and other liabilities 1,895,452
---------------
Total liabilities $ 392,230,152
---------------
Net assets $11,519,538,572
===============
Net assets consist of:
Paid-in capital $ 7,323,660,701
Unrealized appreciation on investments and
translation of assets and liabilities in
foreign currencies 4,084,090,893
Accumulated undistributed net realized gain on
investments and foreign transactions 111,886,737
Accumulated net investment loss (99,759)
---------------
Total $11,519,538,572
---------------
Shares of beneficial interest outstanding 287,451,862
===========
Class A shares:
Net asset value per share (net assets of
$4,713,352,835 / 115,940,707 shares of
beneficial interest outstanding) $40.65
======
Offering price per share (100 / 94.25) $43.13
======
Class B shares:
Net asset value and offering price per share
(net assets of $6,190,463,973 / 155,958,521
shares of beneficial interest outstanding) $39.69
======
Class C shares:
Net asset value and offering price per share
(net assets of $564,096,914 / 14,286,109 shares of
beneficial interest outstanding) $39.49
======
Class I shares:
Net asset value, offering price, and redemption
price per share (net assets of $51,536,607 / 1,264,303
shares of beneficial interest outstanding) $40.76
======
Class J shares:
Net asset value and redemption price per share
(net assets of $88,243 / 2,222 shares of beneficial
interest outstanding) $39.71
======
Offering price per share (100 / 97) $40.94
======
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
<PAGE>
FINANCIAL STATEMENTS -- continued
Statement of Operations
- --------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998
- --------------------------------------------------------------------------------
Net investment income (loss):
Income -
Dividends (including $1,001,936 received from
affiliated issuers) $ 14,501,121
Interest (including income on securities loaned
of $6,300,253) 15,827,376
Foreign taxes withheld (394,396)
--------------
Total investment income $ 29,934,101
--------------
Expenses -
Management fee $ 73,371,091
Trustees' compensation 78,342
Shareholder servicing agent fee 12,008,782
Distribution and service fee (Class A) 10,883,411
Distribution and service fee (Class B) 56,915,584
Distribution and service fee (Class C) 4,645,812
Distribution and service fee (Class J) 70
Administrative fee 322,111
Custodian fee 1,879,350
Postage 1,160,582
Printing 446,109
Auditing fees 40,285
Legal fees 96,851
Miscellaneous 6,987,017
--------------
Total expenses $ 168,835,397
Fees paid indirectly (690,437)
--------------
Net expenses $ 168,144,960
--------------
Net investment loss $ (138,210,859)
--------------
Realized and unrealized gain on investments:
Realized gain (identified cost basis) -
Investment transactions (including $2,404,374 net
loss from transactions with affiliated issuers) $ 214,622,568
Foreign currency transactions 7,288
--------------
Net realized gain on investments and foreign
currency transactions $ 214,629,856
--------------
Change in unrealized appreciation -
Investments $ 860,181,948
Translation of assets and liabilities in foreign
currencies 1,250
--------------
Net unrealized gain on investments and foreign
currency translation 860,183,198
--------------
Net realized and unrealized gain on investments
and foreign currency $1,074,813,054
--------------
Increase in net assets from operations $ 936,602,195
==============
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Increase (decrease) in net assets:
From operations -
Net investment loss $ (138,210,859) $ (109,902,167)
Net realized gain on investments and foreign
currency transactions 214,629,856 191,992,033
Net unrealized gain on investments and foreign
currency translation 860,183,198 1,252,998,931
--------------- ---------------
Increase in net assets from operations $ 936,602,195 $ 1,335,088,797
--------------- ---------------
Distributions declared to shareholders -
From net realized gain on investments and foreign
currency transactions (Class A) $ (35,451,730) $ (28,565,649)
From net realized gain on investments and foreign
currency transactions (Class B) (37,089,138) (21,625,602)
From net realized gain on investments and foreign
currency transactions (Class C) (2,529,758) (1,402,958)
From net realized gain on investments and foreign
currency transactions (Class I) (526,650) --
--------------- ---------------
Total distributions declared to shareholders $ (75,597,276) $ (51,594,209)
--------------- ---------------
Net increase in net assets from Fund share
transactions $ 1,248,664,828 $ 1,825,218,681
--------------- ---------------
Total increase in net assets $ 2,109,669,747 $ 3,108,713,269
Net assets:
At beginning of period 9,409,868,825 6,301,155,556
--------------- ---------------
At end of period (including accumulated net
investment loss of $99,759 and $87,403, respectively) $11,519,538,572 $ 9,409,868,825
=============== ===============
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
CLASS A
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $37.54 $32.01 $26.79 $18.73 $17.68
------ ------ ------ ------ ------
Income loss from investment operations# -
Net investment loss $(0.34) $(0.34) $(0.29) $(0.23) $(0.20)
Net realized and unrealized gain on
investments and foreign currency
transactions 3.79 6.24 5.51 8.68 1.78
------ ------ ------ ------ ------
Total from investment operations $ 3.45 $ 5.90 $ 5.22 $ 8.45 $ 1.58
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions $(0.34) $(0.37) $ -- $(0.38) $(0.53)
In excess of net realized gain on
investments and foreign currency transactions -- -- -- -- *** --
From paid-in capital -- -- -- (0.01) --
------ ------ ------ ------ ------
Total distributions declared to
shareholders $(0.34) $(0.37) $ -- $(0.39) $(0.53)
------ ------ ------ ------ ------
Net asset value - end of period $40.65 $37.54 $32.01 $26.79 $18.73
====== ====== ====== ====== ======
Total return+ 9.36% 18.66% 19.52% 45.98% 9.06%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.16% 1.21% 1.20% 1.28% 1.33%
Net investment loss (0.87)% (0.99)% (1.01)% (1.04)% (1.09)%
Portfolio turnover 15% 21% 22% 20% 39%
Net assets at end of period (000,000 omitted) $4,713 $3,875 $2,524 $1,312 $470
*** The per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
+ Total returns for Class A shares do not include the applicable sales charge. If the charge had been included, the results
would have been lower.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED NOVEMBER 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
CLASS B
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $36.85 $31.48 $26.56 $18.57 $17.64
------ ------ ------ ------ ------
Income (loss) from investment operations# -
Net investment loss $(0.62) $(0.59) $(0.52) $(0.41) $(0.35)
Net realized and unrealized gain on
investments and foreign currency transactions 3.72 6.14 5.44 8.65 1.78
------ ------ ------ ------ ------
Total from investment operations $ 3.10 $ 5.55 $ 4.92 $ 8.24 $ 1.43
------ ------ ------ ------ ------
Less distributions declared to shareholders -
From net realized gain on investments and
foreign currency transactions $(0.26) $(0.18) $ -- $(0.24) $(0.50)
In excess of net realized gain on investments
and foreign currency transactions -- -- -- -- *** --
From paid-in capital -- -- -- (0.01) --
------ ------ ------ ------ ------
Total distributions declared to shareholders $(0.26) $(0.18) $ -- $(0.25) $(0.50)
------ ------ ------ ------ ------
Net asset value - end of period $39.69 $36.85 $31.48 $26.56 $18.57
====== ====== ====== ====== ======
Total return 8.55% 17.78% 18.52% 44.89% 8.21%
Ratios (to average net assets)/Supplemental data:
Expenses## 1.91% 1.97% 2.00% 2.08% 2.14%
Net investment loss (1.62)% (1.75)% (1.80)% (1.83)% (1.90)%
Portfolio turnover 15% 21% 22% 20% 39%
Net assets at end of period (000,000 omitted) $6,190 $5,144 $3,659 $2,001 $769
*** The per share amount was less than $0.01.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fees based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. For fiscal years ending after September 1, 1995,
the Fund's expenses are calculated without reduction for this expense offset arrangement.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
Financial Highlights - continued
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED
NOVEMBER 30, PERIOD ENDED
----------------------------------- NOVEMBER 30,
1998 1997 1996*
- ----------------------------------------------------------------------------------------------------------------------
CLASS C
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $36.66 $31.48 $28.37
------ ------ ------
Income from investment operations# -
Net investment loss $(0.61) $(0.59) $(0.38)
Net realized and unrealized gain on investments and
foreign currency transactions 3.70 6.12 3.49
------ ------ ------
Total from investment operations $ 3.09 $ 5.53 $ 3.11
------ ------ ------
Less distributions declared to shareholders from net $
realized gain on investments and foreign currency
transactions $(0.26) $(0.35) --
------ ------ ------
Net asset value - end of period $39.49 $36.66 $31.48
====== ====== ======
Total return 8.54% 17.81% 10.96%++
Ratios (to average net assets)/Supplemental data:
Expenses## 1.91% 1.97% 1.35%+
Net investment loss (1.62)% (1.75)% (1.25)%+
Portfolio turnover 15% 21% 22%
Net assets at end of period (000,000 omitted) $ 564 $ 344 $ 119
* For the period from the inception of Class C, April 1, 1996, through November 30, 1996.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. The Fund's expenses are calculated
without reduction for this expense offset arrangement.
</TABLE>
See notes to financial statements
<PAGE>
FINANCIAL STATEMENTS -- continued
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS - CONTINUED
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED
NOVEMBER 30, PERIOD ENDED
----------------------------- NOVEMBER 30,
1998 1997** 1998***
- ---------------------------------------------------------------------------------------------------------------------
CLASS I CLASS J
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per share data (for a share outstanding throughout each period):
Net asset value - beginning of period $37.62 $29.90 $35.31
------ ------ ------
Income from investment operations# -
Net investment loss $(0.24) $(0.23) $(0.09)
Net realized and unrealized gain on investments
and foreign currency transactions 3.80 7.87 4.49
------ ------ ------
Total from investment operations $ 3.56 $ 7.64 $ 4.40
------ ------ ------
Less distributions declared to shareholders from net
realized gain on investments and foreign currency
transactions $(0.42) $ -- $ --
------ ------ ------
Net asset value - end of period $40.76 $37.62 $39.71
====== ====== ======
Total return
9.67% 25.48%++ 12.46%++
Ratios (to average net assets)/Supplemental data:
Expenses##
0.91% 0.97%+ 1.66%+
Net investment loss (0.62)% (0.74) (1.50)+
Portfolio turnover 15% 21% 15%
Net assets at end of period (000 omitted) $51,537 $47,240 $ 88
** For the period from the inception of Class I, January 2, 1997, through November 30, 1997.
*** For the period from the inception of Class J, September 24, 1998, through November 30, 1998.
+ Annualized.
++ Not annualized.
# Per share data are based on average shares outstanding.
## The Fund has an expense offset arrangement which reduces the Fund's custodian fee based upon the amount of cash
maintained by the Fund with its custodian and dividend disbursing agent. The Fund's expenses are calculated
without reduction for this expense offset arrangement.
</TABLE>
See notes to financial statements
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(1) Business and Organization
MFS Emerging Growth Fund (the Fund) is a diversified series of MFS Series
Trust II (the Trust). The Trust is organized as a Massachusetts business trust
and is registered under the Investment Company Act of 1940, as amended, as an
open-end management investment company.
(2) Significant Accounting Policies
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.
Investments in foreign securities are vulnerable to the effects of changes in
the relative values of the local currency and the U.S. dollar and to the
effects of changes in each country's legal, political, and economic
environment.
Investment Valuations - Equity securities listed on securities exchanges or
reported through the NASDAQ system are reported at market value using last
sale prices. Unlisted equity securities or listed equity securities for which
last sale prices are not available are reported at market value using last
quoted bid prices. Debt securities (other than short-term obligations which
mature in 60 days or less), including listed issues, forward contracts, and
swap agreements, 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.
Security Loans - The Fund may lend its securities to member banks of the Federal
Reserve System and to member firms of the New York Stock Exchange or
subsidiaries thereof. The loans are collateralized at all times by US Treasuries
securities with a market value at least equal to the market value of securities
loaned. As with other extensions of credit, the Fund bears the risk of delay in
recovery or even loss of rights in the collateral should the borrower of the
securities fail financially.
At November 30, 1998, the value of securities loaned was $111,699,360. These
loans are collateralized by U.S. Treasury securities in the amount of
$126,648,906. The Fund receives a fee for lending its securities and also
continues to earn income on the securities loaned. Income from securities
lending is included in interest income on the Statement of Operations. The
dividend and interest income earned on the securities loaned is accounted for
in the same manner as other dividend and interest income.
Investment Transactions and Income - Investment transactions are recorded on
the trade date. Interest income is recorded on the accrual basis. All discount
is accreted for financial statement and tax reporting purposes as required by
federal income tax regulations. Dividends received in cash are recorded on the
ex-dividend date. Dividend and interest payments received in additional
securities are recorded on the ex-dividend or ex-interest date in an amount
equal to the value of the security on such date.
Fees Paid Indirectly - The Fund's custody fee is calculated as a percentage of
the Fund's month end net assets. The fee is reduced according to an
arrangement that measures 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.
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 net realized gains. During
the year ended November 30, 1998, $103,746,237 and $34,452,266, respectively,
were reclassified from accumulated net realized gain on investments and
foreign currency transactions and paid-in capital to accumulated net
investment loss due to differences between book and tax accounting. 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 multiple
classes of shares, which differ in their respective distribution and service
fees. All shareholders bear the common expenses of the Fund 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. Class B shares will convert to Class A
shares approximately eight years after purchase.
(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 the following annual
rates:
First $2.5 billion 0.75%
Next $4.5 billion 0.70%
In excess of 7 billion 0.65%
Administrator - The Fund has an administrative services agreement with MFS to
provide the Fund with certain financial, legal, shareholder servicing,
compliance, and other administrative services. As a partial reimbursement for
the cost of providing these services, the Fund pays MFS an administrative fee
at the following annual percentages of the Fund's average daily net assets:
First $1 billion 0.0150%
Next $1 billion 0.0125%
Next $1 billion 0.0100%
In excess of $3 billion 0.0000%
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 officers and
Trustees of the Fund are officers or directors of MFS, MFS Fund Distributors,
Inc. (MFD), and MFS Service Center, Inc. (MFSC). The Fund has an unfunded
defined benefit plan for all of its independent Trustees and Mr. Bailey.
Included in Trustees' compensation is a net periodic pension expense of
$17,150 for the year ended November 30, 1998.
Distributor - MFD, a wholly owned subsidiary of MFS, as distributor, received
$2,399,643 for the year ended November 30, 1998, as its portion of the sales
charge on sales of Class A shares of the Fund.
The Trustees have adopted a distribution plan for Class A, Class B, Class C, and
Class J shares pursuant to Rule 12b-1 of the Investment Company Act of 1940 as
follows:
The Fund's distribution plan provides that the Fund will pay MFD up to 0.35%
per annum of its average daily net assets attributable to Class A shares in
order that MFD may pay expenses on behalf of the Fund related to the
distribution and servicing of its shares. These expenses include a service fee
paid to each securities dealer that enters into a sales agreement with MFD of
up to 0.25% per annum of the Fund's average daily net assets attributable to
Class A shares which are attributable to that securities dealer and a
distribution fee to MFD of up to 0.10% per annum of the Fund's average daily
net assets attributable to Class A shares. MFD retains the service fee for
accounts not attributable to a securities dealer, which amounted to $535,026
for the year ended November 30, 1998. Payment of the 0.10% per annum Class A
distribution fee will commence on such date as the Trustees of the Trust may
determine. Fees incurred under the distribution plan during the year ended
November 30, 1998, were 0.25% of average daily net assets attributable to
Class A shares on an annualized basis.
The Fund's 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 that 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 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 $262,993 and $4,001 for Class B and Class C shares, respectively,
for the year ended November 30, 1998. Fees incurred under the distribution plan
during the year ended November 30, 1998, were 1.00% of average daily net assets
attributable to both Class B and Class C shares on an annualized basis.
The Fund's distribution plan provides that the Fund will pay MFD a
distribution fee of up to 0.50% per annum, and a service fee of up to 0.25%
per annum, of the Fund's average daily net assets attributable to Class J
shares. Class J shares are available for distribution through Merrill Lynch
Japan Securities Co. ("MLJ") and its network of financial intermediaries. MLJ
also serves as the Fund's Agent Securities Company in Japan, and in that
capacity represents the Fund before Japanese regulatory authorities. MFD will
pay to MLJ all of the service fee and all of the distribution fee attributable
to Class J shares. A portion of the distribution fee equal to 0.10% per annum
of the Fund's average daily net assets attributable to Class J shares is paid
to MLJ to cover its services as the Fund's Agent Securities Company. Fees
incurred under the distribution plan during the year ended November 30, 1998,
were 0.75% of average net assets attributable to Class J shares, on an
annualized basis.
Certain Class A and Class C shares are subject to a contingent deferred sales
charge in the event of a shareholder redemption within 12 months following
purchase. A contingent deferred sales charge is imposed on shareholder
redemption's of Class B shares in the event of a shareholder redemption within
six years of purchase. MFD receives all contingent deferred sales charges.
Contingent deferred sales charges imposed during the year ended November 30,
1998, were $137,029, $8,853,466, and $193,565 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 Fund's average daily net assets at an effective annual
rate of 0.1125%. Prior to January 1, 1998, the fee was calculated as a
percentage of the average Fund's daily net assets at an effective annual rate
of 0.13%.
(4) Portfolio Securities
Purchases and sales of investments, other than U.S. government securities,
purchased option transactions, and short-term obligations, aggregated
$2,842,426,831 and $1,561,620,405, 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 $7,762,620,221
--------------
Gross unrealized appreciation $4,981,081,728
Gross unrealized depreciation (904,479,438)
--------------
Net unrealized appreciation $4,076,602,290
==============
(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. Transactions in
Fund shares were as follows:
<TABLE>
<CAPTION>
Class A Shares
YEAR ENDED NOVEMBER 30, 1998 YEAR ENDED NOVEMBER 30, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 323,635,709 $ 12,557,270,573 186,156,395 $ 6,322,350,066
Shares from merger of
USA Growth Fund -- -- 5,056,383 166,860,649
Share issued to shareholders
in reinvestment of
distributions 959,730 33,147,195 879,714 26,601,710
Shares reacquired (311,882,646) (12,167,722,188) (166,809,329) (5,698,965,342)
Transfer to Class I -- -- (888,406) (26,634,425)
----------- ---------------- ----------- ---------------
Net increase 12,712,793 $ 422,695,580 24,394,757 $ 790,212,658
=========== ================ =========== ===============
<CAPTION>
Class B Shares
YEAR ENDED NOVEMBER 30, 1998 YEAR ENDED NOVEMBER 30, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 74,377,060 $ 2,833,309,632 75,823,687 $ 2,516,584,452
Shares issued to shareholders
in reinvestment of
distributions 861,205 29,129,405 567,281 16,942,530
Shares reacquired (58,855,318) (2,223,583,962) (53,046,942) (1,739,291,055)
----------- ---------------- ----------- ---------------
Net increase 16,382,947 $ 638,855,075 23,344,026 $ 794,235,927
=========== ================ =========== ===============
<CAPTION>
Class C Shares
YEAR ENDED NOVEMBER 30, 1998 YEAR ENDED NOVEMBER 30, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 31,755,320 $ 1,218,876,343 9,194,500 $ 307,318,296
Shares issued to shareholders
in reinvestment of
distributions 40,350 1,357,348 22,963 684,782
Shares reacquired (26,901,015) (1,033,437,490) (3,605,048) (120,103,252)
----------- ---------------- ----------- ---------------
Net increase 4,894,655 $ 186,796,201 5,612,415 $ 187,899,826
=========== ================ =========== ===============
<CAPTION>
Class I Shares
YEAR ENDED NOVEMBER 30, 1998 YEAR ENDED NOVEMBER 30, 1997
---------------------------------- ---------------------------------
SHARES AMOUNT SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares sold 209,180 $ 8,247,866 530,365 $ 16,396,903
Transfer from Class A -- -- 888,406 26,634,425
Shares issued to shareholders
in reinvestment of
distributions 15,319 526,918 -- --
Shares reacquired (215,813) (8,535,894) (163,154) (5,454,303)
----------- ---------------- ----------- ---------------
Net increase 8,686 $ 238,890 1,255,617 $ 37,577,025
=========== ================ =========== ===============
<CAPTION>
Class J Shares
PERIOD ENDED NOVEMBER 30, 1998*
----------------------------------
SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Shares sold 2,222 $ 79,082
=========== ================
*For the period from the inception of Class J, September 24, 1998, through November 30, 1998.
</TABLE>
(6) Line of Credit
The Fund and other affiliated funds participate in an $805 million unsecured
line of credit provided by a syndication of banks under a line of credit
agreement. 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, 1998, was $81,579.
(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, 1998, is set forth below:
<TABLE>
<CAPTION>
ACQUISTIONS DISPOSITIONS
BEGINNING ------------------------------- ----------------------------
AFFILIATE SHARES SHARES COST SHARES COST
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amerihost Properties, Inc. 517,000 10,000 $ 47,188 -- $ --
Applebees International, Inc. 3,139,500 -- -- -- --
Buffets, Inc. 2,953,050 186,400 2,097,778 15,000 219,368
Cadence Design Systems, Inc. 10,575,070 954,600 25,385,725 -- --
CEC Entertainment, Inc. 1,017,000 45,000 883,638 -- --
Danka Business Systems, ADR 2,710,300 1,500,000 21,599,624 -- --
Dayton Superior Corp. 265,000 -- -- 265,000 4,730,561
Equalnet Holding Corp. 400,000 -- -- 400,000 819,648
Gametech International, Inc. 175,000 340,000 2,047,974 -- --
Micro Warehouse, Inc. 2,878,500 40,000 618,750 -- --
Modis Professional Services, Inc. 4,728,300 2,481,850 53,084,626 -- --
Mortons Restaurant Group, Inc. 500,000 -- -- 60,000 1,422,865
Mothers Work, Inc. 211,500 -- -- 9,500 92,684
ShoLodge, Inc. 375,600 -- -- -- --
Taco Cabana, Inc. 962,395 -- -- 137,395 747,901
Tel-Save.com, Inc. 6,213,400 379,700 6,034,897 122,000 2,148,034
------------ -----------
$111,800,200 $10,181,061
============ ===========
<CAPTION>
ENDING REALIZED DIVIDEND ENDING
AFFILIATE SHARES GAIN (LOSS) INCOME VALUE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amerihost Properties, Inc. 527,000 $ -- $ -- $ 2,042,125
Applebees International, Inc. 3,139,500 -- 251,160 64,555,969
Buffets, Inc. 3,124,450 (54,382) -- 36,712,287
Cadence Design Systems, Inc. 11,529,670 -- -- 324,271,969
CEC Entertainment, Inc. 1,062,000 -- -- 31,461,750
Danka Business Systems, ADR 4,210,300 -- 745,934 14,472,906
Dayton Superior Corp. -- 1,285,561 4,842 --
Equalnet Holding Corp. -- (3,322,173) -- --
Gametech International, Inc. 515,000 -- -- 1,351,875
Micro Warehouse, Inc. 2,918,500 -- -- 79,893,937
Modis Professional Services, Inc. 7,210,150 -- -- 86,071,166
Mortons Restaurant Group, Inc. 440,000 507,865 -- 8,745,000
Mothers Work, Inc. 202,000 (70,003) -- 2,424,000
ShoLodge, Inc. 375,600 -- -- 2,676,150
Taco Cabana, Inc. 825,000 (1,445,882) -- 5,723,437
Tel-Save.com, Inc. 6,471,100 694,640 -- 77,248,756
------------- ----------- ------------
$ (2,404,374) $ 1,001,936 $737,651,327
============= =========== ============
</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,
1998, the Fund owned the following restricted securities (constituting 0.10%
of net assets) which may not be publicly sold without registration under the
Securities Act of 1933. The Fund does not have the right to demand that such
securities be registered. The value of these securities is determined by
valuations furnished by dealers or by a pricing service, or if not available,
are valued at fair value as determined in good faith by or at the direction of
the Trustees.
<TABLE>
<CAPTION>
DATE OF SHARE/
DESCRIPTION ACQUISITION PAR AMOUNT COST VALUE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Copley Partners 1 12/6/86 3,000,000 $ 1,437,794 $ 439,350
Copley Partners 2 12/2/86 - 8/9/91 3,000,000 2,451,234 1,262,100
Highland Capital Partners 6/28/88 - 6/28/93 7,500,000 4,636,048 937,500
Jarvis Hotels PLC 6/21/96 98,300 264,282 200,903
Republic Industries, Inc. 5/15/96 6,505,000 227,897,500 110,585,000
------------
$113,424,853
============
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Trustees of the MFS Series Trust II and the 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, 1998, the
related statement of operations for the year then ended, the statement of
changes in net assets for the years ended November 30, 1998 and 1997, and the
financial highlights for each of the years in the five-year period ended
November 30, 1998. 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 securities
owned at November 30, 1998 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 the MFS Emerging
Growth Fund at November 30, 1998, 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 8, 1999
<PAGE>
- --------------------------------------------------------------------------------
FEDERAL TAX INFORMATION
- --------------------------------------------------------------------------------
IN JANUARY 1999, SHAREHOLDERS WERE MAILED A TAX FORM SUMMARY REPORTING
THE FEDERAL TAX STATUS OF ALL DISTRIBUTIONS PAID DURING THE CALENDAR
YEAR 1998.
THE FUND HAS DESIGNATED $67,283,185 AS A CAPITAL GAIN DIVIDEND.
FOR THE YEAR ENDED NOVEMBER 30, 1998, THE AMOUNT OF DISTRIBUTIONS FROM
INCOME ELIGIBLE FOR THE 70% DIVIDENDS RECEIVED DEDUCTION FOR
CORPORATIONS CAME TO 36.99%.
- --------------------------------------------------------------------------------
<PAGE>
<TABLE>
MFS(R) EMERGING GROWTH FUND
<S> <C>
TRUSTEES SECRETARY
Richard B. Bailey* - Private Investor; Stephen E. Cavan*
Former Chairman and Director (until 1991),
MFS Investment Management ASSISTANT SECRETARY
James R. Bordewick, Jr.*
Marshall N. Cohan - Private Investor
CUSTODIAN
Lawrence H. Cohn, M.D. - Chief of Cardiac State Street Bank and Trust Company
Surgery, Brigham and Women's Hospital;
Professor of Surgery, Harvard Medical School AUDITORS
Deloitte & Touche LLP
The Hon. Sir J. David Gibbons, KBE - Chief
Executive Officer, Edmund Gibbons Ltd.; INVESTOR INFORMATION
Chairman, Colonial Insurance Company, Ltd. For MFS stock and bond market outlooks, call
toll free: 1-800-637-4458 anytime from a
Abby M. O'Neill - Private Investor touch-tone telephone.
Walter E. Robb, III - President and Treasurer, For information on MFS mutual funds, call your
Benchmark Advisors, Inc. (corporate financial financial adviser or, for an information kit,
consultants); President, Benchmark Consulting call toll free: 1-800-637-2929 any business day
Group, Inc. (office services) from 9 a.m. to 5 p.m. Eastern time (or leave a
message anytime).
Arnold D. Scott* - Senior Executive
Vice President, Director, and Secretary, INVESTOR SERVICE
MFS Investment Management MFS Service Center, Inc.
P.O. Box 2281
Jeffrey L. Shames* - Chairman, Chief Executive Boston, MA 02107-9906
Officer, and Director, MFS Investment
Management For general information, call toll free:
1-800-225-2606 any business day from 8 a.m. to
J. Dale Sherratt - President, Insight Resources, 8 p.m. Eastern time.
Inc. (acquisition planning specialists) Ward
Smith - Former Chairman (until 1994), NACCO For service to speech- or hearing-impaired,
Industries (holding company) call toll free: 1-800-637-6576 any business day
from 9 a.m. to 5 p.m. Eastern time. (To use
INVESTMENT ADVISER this service, your phone must be equipped with
Massachusetts Financial Services Company a Telecommunications Device for the Deaf.)
500 Boylston Street
Boston, MA 02116-3741 For share prices, account balances, and
exchanges, call toll free: 1-800-MFS-TALK
DISTRIBUTOR (1-800-637-8255) anytime from a touch-tone
MFS Fund Distributors, Inc. telephone.
500 Boylston Street
Boston, MA 02116-3741 WORLD WIDE WEB
www.mfs.com
PORTFOLIO MANAGER
John W. Ballen*
TREASURER
W. Thomas London*
ASSISTANT TREASURERS
Mark E. Bradley*
Ellen Moynihan*
James O. Yost*
*Affiliated with the Investment Adviser
</TABLE>
<PAGE>
----------------
MFS(R) EMERGING Bulk Rate
GROWTH FUND U.S. Postage
Paid
MFS
----------------
[Logo] M F S(R
INVESTMENT MANAGEMENT
We invented the mutual fund(R)
500 Boylston Street
Boston, MA 02116-3741
(c)1998 MFS Fund Distributors, Inc., 500 Boylston Street, Boston, MA 02116-3741
MEG-2 1/99 938M 07/207/307/807
