<PAGE> 1
John Hancock Funds
- -------------------------------------------------------------------------------
GROWTH
FUND
ANNUAL REPORT
December 31, 1994
<PAGE> 2
TRUSTEES
EDWARD J. BOUDREAU, JR.
Chairman
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
GAIL D. FOSLER
BAYARD HENRY*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
MICHAEL P. DICARLO
Senior Vice President
JAMES K. HO
Senior Vice President
JOHN A. MORIN
Vice President
SUSAN S. NEWTON
Vice President, Assistant Secretary and
Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTORS SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS -2116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
With 1995 upon us, New Year's resolutions abound. Dieting and saving money --
Americans' long-time favorites -- are sure to top the list once again. And once
again, they'll probably be the most difficult to keep. This year, however,
Congress may give savers an additional incentive to stick to their guns.
Both the Republicans and Democrats want to revive Individual Retirement
Accounts (IRAs). In an effort to encourage savings, IRAs were made available to
all working Americans in 1981. Anyone with earned income could contribute up to
$2,000 annually. The contributions were fully tax-deductible, and the earnings
weren't taxed until withdrawal. IRAs became the most successful savings program
in the U.S., drawing in more than $250 billion and 13 million new participants
by 1985.
Sweeping tax reforms in 1986, however, changed all that. As it stands now,
the full deduction only applies to individuals who earn less than $25,000,
married couples who earn less than $40,000 and people without employer-sponsored
retirement plans. The result of this congressional tinkering: the number of IRA
contributors declined dramatically, from 16.2 million in 1985 to 4.2 million in
1992.
Legislators are now taking a closer look at expanding the accessibility of
IRAs once again. Several proposals are on the table: (1) the Republicans'
"Contract with America" includes the American Dream Savings Account, a type of
IRA; (2) President Clinton has proposed expanding eligibility by raising income
limits; and (3) several congressional representatives have introduced
legislation to restore the universal availability of a fully tax-deductible IRA.
We enthusiastically support restoring IRAs to their original luster. Not
only will they provide a tax break to middle-income Americans, but they'll go a
long way toward raising the nation's dangerously low personal savings rate --
the lowest of any major industrialized country. There's an increasing awareness
that Social Security and pension plans will no longer provide for the retirement
needs of middle-income Americans. Increasing IRA accessibility for more working
individuals and families is one of the most sensible ways to help Americans take
responsibility for their future financial needs. We urge you to support the
expanded IRA by contacting your congressional representative or senator.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 3
BY ROBERT G. FREEDMAN, CHIEF INVESTMENT OFFICER AND
BENJAMIN J. WILLIAMS JR., PORTFOLIO MANAGER
JOHN HANCOCK
GROWTH FUND
Rising interest rates hurt growth stocks in 1994;
prospects appear better in 1995
Effective January 1, 1995, Robert G. Freedman, who has managed John Hancock
Growth Fund since 1993, assumed full-time responsibility as vice chairman and
chief investment officer of John Hancock Funds. Benjamin J. Williams, Jr., who
joined John Hancock in 1990, has been named portfolio manager. Mr. Williams also
manages John Hancock Global Rx Fund. What follows is Mr. Freedman's discussion
of the Fund's performance in 1994 and Mr. Williams' outlook and strategy for
1995.
[A 2 3/8" x 2 3/8" photo of Robert G. Freedman and Benjamin J. Williams, Jr. at
bottom right. Caption reads: "Robert J. Freedman (left) and Benjamin J.
Williams, Jr. (right)]
Victims of rising interest rates, stocks stumbled in 1994 despite a strong
economy and rising corporate profits. In the first half of the year, growth
stocks were among the most severely impacted. During that time, investors
favored cyclical stocks, which benefit more from an improving economy than their
growth counterparts.
By the third quarter, however, that trend reversed. Fears that higher
interest rates would slow the economy drove investors out of cyclicals and into
growth stocks -- which tend to generate steady earnings regardless of the
economic environment. Some of our largest, highest-quality holdings benefited
from the growth stock resurgence. After slumping in the first half, Coca-Cola,
McDonald's and Walt
[CAPTION]
"...STOCKS STUMBLED IN 1994 DESPITE A STRONG ECONOMY..."
3
<PAGE> 4
John Hancock Funds - Growth Fund
[Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) Motorola 3.1% 2) McDonald's 2.9% 3) Adaptec
2.6% 4) Polygram N.V. 2.3% 5) HBO & Co. 2.3%. A footnote below reads: "As a
percentage of net assets on December 31, 1994."]
Disney jumped in the second half, recouping some of their losses by year-end.
Unfortunately, the ground we gained in the second half wasn't enough to
help the Fund come out ahead of its average competitor in 1994. For the twelve
months ended December 31, 1994, John Hancock Growth Fund's Class A, B and C
shares had total returns of -7.50%, -6.56% and -7.07%, respectively, at net
asset value. Those compared to a return of -2.15% for the average growth fund,
according to Lipper Analytical Services.1 The primary reason for the difference
in performance is that the Growth Fund is invested more aggressively than many
of its peers. So when the market turned down in the first half, our stocks were
hit harder. However, when growth stocks rebounded in the second half, many of
our stocks led the way. For the six months ended December 31, 1994, the Fund's
Class A, B and C shares returned 8.73%, 8.40% and 9.02%, respectively, at net
asset value. The average growth fund posted a return of 4.07% for the same
period.
RESPONSE TO RISING RATES
During the year, we took measures to minimize the Fund's vulnerability to the
market's volatility. First, we moved out of more volatile, smaller company
growth stocks and emphasized larger, less volatile companies. Second, we raised
the Fund's cash level -- to as high as 15% in the third quarter. Though neither
of these measures proved enough to protect the Fund entirely from losses, they
did help stem the decline. There was an additional upside: The extra cash we had
on hand in the fourth quarter allowed to us to buy stocks at very attractive
prices.
FOCUS ON SECTORS
At about 15%, health care remained one of the Fund's largest sector
concentrations throughout the period. As the near-term prospect for nationally
mandated health-care reform evaporated, we emphasized companies that specialize
in cost containment and alternative care. Holdings include Health Management
Associates, Value Health and HBO & Co. We've also added drug stocks, including
Pfizer and Johnson & Johnson. After taking a beating in the last few years,
these stocks were attractively priced. What's more, both companies far outpaced
many of their competitors with double-digit sales.
Technology stocks -- which made up about 20% of the Fund's assets -- once
again lived up to their volatile nature. For that reason, we continued to favor
technology companies we believe can successfully ride out the market's
technical, short-term ups and downs. Despite
[Table entitled "Scorecard" at bottom of left hand column. The header for the
left column is "Investment"; the header for the right column is "Recent
performance ... and what's behind the numbers." The first listing is Motorola
followed by an up arrow and the phrase "Wireless/semiconductor business takes
off." The second listing is International Game Technology followed by a down
arrow and the phrase "Gaming stocks roll snake eyes." The third listing is
Telefonos de Mexico followed by a down arrow and the phrase "Troubles in Mexican
market." Footnote below reads: "See "Schedule of Investments. "Investment
holdings are subject to change."]
[CAPTION]
"...WE TOOK MEASURES TO MINIMIZE THE FUND'S VULNERABILITY..."
4
<PAGE> 5
John Hancock Funds - Growth Fund
[Bar chart with heading " Fund Performance" at top of left hand column. Under
the heading is the footnote: "For the year ended December 31, 1994." The chart
is scaled in increments of 5% from bottom to top, with 0% at the top and -10%
at the bottom. Within the chart, there are four solid bars. The first
represents the -7.50% total return for John Hancock Growth Fund: Class A. The
second represents the -6.56% total return for John Hancock Growth Fund: Class
B. The third represents the -7.07% total return of John Hancock Growth Fund:
Class C. The fourth represents the -2.15% total return for the average growth
fund. The footnote below states: "Total returns for John Hancock Growth Fund
are at net asset value with all distributions reinvested. The average growth
fund is tracked by Lipper Analytical Services. See following page for
historical performance information."]
a difficult environment, companies with leadership positions in their industries
- -- like Motorola -- escaped the sector's volatility and proved to be big
winners. Even though personal computer companies posted record sales in 1994, we
avoided them. Because personal computer (PC) sales can vary widely from season
to season, we're more comfortable owning networking and other companies that
will benefit from the personal computer boom but aren't as sensitive to PC sales
cycles. Adaptec, one of our largest holdings, is a good example. During the
year, we also added on-line companies like America Online (AOL), whose stock has
jumped more than 60% from when we bought it in the fourth quarter. With more
consumers and businesses tapping into the Internet, AOL's earnings picture is
bright.
Apparel retailers turned in mixed results for the year, partly due to
unseasonably warm winter weather across the country. However, we think that
high-quality companies like AnnTaylor and Nordstrom can continue to post
attractive rates of earnings growth. Since stock prices tend to follow earnings,
we expect that their stock prices will eventually turn around.
STRATEGY SHIFTS AND OUTLOOK
As always, we'll remain committed to investing in companies that have dynamic
growth with above-average earnings potential. However, we'll most likely make
two modifications. We'll pare back the number of holdings in the Fund and we'll
concentrate more on large-capitalization growth stocks.
Looking out into 1995, the Federal Reserve Board will probably make
additional interest rates hikes, although it's unlikely those increases will be
as dramatic as those in 1994. Given that, the stock market as a whole could
remain choppy for at least the first several months of 1995 -- and perhaps for
the entire year.
Still, we're optimistic about growth stocks. Once the Fed is convinced that
inflation is in check and economic growth has slowed, interest rates should
stabilize and provide a better backdrop for the stock market. And if interest
rates do stop rising -- which we think they might by mid-year -- and economic
growth remains slow but steady, prospects for growth stocks could be good. In
that kind of environment, investors will likely continue to shift out of
cyclical stocks -- since their earnings would be vulnerable to a slower economy
- -- and into growth stocks. That renewed investor interest, in turn, could help
boost the prices of growth stocks and help the Fund's performance.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance would be
lower.
[CAPTION]
"...WE'RE OPTIMISTIC ABOUT GROWTH STOCKS."
5
<PAGE> 6
NOTES TO PERFORMANCE INFORMATION
John Hancock Funds - Growth Fund
In accordance with the reporting requirements of the Securities and Exchange
Commission, the following data are supplied for the periods ended December 31,
1994 with all distributions reinvested in shares. The average annualized total
returns for Class A shares for the 1-year, 5-year and 10-year periods were
(12.14%), 6.47%, and 11.90%, respectively, and reflect payment of the maximum
sales charges of 5.0%. Total return (not annualized) since inception on January
3, 1994 for Class B shares was (11.23%) and reflects the applicable contingent
deferred sales charge (maximum contingent deferred sales charge is 5% and
declines to 0% over 6 years). The average annualized total returns for the
1-year period and since inception on May 7, 1993 for Class C shares were (7.07%)
and 4.21%, respectively. All performance data shown represent past performance,
and should not be considered indicative of future performance. Returns and
principal values of Fund investments will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Different sales charges for Class A shares were in effect prior to January 2,
1992 (maximum sales charge of 8.5%) and are not reflected in the above
performance information. Performance is affected by a 12b-1 plan, which
commenced on January 1, 1990 and January 3, 1994 for Class A and Class B shares,
respectively. Class C shares are sold at net asset value to certain institutions
and retirement accounts.
HYPOTHETICAL $10,000 INVESTMENT OVER LIFE OF THE FUND (OR MOST RECENT TEN YEARS)
[Growth Fund
Class A shares
Line chart with the heading Growth Fund: Class A, representing the growth of a
hypothetical $10,000 investment over the life of the fund (or most recent 10
years). Within the chart are three lines. The first line represents the value of
the Standard & Poor's 500 Stock Index and is equal to $38,268 as of December
31, 1994. The second line represents Growth Fund before sales charge and is
equal to $32,414 as of December 31, 1994. The third line represents the Growth
Fund after sales charge and is equal to $30,790 as of December 31, 1994.
Growth Fund
Class B shares
Line chart with the heading Growth Fund: Class B, representing the growth of a
hypothetical $10,000 investment over the life of the fund (or most recent 10
years). Within the chart are three lines. The first line represents the value of
the Standard & Poor's 500 Stock Index and is equal to $10,131 as of December
31, 1994. The second line represents the Growth Fund before contingent deferred
sales charge and is equal to $9,344 as of December 31, 1994. The third line
represents Growth Fund after contingent deferred sales charge and is equal to
$8,877 as of December 31, 1994.
Growth Fund
Class C shares
Line chart with the heading Growth Fund: Class C, representing the growth of a
hypothetical $10,000 investment over the life of the fund (or most recent 10
years). Within the chart are two lines. The first line represents the value of
the Standard & Poor's 500 Stock Index and is equal to $10,949 as of December 31,
1994. The second line represents the Growth Fund and is equal to $10,704 as of
December 31, 1994.
*The Standard & Poor's 500 Stock Index is an unmanaged index that includes 500
widely traded common stocks and is a commonly used measure of stock market
performance.]
6
<PAGE> 7
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1994. YOU'LL
ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF
THAT DATE.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Common and preferred stocks and other
investments (cost - $99,222,702) ................................... $133,044,530
Publicly traded convertible bonds (cost - $650,000)................... 680,063
Joint repurchase agreement (cost - $18,236,000) ...................... 18,236,000
Corporate savings account ............................................ 217
------------
151,960,810
Receivable for shares sold ............................................. 2,016
Interest receivable .................................................... 11,045
Dividends receivable ................................................... 86,456
------------
Total Assets ................................... 152,060,327
---------------------------------------------------------------
LIABILITIES:
Payable to John Hancock Advisers, Inc. and
affiliates - Note B ................................................ 152,434
Accounts payable and accrued expenses ................................ 60,429
------------
Total Liabilities .............................. 212,863
---------------------------------------------------------------
NET ASSETS:
Capital paid-in ...................................................... 118,146,978
Accumulated net realized loss on investments ......................... ( 151,405)
Net unrealized appreciation of investments ........................... 33,851,891
------------
Net Assets ..................................... $151,847,464
===============================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding -- unlimited number of shares
authorized with no par value, respectively)
Class A - $146,466,468/9,218,162 ..................................... $ 15.89
=====================================================================================
Class B - $3,807,391/240,447 ......................................... $ 15.83
=====================================================================================
Class C - $1,573,605/98,220 .......................................... $ 16.02
=====================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($15.89 x 105.26%) ......................................... $ 16.73
=====================================================================================
</TABLE>
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
** Class B shares commenced operations on January 3, 1994
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
STATEMENT OF OPERATIONS
Year ended December 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $30,851) ............... $ 932,417
Interest .............................................................. 627,462
----------
1,559,879
----------
Expenses:
Investment management fee - Note B .................................... 1,231,294
Transfer agent fee - Note B
Class A ............................................................. 601,585
Class B ** .......................................................... 9,113
Class C ............................................................. 2,156
Distribution/service fee - Note B
Class A ............................................................. 451,377
Class B ** .......................................................... 21,705
Registration and filing fees .......................................... 59,064
Custodian fee ......................................................... 55,716
Printing .............................................................. 44,806
Auditing fee .......................................................... 34,700
Trustees' fees ........................................................ 16,215
Miscellaneous ......................................................... 10,798
Legal fees ............................................................ 8,130
----------
Total Expenses .................................. 2,546,659
---------------------------------------------------------------
Net Investment Loss ............................. ( 986,780)
---------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:
Net realized gain on investments sold ................................. 1,529,276
Change in net unrealized appreciation/depreciation
of investments ...................................................... ( 13,091,731)
----------
Net Realized and Unrealized
Loss on Investments ............................. ( 11,562,455)
---------------------------------------------------------------
Net Decrease in Net Assets
Resulting from Operations ....................... ($12,549,235)
===============================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 8
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
STATEMENT OF CHANGES IN NET ASSETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993
------------ ------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment loss........................................................................... ($ 986,780) ($ 1,051,228)
Net realized gain on investments sold ........................................................ 1,529,276 19,949,589
Change in net unrealized appreciation/depreciation of investments ............................ ( 13,091,731) 707,708
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations ........................... ( 12,549,235) 19,606,069
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Distributions from net realized gain on investments sold
Class A - ($0.2020 and $2.1376 per share, respectively) ............................. ( 1,850,208) ( 18,554,024)
Class B** - ($0.2020 and none per share, respectively) ................................... ( 43,984) --
Class C*** - ($0.2020 and $2.1376 per share, respectively) .............................. ( 18,255) ( 139,862)
------------ ------------
Total Distributions to Shareholders ...................................................... ( 1,912,447) ( 18,693,886)
------------ ------------
FROM FUND SHARE TRANSACTIONS -- NET* 2,086,820 10,252,971
NET ASSETS:
Beginning of period .......................................................................... 164,222,326 153,057,172
------------ ------------
End of period ................................................................................ $151,847,464 $164,222,326
============ ============
* ANALYSIS OF FUND SHARE TRANSACTIONS:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1994 1993
------------------------- -----------------------------
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ------------ ------------
CLASS A
Shares sold .................................................... 4,198,071 $71,177,794 7,812,551 $142,828,715
Shares issued to shareholders in reinvestment of distributions . 110,953 1,738,305 1,019,169 17,417,659
--------- ------------ ------------ ------------
4,309,024 72,916,099 8,831,720 160,246,374
Less shares repurchased ........................................ (4,457,375) ( 75,094,698) ( 8,300,651) ( 151,269,460)
--------- ------------ ------------ ------------
Net increase (decrease) ........................................ ( 148,351) ($ 2,178,599) 531,069 $ 8,976,914
========= =========== ============ ============
CLASS B **
Shares sold .................................................... 259,658 $ 4,192,534
Shares issued to shareholders in reinvestment of distributions . 2,737 42,721
--------- -----------
262,395 4,235,255
Less shares repurchased ........................................ ( 21,948) ( 347,495)
--------- -----------
Net increase ................................................... 240,447 $ 3,887,760
========= ===========
CLASS C ***
Shares sold .................................................... 30,518 $ 480,690 65,430 $ 1,136,195
Shares issued to shareholders in reinvestment of distributions . 1,121 17,646 8,165 139,862
--------- ----------- ----------- ------------
31,639 498,336 73,595 1,276,057
Less shares repurchased ........................................ ( 7,014) ( 120,677)
--------- ----------- ----------- ------------
Net increase ................................................... 24,625 $ 377,659 73,595 $ 1,276,057
========= =========== =========== ============
</TABLE>
** Class B shares commenced operations on January 3, 1994.
*** Class C shares commenced operations on May 7, 1993.
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 9
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated: investment returns, key ratios and supplemental data are as
follows:
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period .............................. $ 17.40 $ 17.32 $ 17.48 $ 12.93 $ 15.18
-------- -------- -------- -------- --------
Net Investment Income (Loss) ...................................... ( 0.10) ( 0.11) ( 0.06) 0.04 0.16
Net Realized and Unrealized Gain (Loss) on Investments ............ ( 1.21) 2.33 1.10 5.36 ( 1.47)
-------- -------- -------- -------- --------
Total from Investment Operations .................................. ( 1.31) 2.22 1.04 5.40 ( 1.31)
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .............................. -- -- -- ( 0.04) ( 0.16)
Distributions from Net Realized Gain on Investments Sold .......... ( 0.20) ( 2.14) ( 1.20) ( 0.81) ( 0.78)
-------- -------- -------- -------- --------
Total Distributions ............................................... ( 0.20) ( 2.14) ( 1.20) ( 0.85) ( 0.94)
-------- -------- -------- -------- --------
Net Asset Value, End of Period .................................... $ 15.89 $ 17.40 $ 17.32 $ 17.48 $ 12.93
======== ======== ======= ======== ========
Total Investment Return at Net Asset Value ........................ ( 7.50%) 13.03% 6.06% 41.68% ( 8.34%)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ......................... $146,466 $162,937 $153,057 $145,287 $102,416
Ratio of Expenses to Average Net Assets ........................... 1.65% 1.56% 1.60% 1.44% 1.46%
Ratio of Net Investment Income (Loss) to Average Net Assets ....... ( 0.64%) ( 0.67%) ( 0.36%) 0.27% 1.12%
Portfolio Turnover Rate ........................................... 52% 68% 71% 82% 102%
CLASS B (a)
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period .............................. $ 17.16 (b)
--------
Net Investment Loss ............................................... ( 0.20)(c)
Net Realized and Unrealized Loss on Investments ................... ( 0.93)
--------
Total from Investment Operations .................................. ( 1.13)
--------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold .......... ( 0.20)
--------
Net Asset Value, End of Period .................................... $ 15.83
========
Total Investment Return at Net Asset Value ........................ ( 6.56%)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (OOO's omitted) ......................... $ 3,807
Ratio of Expenses to Average Net Assets ........................... 2.38% (d)
Ratio of Net Investment Loss to Average Net Assets ................ ( 1.25%)(d)
Portfolio Turnover Rate ........................................... 52%
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 10
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, PERIOD ENDED
1994 DECEMBER 31, 1993(e)
------------ -----------------
<S> <C> <C>
CLASS C
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ........................... $ 17.46 $ 17.05 (b)
-------- --------
Net Investment Loss ............................................ ( 0.01) ( 0.02)
Net Realized and Unrealized Gain (Loss) on Investments ......... ( 1.23) 2.57
-------- --------
Total from Investment Operations ............................... ( 1.24) 2.55
-------- --------
Less Distributions:
Distributions from Net Realized Gain on Investments Sold ....... ( 0.20) ( 2.14)
-------- --------
Net Asset Value, End of Period ................................. $ 16.02 $ 17.46
======== ========
Total Investment Return at Net Asset Value ..................... ( 7.07%) ( 15.18%)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (OOO's omitted) ...................... $ 1,574 $ 1,285
Ratio of Expenses to Average Net Assets ........................ 1.12% 1.05% (d)
Ratio of Net Investment Loss to Average Net Assets ............. ( 0.08%) ( 0.17%)(d)
Portfolio Turnover Rate ........................................ 52% 68%
</TABLE>
(a) Class B shares commenced operations on January 3, 1994.
(b) Initial price at commencement of operations.
(c) On average month end shares outstanding.
(d) On an annualized basis.
(e) Class C shares commenced operations on May 7, 1993.
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: THE NET INVESTMENT INCOME, GAINS
(LOSSES), DISTRIBUTIONS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW
THE FUND'S NET ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS
PERIOD. ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN
THE FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 11
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY THE
GROWTH FUND ON DECEMBER 31, 1994. IT'S DIVIDED INTO FIVE MAIN CATEGORIES: COMMON
STOCKS, PREFERRED STOCKS, OTHER INVESTMENTS, PUBLICLY TRADED CONVERTIBLE BONDS
AND SHORT-TERM INVESTMENTS. THE INVESTMENTS ARE FURTHER BROKEN DOWN BY INDUSTRY
GROUPS. SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S "CASH" POSITION, ARE
LISTED LAST.
SCHEDULE OF INVESTMENTS
December 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
<S> <C> <C>
COMMON STOCKS
APPLIANCES - HOUSEHOLD (0.42%)
Fedders Corp.** .......................... 70,000* $ 498,750
Fedders Corp. (Class A)** ................ 25,000* 131,250
------------
630,000
------------
BANKS (0.87%)
West One Bancorp .......................... 50,000 1,325,000
------------
BEVERAGES (1.87%)
Coca-Cola Co. (The) ...................... 55,000 2,832,500
------------
BROADCASTING (5.52%)
Gaylord Entertainment Co. (Class A) ...... 100,000 2,275,000
Grupo Televisa S.A., Global
Depository Receipt (GDR) ............... 20,000 635,000
Infinity Broadcasting Corp. (Class A)** .. 90,000 2,835,000
Tele-Communications, Inc. (Class A)** .... 60,000 1,305,000
Telewest Communications PLC, American
Depositary Receipt, (ADR)** ............ 50,000* 1,325,000
------------
8,375,000
------------
BUILDING PRODUCTS (1.97%)
Home Depot, Inc. (The) ................... 65,000 2,990,000
------------
COMPUTERS (10.91%)
Adaptec, Inc.** .......................... 170,000 3,995,000
America Online, Inc.** ................... 40,000* 2,230,000
cisco Systems, Inc.** .................... 60,000 2,100,000
Computer Associates International, Inc. .. 50,000 2,425,000
EMC Corp.** .............................. 110,400 2,387,400
HBO & Co. ................................ 100,000* 3,425,000
------------
16,562,400
------------
COSMETICS & TOILETRIES (2.22%)
Gillette Co. (The) ....................... 45,000 3,363,750
------------
DRUGS (1.02%)
Pfizer, Inc. ............................. 20,000* 1,545,000
------------
ELECTRONICS (8.01%)
Molex Inc. (Class A) ..................... 75,000* 2,325,000
Motorola, Inc. ........................... 80,400 4,653,150
Scientific-Atlanta, Inc. ................. 100,000* 2,100,000
Vishay Intertechnology, Inc.** ........... 63,000 3,087,000
------------
12,165,150
------------
FINANCE (3.82%)
MBNA Corp. ............................... 120,000 2,805,000
Paychex, Inc. ............................ 75,000 3,000,000
------------
5,805,000
------------
FINANCIAL/BUSINESS SERVICES (0.47%)
Robert Half International, Inc.** ........ 30,000* 720,000
------------
FURNITURE (1.07%)
Heilig Meyers Co. ........................ 64,300* 1,623,575
------------
HEALTHCARE (8.44%)
Health Management Associates,
Inc. (Class A)** ....................... 90,000* 2,250,000
Humana, Inc.** ........................... 110,000* 2,488,750
Johnson & Johnson ........................ 35,000* 1,916,250
Physician Corp. of America** ............. 75,000* 1,518,750
United Healthcare Corp. .................. 70,000* 3,158,750
Value Health, Inc.** ..................... 40,000* 1,490,000
------------
12,822,500
------------
HOTELS & MOTELS (1.33%)
Doubletree Corp.** ....................... 40,000* 730,000
La Quinta Motor Inns, Inc. ............... 60,000* 1,282,500
------------
2,012,500
------------
LEISURE & RECREATION (6.34%)
Disney (Walt) Co., (The) ................. 70,000 3,228,750
International Game Technology ............ 90,000 1,395,000
PolyGram N.V. (ADR) ...................... 75,000 3,459,375
Promus Companies, Inc. (The)** ........... 50,000 1,550,000
------------
9,633,125
------------
LINEN SUPPLY (1.38%)
Cintas Corp. ............................. 60,000 2,100,000
------------
MEDICAL/DENTAL (1.60%)
Cardinal Health, Inc. .................... 52,500* 2,434,687
------------
MOTION PICTURES (1.48%)
King World Productions, Inc.** ........... 65,000 2,242,500
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 12
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
<TABLE>
<CAPTION>
ISSUER, DESCRIPTION NUMBER OF SHARES MARKET VALUE
- ------------------- ---------------- ------------
<S> <C> <C>
NURSING HOMES (3.34%)
Health Care & Retirement** ............... 100,000 $ 3,012,500
Manor Care, Inc. ......................... 75,000* 2,053,125
------------
5,065,625
------------
OFFICE EQUIPMENT & SUPPLIES (1.26%)
Office Depot, Inc.** ..................... 80,000* 1,920,000
------------
PUBLISHING (1.90%)
News Corp. Ltd. (The) (ADR) .............. 50,000* 781,250
Time Warner, Inc. ........................ 60,000 2,107,500
------------
2,888,750
------------
RESTAURANTS (3.67%)
Brinker International, Inc.** ............ 65,000 1,178,125
McDonald's Corp. ......................... 150,000 4,387,500
------------
5,565,625
------------
RETAIL (12.84%)
Albertson's, Inc. ........................ 70,000 2,030,000
AnnTaylor Stores, Corp.** ................ 70,000 2,406,250
Barnes & Noble, Inc.** ................... 25,000* 781,250
CUC International, Inc.** ................ 70,000 2,345,000
Dollar General Corp. ..................... 100,000 2,950,000
Gap, Inc. (The) .......................... 60,000* 1,830,000
Nordstrom, Inc. .......................... 40,000* 1,680,000
Sports & Recreation, Inc. ................ 80,000* 2,060,000
Sports Authority, Inc. (The)** ........... 21,000* 441,000
Wal-Mart Stores, Inc. .................... 140,000 2,975,000
------------
19,498,500
------------
TELECOMMUNICATIONS (5.05%)
Airtouch Communications, Inc.** .......... 70,000* 2,038,750
LDDS Communications, Inc.** .............. 50,000* 968,750
Telefonos de Mexico, S.A., (ADR) ......... 40,000* 1,640,000
Vodafone Group PLC (ADR) ................. 90,000 3,026,250
------------
7,673,750
------------
TEXTILES (0.59%)
Tommy Hilfiger Corp.** ................... 20,000* 902,500
------------
TOTAL COMMON STOCKS
(Cost $98,751,932) ( 87.39%) 132,697,437
------- ------------
PREFERRED STOCK
PUBLISHING (0.23%)
News Corp. Ltd. (The) ADR ................ 25,000* 346,875
------------
TOTAL PREFERRED STOCK
(Cost $399,895) ( 0.23%) 346,875
------- ------------
OTHER INVESTMENTS
DRUGS (0.00%)
Lilly (Eli) & Co., Contingent
Payment Units** ........................ 14,000 218
------------
TOTAL OTHER INVESTMENT
(COST $ 70,875) ( 0.00%) 218
------- ------------
TOTAL COMMON STOCKS,
PREFERRED STOCKS AND
OTHER INVESTMENTS
(COST $ 99,222,702) ( 87.62%) 133,044,530
------- ------------
</TABLE>
<TABLE>
<CAPTION>
INTEREST S&P PAR VALUE
RATE RATING*** (000'S OMITTED)
-------- ------ ---------------
<S> <C> <C> <C>
PUBLICLY TRADED
CONVERTIBLE BONDS
TOYS/GAMES/
HOBBY PRODUCTS (0.44%)
Hasbro, Inc.
Conv. Sub.
Note 11-15-98 ....... 6.00% A- $ 650 680,063
------------
TOTAL PUBLICLY TRADED
CONVERTIBLE BONDS
(Cost $ 650,000) ( 0.44%) 680,063
------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 13
FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
<TABLE>
<CAPTION>
INTEREST PAR VALUE
ISSUER, DESCRIPTION RATE (000'S OMITTED) MARKET VALUE
- ------------------- -------- --------------- ------------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (12.01%)
Investment in a joint
repurchase agreement
transaction with Lehman
Bros., Inc. - Dated 12-30-94,
Due 01-03-95 (Secured
by US Treasury Bonds,
9.25% due 02-15-16; and
8.125% due 08-15-21; and
US Treasury Notes, 5.50%
due 02-15-95 and 4.625%
due 08-15-95) ..................... 5.85% $18,236 $ 18,236,000
------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust
Company Daily Interest
Savings Account
Current Rate 3.00% ................ 217
------------
TOTAL SHORT-TERM INVESTMENTS ( 12.01%) 18,236,217
-------- ------------
TOTAL INVESTMENTS (100.07%) $151,960,810
======= ============
</TABLE>
* Securities, other than short-term investments, newly added to the portfolio
during the year ended December 31, 1994.
** Non-income producing securities.
*** Credit ratings are unaudited.
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust"), is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series portfolios: John Hancock Growth Fund (the "Fund") and John Hancock
Special Value Fund. The Trustees have authorized the issuance of multiple
classes of the Fund, designated as Class A, Class B and Class C. The shares of
each class represent an interest in the same portfolio of investments of the
Fund and have equal rights to voting, redemptions, dividends and liquidation,
except that certain expenses, subject to the approval of the Trustees, may be
applied differently to each class of shares in accordance with current
regulations of the Securities and Exchange Commission and the Internal Revenue
Service. Shareholders of a class, which bears distribution/service expenses
under terms of a distribution plan, have exclusive voting rights regarding such
distribution plan. Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all its taxable income, including any net realized gain on
investments, to its shareholders. Therefore, no federal income tax provision is
required. Net capital losses of $151,430 attributable to security transactions
occurring after October 31, 1994 and are treated as arising on the first day
(January 1, 1995) of the Fund's next taxable year.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment securities
is recorded on the ex-dividend date. Interest income on investment securities is
recorded on the accrual basis. Foreign income may be subject to foreign
withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, and at
the same time and will be in the same amount, except for the effect of expenses
that may be applied differently to each class as explained previously.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes. Transfer
agent expenses and distribution/service fees if any, are calculated daily at the
class level based on the appropriate
14
<PAGE> 15
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
net assets of each class and the specific expense rate(s) applicable to each
class.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of (a) 0.80% of the first $250,000,000 of the Fund's
average daily net asset value, (b) 0.75% of the next $250,000,000 and (c) 0.70%
of the Fund's average daily net asset value in excess of $500,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are 2.5% of the first $30,000,000 of the
Fund's average daily net asset value, 2.0% of the next $70,000,000, and 1.5% of
the remaining average daily net asset value.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. Prior to January 1, 1995, JH
Funds was known as John Hancock Broker Distribution Services, Inc. For the
period ended December 31, 1994, JH Funds received net sales charges of $393,400.
Out of this amount, $59,810 was retained and used for printing prospectuses,
advertising, sales literature, and other purposes, $44,496 was paid as sales
commissions and first year service fees to unrelated broker-dealers, and
$289,094 was paid as sales commissions and first year service fees to sales
personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker Anthony,
Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"). The Adviser's
indirect parent, John Hancock Mutual Life Insurance Company, is the indirect
sole shareholder of Distributors and John Hancock Freedom Securities Corporation
and its subsidiaries, which include Tucker Anthony and Sutro, all of which are
broker-dealers.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended December 31,
1994 contingent deferred sales charges received by JH Funds amounted to $29,565.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds for
distribution and service expenses, at an annual rate not to exceed 0.30% of
Class A average daily net assets and 1.00% of Class B average daily net assets
to reimburse JH Funds for its distribution and service costs. Up to a maximum of
0.25% of such payments may be service fees as defined by the amended Rules of
Fair Practice of the National Association of Securities Dealers. Under the
amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor Services
Corporation, ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. Prior to January 1, 1995, Investor Services was known as John
Hancock Fund Services, Inc. For the period ended December 31, 1994, the Fund
paid Investor Services a monthly transfer agent fee equivalent, on an annual
basis, to 0.40%, 0.42% and 0.10% (0.40% prior to April 1, 1994) of the average
daily net asset value, attributable to Class A, Class B and Class C shares of
the Fund, respectively, plus out of pocket expenses incurred by Investor
Services on behalf of the Fund for proxy mailings. Effective January 1, 1995,
Class A and Class B shares will pay transfer agent fees based on transaction
volume and the number of shareholder accounts.
15
<PAGE> 16
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Growth Fund
Messrs. Edward J. Boudreau, Jr., Francis C. Cleary, Jr., (until December
14, 1994) and Richard S. Scipione are directors and/or officers of the Adviser,
and/or its affiliates as well as Trustees of the Fund. John Hancock Mutual Life
Insurance Company owns 400,000 Class A shares of beneficial interest of the
Fund. The compensation of unaffiliated Trustees is borne by the Fund.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended December 31, 1994, aggregated $74,445,236 and $95,019,524, respectively.
There were no purchases or sales of long-term obligations of the U.S. government
and its agencies during the period ended December 31, 1994.
The cost of investments owned at December 31, 1994 (excluding the corporate
savings account) for federal income tax purposes was $118,108,702. Gross
unrealized appreciation and depreciation of investments aggregated $38,739,795
and $4,887,904, respectively, resulting in net unrealized appreciation of
$33,851,891.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1994, the Fund has reclassified the
accumulated net investment loss $986,780 to capital paid-in. This represents the
cumulative amount necessary to report these balances on a tax basis, excluding
certain temporary differences, as of December 31, 1994. Additional adjustments
may be needed in subsequent reporting periods. These reclassifications, which
have no impact on the net asset value of the Fund, are primarily attributable to
certain differences in the computation of distributable income and capital gains
under federal tax rules versus generally accepted accounting principles.
16
<PAGE> 17
John Hancock Funds - Growth Fund
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock Growth Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Growth Fund (the "Fund"), one of the portfolios constituting John
Hancock Capital Series, including the schedule of investments, as of December
31, 1994, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and financial highlights for each of the five years in the period then
ended. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
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 as of
December 31, 1994, by correspondence with the custodian. 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, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of
John Hancock Growth Fund portfolio of John Hancock Capital Series at December
31, 1994, the results of its operations for the year then ended, the changes in
its net assets for each of the two years in the period then ended, and financial
highlights for each of the five years in the period then ended, in conformity
with generally accepted accounting principles.
[SIGNATURE]
/s/ Ernst & Young LLP
Boston, Massachusetts
February 13, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1994.
The Fund designated distributions to shareholders of $1,863,000 as
long-term capital gain dividends. Shareholders were mailed a 1994 U.S. Treasury
Department Form 1099-DIV in January 1995 representing their proportionate share.
United States Government Obligations: None of the 1994 income earned by the
Fund was derived from obligations of the U.S. government or its agencies. The
Fund did not have any assets invested in U.S. Treasury bond, bills, notes or
other U.S. Government Agencies at year end.
With respect to the Fund's ordinary taxable income for the fiscal year
ended December 31, 1994 none of the dividends qualify for the corporate
dividends received deduction.
For specific information on exemption provisions in your state, consult
your local state tax office or your tax adviser.
17
<PAGE> 18
NOTES
John Hancock Funds - Growth Fund
18
<PAGE> 19
NOTES
John Hancock Funds - Growth Fund
19
<PAGE> 20
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
[A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Growth Fund. It may be used as sales literature when preceded or accompanied by
the current prospectus, which details charges, investment objectives and
operating policies.
[A recycled logo in lower left hand corner with the caption " Printed on
Recycled Paper."]
JH 2000A 12/94
<PAGE> 21
John Hancock Funds
- --------------------------------------------------------------------------------
SPECIAL
VALUE
FUND
ANNUAL REPORT
December 31, 1994
<PAGE> 22
TRUSTEES
EDWARD J. BOUDREAU, JR.
Chairman
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
GAIL D. FOSLER*
BAYARD HENRY*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
MICHAEL P. DICARLO
Senior Vice President
JAMES K. HO
Senior Vice President
JOHN A. MORIN
Vice President
SUSAN S. NEWTON
Vice President, Assistant Secretary
and Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
INVESTMENT SUB-ADVISER
NM CAPITAL MANAGEMENT, INC.
7510 MONTGOMERY, N.E., SUITE 201
ALBUQUERQUE, NM 87109
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
With 1995 upon us, New Year's resolutions abound. Dieting and saving money --
Americans' long-time favorites -- are sure to top the list once again. And once
again, they'll probably be the most difficult to keep. This year, however,
Congress may give savers an additional incentive to stick to their guns.
Both the Republicans and Democrats want to revive Individual Retirement
Accounts (IRAs). In an effort to encourage savings, IRAs were made available to
all working Americans in 1981. Anyone with earned income could contribute up to
$2,000 annually. The contributions were fully tax-deductible, and the earnings
weren't taxed until withdrawal. IRAs became the most successful savings program
in the U.S., drawing in more than $250 billion and 13 million new participants
by 1985.
Sweeping tax reforms in 1986, however, changed all that. As it stands now,
the full deduction only applies to individuals who earn less than $25,000,
married couples who earn less than $40,000 and people without employer-sponsored
retirement plans. The result of this congressional tinkering: the number of IRA
contributors declined dramatically, from 16.2 million in 1985 to 4.2 million in
1992.
Legislators are now taking a closer look at expanding the accessibility of
IRAs once again. Several proposals are on the table: (1) the Republicans'
"Contract with America" includes the American Dream Savings Account, a type of
IRA; (2) President Clinton has proposed expanding eligibility by raising income
limits; and (3) several congressional representatives have introduced
legislation to restore the universal availability of a fully tax-deductible IRA.
We enthusiastically support restoring IRAs to their original luster. Not
only will it provide a tax break to middle-income Americans, but it will go a
long way toward raising the nation's dangerously low personal savings rate,
which is the lowest of any major industrialized country. There's an increasing
awareness that Social Security and pension plans will no longer provide for the
retirement needs of middle-income Americans. Increasing IRA accessibility for
more working individuals and families is one of the most sensible ways to help
Americans take responsibility for their future financial needs. We urge you to
support the expanded IRA by contacting your congressional representative or
senator.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 23
BY ANGELA BRISTOW, CFA,
FOR THE PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK
SPECIAL VALUE FUND
"The principle of maximum pessimism"
"In almost every activity of normal life people try to go where the outlook is
best. You look for a job in an industry with a good future or build a factory
where the prospects are best. But my contention is if you're selecting publicly
traded investments, you have to do the opposite. You're trying to buy a share at
the lowest possible price in relation to what that corporation is worth. And
there's only one reason a share goes to a bargain price: Because other people
are selling. There is no other reason. To get to a bargain price, you've got to
look for where the public is most frightened and pessimistic."
- - Sir John Templeton,
Forbes, January 16, 1995
Sir John Templeton's overriding principle of "maximum pessimism" weighs heavily
in our investment philosophy. At John Hancock Special Value Fund, we invest in
companies that few care about. We search for the neglected, shunned, forgotten,
ignored and avoided corners of the investment universe. We target fundamentally
sound companies whose stocks are significantly undervalued.
One extremely important point of differentiation between us and many other
value
[A 2 1/2" x 2 3/8" photo of the portfolio management team at bottom right.
Caption reads: "The Special Value Portfolio Management Team: Charles Womack
(left), Thomas Christopher (middle) and Angela Bristow (right)."]
[CAPTION]
"WE SEARCH FOR THE NEGLECTED, SHUNNED, FORGOTTEN...
CORNERS OF THE INVESTMENT UNIVERSE."
3
<PAGE> 24
John Hancock Funds - Special Value Fund
[Chart with the heading "Top Five Common Stock Holdings" at top of left hand
column. The chart lists five holdings: 1) James River Corporation 4.8%; 2)
Hanson PLC 4.8%; 3) Coors 4.7% ; 4) Gibson Greetings 4.7%; and 5) Dole Food
Company 4.7%. A footnote below states: "As a percentage of net assets on
December 31, 1994."]
managers, however, is that we take this principle of maximum pessimism and
combine it with the concept of "margin of safety." We focus on companies whose
market prices are below or near a conservative assessment of their instrinsic
value -- that is, the price a reasonable businessperson would pay for a
company's assets, net of all debts. This approach provides a margin of safety
against sustained price declines. Of course, there's no guarantee that the stock
won't fall, but it reduces the risk of a big drop. It also gives us the
fortitude and patience to wait out the pessimism.
TOUGH YEAR FOR THE MARKET, BUT NOT FOR US
1994 may have been a tough year for the stock market averages. But for us, it
wasn't different than any other year. We don't focus on whether the market goes
up or down. In fact, we completely ignore the day-to-day, quarter-to-quarter and
even year-to-year fluctuations in the mar- ket. And if you're a true long-term
investor, you should too.
Consistency is key to our approach at John Hancock Special Value Fund. We
simply spend our time looking for "average" companies that are selling at
below-average prices. Then, we give those companies plenty of time for their
stock prices to return to normal levels. Often that process can take four to
five years. We're willing to wait. In fact, here's an interesting bit of trivia
about John Hancock Special Value Fund which exemplifies our long-term approach:
In 1994, we didn't sell a single stock position out of the portfolio. We only
sold a small portion of our Coor's holding. We don't know how many mutual funds
can say that, but our guess is that it would be a small number.
Because of our long-term view, we don't believe that one-year returns are a
good barometer of performance. Virtually anything can happen in a given year;
it's simply not enough time to arrive at a meaningful conclusion. But in the
spirit of full and legal disclosure, we're pleased to report that John Hancock
Special Value Fund's Class A and Class B shares had total returns of 7.81% and
7.15%, respectively, at net asset value for the year ended December 31, 1994. By
comparison, the average growth and income fund had a total return of -0.94%,
according to Lipper Analytical Services.(1)
STOCK SPOTLIGHT
Dole Food Company is a stock we bought recently and serves as an example of our
value management style. The stock is extremely undervalued, selling at roughly
$25 a share. By the most conservative estimates of the company's intrinsic
value, it should be somewhere around $40 a share. So, in our view, there's
little downside risk -- or a substantial margin of safety.
"WE SIMPLY SPEND OUR TIME LOOKING FOR "AVERAGE" COMPANIES
THAT ARE SELLING AT BELOW-AVERAGE PRICES."
4
<PAGE> 25
John Hancock Funds - Special Value Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1994." The chart is
scaled in increments of 4% from bottom to top, with 8% at the top and -8% at the
bottom. Within the chart, there are three solid bars. The first represents the
7.81% total return for John Hancock Special Value Fund: Class A. The second
represents the 7.15% return for John Hancock Special Value Fund: Class B. The
third represents the -0.94% return for the average growth and income fund. The
footnote below states: "Total returns for John Hancock Special Value Fund are at
net asset value with all distributions reinvested. The average balanced fund is
tracked by Lipper Analytical Services. See following page for historical
performance information."]
Dole -- the world's number two banana producer -- is a classic case of a
depressed cyclical company. It's earning an extremely low rate of return on the
majority of its operating assets. That's primarily because of an oversupply of
bananas in the marketplace over the last few years. A fierce price war with its
chief competitor, Chiquita, has also put pressure on earnings. Everyone hates
the stock; investors are acting as if no one will ever eat another banana.
As a true value investor, we see this situation in an entirely different
light. Dole is the most efficient, low-cost producer of bananas in the world.
Management is not only extremely talented, but also dedicated to and focused on
enhancing shareholder value. In fact, CEO David Murdock owns 23% of the
company's stock. Banana consumption on a worldwide basis has grown consistently
faster than world GDP in the last decade. And that's not likely to change.
Bananas are simply at the bottom of a typical commodity cycle. Once the supply
and demand situation turns around -- and it will eventually -- so will Dole's
earnings and stock price in our opinion. We'll wait patiently until that time
comes.
WHAT'S AHEAD IN 1995?
People are always asking us: What's your outlook for the stock market? Our
response is: All we know is that there will be one. It's impossible to figure
out where the market is headed next. No one really knows, and it doesn't matter
to us. In our view, what matters is being consistent and maintaining a long-term
view. So as we start 1995, we're not going to concern ourselves with the Fed's
next move or predictions about first quarter earnings reports. We'll simply
continue to do what we've always done. We'll buy undervalued stocks, making sure
they have a margin of safety. Then, we'll patiently hold on until the rest of
the world becomes optimistic about them. At that point, we'll gladly sell them
to those who were not willing to buy at the point of maximum pessimism.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance would
be lower.
"...IT'S IMPOSSIBLE TO FIGURE OUT WHERE THE MARKET IS HEADED..."
5
<PAGE> 26
NOTES TO PERFORMANCE INFORMATION
John Hancock Funds - Special Value Fund
In accordance with the reporting requirements of the Securities and Exchange
Commission, the following data are supplied for the period ended December 31,
1994 with all distributions reinvested in shares. Total return (not annualized)
since inception on January 3, 1994 for Class A shares was 2.39% and reflects
payment of the maximum 5% sales charge. Total return (not annualized) since
inception on January 3, 1994 for Class B shares was 2.15% and reflects the
applicable contingent deferred sales charge (maximum contingent deferred sales
charge is 5% and declines to 0% over 6 years). The Adviser has undertaken
voluntarily to limit the Fund's expenses to the extent required to prevent
expenses from exceeding 0.40% of the Fund's average daily net asset value.
Without the limitation of expenses, the total return (not annualized) since
inception on January 3, 1994 would have been (2.45%) and (2.69%) on Class A and
B shares, respectively. All performance data shown represent past performance
and should not be considered indicative of future performance. Return and
principal values of Fund investments will fluctuate so that an investor's
shares, when redeemed, may be worth more or less than their original cost.
Performance is affected by a 12b-1 plan, which commenced on January 3, 1994 for
both Class A and Class B shares.
HYPOTHETICAL $10,000 INVESTMENT OVER LIFE OF THE FUND
[Special Value Fund
Class A shares
Line chart with the heading Special Value Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the
hypothetical $10,000 investment made in Special Value Fund on January 3, 1994,
before sales charge, and is equal to $10,781 as of December 30, 1994.. The
second line represents the Special Value Fund after sales charge and is equal
to $10,239 as of December 30, 1994. The third line represents the value of the
Standard & Poor's 500 Stock Index and is equal to $10,131 as of December 31,
1994.
Special Value Fund
Class B shares
Line chart with the heading Special Value Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the
hypothetical $10,000 investment made in the Special Value Fund on January 3,
1994, before contingent deferred sales charge, and is equal to $10,715 as of
December 30, 1994. The second line represents Special Value Fund after
contingent deferred sales charge and is equal to $10,215 as of December 30,
1994. The third line represents the value of the Standard & Poor's 500 Stock
Index and is equal to $10,131 as of December 30, 1994
* The Standard & Poor's 500 Stock Index is an unmanaged index that includes 500
widely traded common stocks and is a commonly used measure of stock market
performance.]
6
<PAGE> 27
FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1994. YOU'LL
ALSO FIND THE NET ASSET VALUE AND THE MAXIMUM OFFERING PRICE PER SHARE AS OF
THAT DATE.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Common stocks (cost - $6,944,216)................................................ $7,001,322
Joint repurchase agreement (cost - $940,000)..................................... 940,000
Corporate savings account........................................................ 7,382
----------
7,948,704
Receivable for shares sold ........................................................ 27,186
Interest receivable ............................................................... 324
Dividends receivable .............................................................. 11,881
Receivable from John Hancock Advisers, Inc. - Note B .............................. 106,624
Deferred organization expenses - Note A ........................................... 90,495
----------
Total Assets ................................................ 8,185,214
----------------------------------------------------------------------------
LIABILITIES:
Payable for investments purchased ................................................. 237,564
Payable to John Hancock Advisers, Inc. and affiliates - Note B .................... 152,686
Accounts payable and accrued expenses ............................................. 78,897
----------
Total Liabilities ........................................... 469,147
----------------------------------------------------------------------------
NET ASSETS:
Capital paid-in ................................................................... 7,658,961
Net unrealized appreciation of investments......................................... 57,106
----------
Net Assets .................................................. $7,716,067
============================================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial interest outstanding -
unlimited number of shares authorized with no par value, respectively)
Class A - $4,419,897/491,452 ...................................................... $ 8.99
==================================================================================================
Class B - $3,296,170/366,436 ...................................................... $ 9.00
==================================================================================================
MAXIMUM OFFERING PRICE PER SHARE *
Class A - ($8.99 x 105.26%)........................................................ $ 9.46
==================================================================================================
</TABLE>
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
STATEMENT OF OPERATIONS
For the period January 3, 1994 (commencement of operations) to December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends (net of foreign withholding taxes of $1,084) ............................ $ 65,944
Interest .......................................................................... 17,111
--------
83,055
--------
Expenses:
Investment management fee - Note B ................................................ 18,489
Distribution/service fee - Note B
Class A ......................................................................... 5,641
Class B ......................................................................... 7,607
Transfer agent fee - Note B
Class A ......................................................................... 5,641
Class B ......................................................................... 2,434
Custodian fee ..................................................................... 28,600
Registration and filing fees ...................................................... 27,706
Organization expense - Note A ..................................................... 22,376
Printing .......................................................................... 11,375
Auditing fee....................................................................... 7,500
Legal fees......................................................................... 935
Miscellaneous ..................................................................... 205
--------
Total Expenses .............................................. 138,509
Less Expenses Reimbursable by John Hancock Advisers, Inc. -
Note B ...................................................... ( 106,624)
--------------------------------------------------------------------------
Net Expenses................................................. 31,885
--------------------------------------------------------------------------
Net Investment Income ....................................... 51,170
--------------------------------------------------------------------------
UNREALIZED GAIN ON INVESTMENTS:
Change in net unrealized appreciation/depreciation of investments.................. 57,106
--------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations......... $108,276
==========================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE> 28
FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD
JANUARY 3, 1994
(COMMENCEMENT OF
OPERATIONS) TO
DECEMBER 31, 1994
-----------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income ................................................................... $ 51,170
Change in net unrealized appreciation/depreciation of investments ........................ 57,106
----------
Net Increase in Net Assets Resulting from Operations ................................. 108,276
----------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($0.1687 per share) .......................................................... ( 49,463)
Class B - ($0.1050 per share) .......................................................... ( 18,717)
----------
Total Distributions to Shareholders .................................................. ( 68,180)
----------
FROM FUND SHARE TRANSACTIONS -- NET* ....................................................... 7,175,971
----------
NET ASSETS:
Initial Investment by John Hancock Advisers, Inc. - Note A ............................... 400,000
Initial Investment by NM Capital Management, Inc. - Note A ............................... 100,000
----------
End of year .............................................................................. $7,716,067
==========
</TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY 3, 1994
(COMMENCEMENT OF OPERATIONS) TO
DECEMBER 31, 1994
-------------------------------
SHARES AMOUNT
--------- -----------
<S> <C> <C>
CLASS A
Shares sold .................................................................. 478,011 $4,269,587
Shares issued to shareholders in reinvestment of distributions ............... 4,403 39,080
------- ----------
482,414 4,308,667
Less shares repurchased ...................................................... ( 49,786) ( 445,803)
------- ----------
Net increase ................................................................. 432,628 3,862,864
Initial Investment by John Hancock Advisers, Inc. - Note A ................... 47,059 400,000
Initial Investment by NM Capital Management, Inc. - Note A ................... 11,765 100,000
------- ----------
Net increase and shares outstanding end of period ........................... 491,452 $4,362,864
======= ==========
CLASS B
Shares sold .................................................................. 390,508 $3,529,419
Shares issued to shareholders in reinvestment of distributions ............... 1,918 17,065
------- ----------
392,426 3,546,484
Less shares repurchased ...................................................... ( 25,990) ( 233,377)
------- ----------
Net increase and shares outstanding end of period ............................ 366,436 $3,313,107
======= ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 29
FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE PERIOD JANUARY 3, 1994
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1994
------------------------------
<S> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ........................................ $ 8.50(e)
------
Net Investment Income ....................................................... 0.18(b)
Net Unrealized Gain on Investments .......................................... 0.48
------
Total from Investment Operations .......................................... 0.66
------
Less Distributions:
Dividends from Net Investment Income ........................................ ( 0.17)
------
Net Asset Value, End of Period .............................................. $ 8.99
======
Total Investment Return at Net Asset Value(d) ............................. 7.81%(c)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ................................... $4,420
Ratio of Net Expenses to Average Net Assets** ............................... 0.99%*
Ratio of Adjusted Expenses to Average Net Assets(a) ......................... 4.98%*
Ratio of Net Investment Income to Average Net Assets......................... 2.10%*
Ratio of Adjusted Net Investment Income to Average Net Assets(a) ............ ( 1.89%)*
Portfolio Turnover Rate ..................................................... 0.3%
** Expense Reimbursement Per Share .......................................... $ 0.34(b)
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period ........................................ $ 8.50
-------
Net Investment Income ....................................................... 0.13(b)
Net Unrealized Gain on Investments .......................................... 0.48
-------
Total from Investment Operations .......................................... 0.61
-------
Less Distributions:
Dividends from Net Investment Income ........................................ ( 0.11)
-------
Net Asset Value, End of Period .............................................. $ 9.00
=======
Total Investment Return at Net Asset Value(d) ............................. 7.15%(c)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted) ................................... $3,296
Ratio of Net Expenses to Average Net Assets** ............................... 1.72%*
Ratio of Adjusted Expenses to Average Net Assets(a) ......................... 5.71%*
Ratio of Net Investment Income to Average Net Assets ........................ 1.53%*
Ratio of Adjusted Net Investment Income to Average Net Assets(a)............. ( 2.46%)*
Portfolio Turnover Rate...................................................... 0.3%
** Expense Reimbursement Per Share .......................................... $ 0.34(b)
</TABLE>
* On an annualized basis.
(a) On an unreimbursed basis.
(b) On average month end shares outstanding.
(c) Not annualized.
(d) Without the reimbursement, total investment return would have been lower.
(e) Initial price to commence operations.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 30
FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
SPECIAL VALUE FUND ON DECEMBER 31, 1994. IT'S DIVIDED INTO TWO MAIN CATEGORIES:
COMMON STOCKS AND SHORT-TERM INVESTMENTS. THE COMMON STOCKS ARE FURTHER BROKEN
DOWN BY INDUSTRY GROUPS. SHORT-TERM INVESTMENTS, WHICH REPRESENT THE FUND'S
"CASH" POSITION, ARE LISTED LAST.
SCHEDULE OF INVESTMENTS
December 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- ------
<S> <C> <C>
COMMON STOCKS
AIRCRAFT (12.99%)
AAR Corp. ................................................................. 25,400 $ 339,725
Boeing Co. (The) .......................................................... 6,800 317,900
Precision Castparts Corp. ................................................. 1,200 24,300
Thiokol Corp. ............................................................. 11,500 320,562
---------
1,002,487
---------
BEVERAGES (4.72%)
Coors (Adolph) Co. ........................................................ 21,600 364,500
---------
CHEMICALS (2.86%)
LeaRonal, Inc. ............................................................ 12,000 220,500
---------
DIVERSIFIED OPERATIONS (4.78%)
Hanson PLC, American Depositary Receipts .................................. 20,500 369,000
---------
ELECTRONIC INSTRUMENTS (2.08%)
Dynatech Corp.* .......................................................... 4,900 160,475
---------
FOODS (9.59%)
Archer-Daniels-Midland Co. ................................................ 6,615 136,434
Dole Food Co. ............................................................. 15,600 358,800
Rykoff-Sexton, Inc.* ..................................................... 12,000 244,500
---------
739,734
---------
INSURANCE (1.39%)
Alexander & Alexander Services Inc. ....................................... 5,800 107,300
---------
LEISURE & RECREATION (8.37%)
Outboard Marine Corp. ..................................................... 15,400 302,225
Russ Berrie & Co. Inc. .................................................... 25,000 343,750
---------
645,975
---------
MACHINERY (5.65%)
Harnischfeger Industries, Inc. ............................................ 5,700 160,313
Twin Disc, Inc. ........................................................... 15,200 275,500
---------
435,813
---------
OFFICE EQUIPMENT & SUPPLIES (4.31%)
Cross (A.T.) Co. .......................................................... 24,400 332,450
---------
OIL & GAS (6.74%)
Daniel Industries ......................................................... 24,900 329,925
Parker Drilling Co.* ...................................................... 40,000 190,000
---------
519,925
---------
PAPER (13.36%)
Gibson Greetings, Inc. .................................................... 24,600 362,850
Glatfelter (P.H.) Co. ..................................................... 19,200 297,600
James River Corp. of Virginia ............................................. 18,300 370,575
---------
1,031,025
---------
POLLUTION CONTROL (3.72%)
Calgon Carbon Corp. ....................................................... 27,700 287,388
---------
RETAIL (1.64%)
Mercantile Stores Co., Inc. ............................................... 3,200 126,400
---------
SHOES (2.20%)
Brown Group, Inc. ......................................................... 5,300 169,600
---------
TEXTILE (4.54%)
Delta Woodside Industries, Inc. ........................................... 30,500 350,750
---------
TRANSPORTATION - SHIP (1.79%)
Overseas Shipholding Group, Inc. .......................................... 6,000 138,000
---------
TOTAL COMMON STOCKS
(Cost $6,944,216) ( 90.73%) 7,001,322
------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 31
FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
<TABLE>
<CAPTION>
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000'S OMITTED) VALUE
- ------------------- -------- --------------- ------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
JOINT REPURCHASE AGREEMENT (12.18%)
Investment in a joint repurchas agreement
transaction with Lehman Brothers -
Dated 12-30-94, Due 01-03-95 (secured by
U.S. Treasury Bonds, 9.25% Due 02-15-16 and
8.125% Due 08-15-21, and by U.S. Treasury Notes,
5.500% Due 02-15-95 and 4.625% Due 08-15-95) Note A ........................ 5.85% 940 $ 940,000
----------
CORPORATE SAVINGS ACCOUNT (0.10%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 3.00% ......................................................... 7,382
----------
TOTAL SHORT-TERM INVESTMENTS ( 12.28%) 947,382
------- ----------
TOTAL INVESTMENTS (103.01%) $7,948,704
======= ==========
</TABLE>
* Non-income producing security
The percentage shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series portfolios: John Hancock Special Value Fund (the "Fund") and John
Hancock Growth Fund.
The Trustees have authorized the issuance of multiple classes of the Fund,
designated as Class A, Class B and Class C. The shares of each class represent
an interest in the same portfolio of investments of the Fund and have equal
rights to voting, redemption, dividends, and liquidation, except that certain
expenses, subject to the approval of the Trustees, may be applied differently to
each class of shares in accordance with current regulations of the Securities
and Exchange Commission and the Internal Revenue Service. Shareholders of a
class, which bears distribution/service expenses under the terms of a
distribution plan, have exclusive voting rights regarding such distribution
plan. No Class C shares of the Fund were issued and outstanding during the
period ended December 31, 1994. Significant accounting policies of the Fund are
as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies. It
will not be subject to Federal income tax on taxable earnings which are
distributed to shareholders.
DIVIDENDS, DISTRIBUTIONS AND INTEREST Dividend income on investment securities
is recorded on the ex-dividend date or, in the case of some foreign securities,
on the date thereafter when the Fund is made aware of the dividend. Interest
income on investment securities is recorded on the accrual basis. Foreign income
may be subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment
income and realized gains on the ex-dividend date. Such distributions are
determined in conformity with income tax regulations, which may differ from
generally accepted accounting principles. Dividends paid by the Fund with
respect to each class of shares will be calculated in the same manner, at the
same time and will be in the same amount, except for the effect of expenses that
may be applied differently to each class as explained previously.
EXPENSES The majority of the expenses of the Trust are directly identifiable to
an individual Fund. Expenses which are not readily identifiable to a specific
Fund are allocated in such a manner as deemed equitable, taking into
consideration, among other things, the nature and type of expense and the
relative sizes of the Funds.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes. Transfer
agent expenses and distribution/service fees, if any, are calculated daily at
the class level based on the appropriate
12
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
net assets of each class and the specific expense rate(s) applicable to each
class.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS The Fund may enter into forward
foreign currency exchange contracts as a hedge against the effect of
fluctuations in currency exchange rates. A forward foreign currency exchange
contract involves an obligation to purchase or sell a specific currency at a
future date at a set price. The aggregate principal amounts of the contracts are
marked-to-market daily at the applicable foreign currency exchange rates. Any
resulting unrealized gains and losses are included in the determination of the
Fund's daily net assets. The Fund records realized gains and losses at the time
the forward foreign currency contract is closed out or offset by a matching
contract. Risks may arise upon entering these contracts from potential inability
of counterparties to meet the terms of the contract and from unanticipated
movements in the value of a foreign currency relative to the U.S. dollar.
There were no open foreign currency forward contracts at December 31, 1994.
FOREIGN CURRENCY TRANSLATION All assets or liabilities initially expressed in
terms of foreign currencies are translated into U.S. dollars based on London
currency exchange quotations as of 5:00 p.m., London time, on the date of any
determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/loss on investments are
translated at the rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations
resulting from changes in foreign exchange rates on investments from the
fluctuations arising from changes in market prices of securities held. Such
fluctuations are included with the net realized and unrealized gain or loss from
investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
amounts of dividends, interest, and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains and losses arise from changes in the
value of assets and liabilities other than investments in securities, resulting
from changes in the exchange rate.
OPTIONS Listed options are valued at the last quoted sales price on the exchange
on which they are primarily traded. Over-the-counter options are valued at the
mean between the last bid and asked prices. Upon the writing of a call or put
option, an amount equal to the premium received by the Fund is included in the
Statement of Assets and Liabilities as an asset and corresponding liability. The
amount of the liability is subsequently marked-to-market to reflect the current
market value of the written option.
There were no written option transactions for the period ended December 31,
1994.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts for speculative purposes and/or to hedge against the effects of
fluctuations in interest rates, currency exchange rates and other market
conditions. At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
government securities, known as "initial margin", equal to a certain percentage
of the value of the financial futures contract being traded. Each day, the
futures contract is valued at the official settlement price of the board of
trade or U.S. commodities exchange. Subsequent payments, known as "variation
margin", to and from the broker are made on a daily basis as the market price of
the financial futures contract fluctuates. Daily variation margin adjustments,
arising from this "mark to market", are recorded by the Fund as unrealized gains
or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities.
13
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At December 31, 1994, there were no open positions in financial futures
contracts.
ORGANIZATION EXPENSE Expenses incurred in connection with the organization of
the Fund have been capitalized and are being charged to the Fund's operations
ratably over a five-year period that began with the commencement of investment
operations of the Fund.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser, for a continuous investment program equivalent,
on an annual basis, to the sum of 0.70% of the Fund's average daily net asset
value. Pursuant to a subadvisory agreement between the Adviser and an affiliated
company of the Adviser, NM Capital Management, Inc. (the "Sub-Adviser"), the
Adviser pays the Sub-Adviser 40% of the fee received by the Adviser for managing
the Fund. The Fund is not responsible for the sub-advisory fee.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares of beneficial interest, the
fee payable to the Adviser will be reduced to the extent of such excess, and the
Adviser will make additional arrangements necessary to eliminate any remaining
excess expenses. The current limits are 2.5% of the first $30,000,000 of the
Fund's average daily net asset value, 2.0% of the next $70,000,000 and 1.5% of
the remaining average daily net asset value.
The Adviser has voluntarily agreed to limit Fund expenses, including the
management fee (but not including the transfer agent fee and the 12b-1 fee), to
0.40% of the Fund's average daily net assets. Accordingly, the entire Adviser's
fee amounting to $18,489 has been waived and the Adviser has reimbursed the Fund
for the remaining excess expenses of $88,135. The Adviser reserves the right to
terminate this voluntary limitation in the future.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. Prior to January 1, 1995, JH
Funds was known as John Hancock Broker Distribution Services, Inc. For the
period ended December 31, 1994, JH Funds received net sales charges of $68,494
with regard to sales of Class A shares. Out of this amount, $10,855 was retained
and used for printing prospectuses, advertising, sales literature and other
purposes, $27,444 was paid as sales commissions to unrelated broker-dealers and
$30,195 was paid as sales commissions to sales personnel of John Hancock
Distributors, Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker
Anthony") and Sutro & Co., Inc. ("Sutro"). The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company, is the indirect sole shareholder of
Distributors and John Hancock Freedom Securities Corporation and its
subsidiaries, which include Tucker Anthony and Sutro, all of which are
broker-dealers.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from the CDSC are paid to JH Funds and are used in whole or in part to defray
its expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended December 31,
1994, contingent deferred sales charges received by JH Funds amounted to
$17,021.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B pursuant to Rule 12b-1 under the Investment
Company Act of 1940. Accordingly, the Fund will make payments to JH Funds, for
distribution and service expenses at an annual rate not to exceed 0.30% of Class
A average daily net assets and 1.00% of Class B average daily net assets to
reimburse JH Funds for its distribution/service costs. Up to a maximum of 0.25%
of such
14
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Special Value Fund
payments may be service fees as defined by the amended Rules of Fair Practice of
the National Association of Securities Dealers. Under the amended Rules of Fair
Practice, curtailment of a portion of the Fund's 12b-1 payments could occur
under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor Services
Corporation, ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. Prior to January 1, 1995, Investor Services was known as John
Hancock Fund Services, Inc. The Fund pays Investor Services a monthly transfer
agent fee equivalent, on an annual basis, to 0.30% and 0.32% of the average
daily net asset value of Class A and Class B shares of the Fund, respectively,
plus out of pocket expenses incurred by Investor Services on behalf of the Fund
for proxy mailings. Effective January 1, 1995, Class A and Class B shares will
pay transfer agent fees based on transaction volume and the number of
shareholder accounts.
Messrs. Edward J. Boudreau, Jr., Francis C. Cleary, Jr. (until December 14,
1994), and Richard S. Scipione are directors and/or officers of the Adviser,
and/or its affiliates as well as Trustees of the Fund. The compensation of
unaffiliated Trustees is borne by the Fund. The Adviser and NM Capital
Management, Inc. own 47,062 and 11,765 Class A shares of beneficial interest of
the Fund, respectively.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligation of the
U.S. government and its agencies and short-term securities, during the period
ended December 31, 1994 aggregated $6,952,091 and $7,875, respectively. There
were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended December 31, 1994.
The cost of investments owned at December 31, 1994 for Federal income tax
purposes was $7,884,216. Gross unrealized appreciation and depreciation of
investments aggregated $305,969, and $248,863, respectively, resulting in net
unrealized appreciation of $57,106.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1994, the Fund has reclassified $17,010 from
capital paid-in to net investment income. This represents the cumulative amount
necessary to report these balances on a tax basis as of December 31, 1994.
Additional adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the Fund, are
primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
15
<PAGE> 36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock Special Value Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Special Value Fund (the "Fund"), one of the portfolios constituting John
Hancock Capital Series, including the schedule of investments, as of December
31, 1994, and the related statements of operations, changes in net assets and
financial highlights for the period from January 3, 1994 (commencement of
investment operations) to December 31, 1994. These financial statements and the
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audit.
We conducted our audit 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 as of
December 31, 1994, by correspondence with the custodian and brokers. 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 audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
John Hancock Special Value Fund portfolio of John Hancock Capital Series at
December 31, 1994, the results of its operations, the changes in its net assets,
and financial highlights for the period from January 3, 1994 to December 31,
1994, in conformity with generally accepted accounting principles.
[SIGNATURE]
/s/ Ernst & Young LLP
Boston, Massachusetts
February 13, 1995
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1994.
United States Government Obligations: None of the 1994 income earned by the
Fund was derived from obligations of the U.S. government or its agencies. The
Fund did not have any assets invested in U.S. Treasury bond, bills, notes or
other U.S. Government agencies at year end.
With respect to the Fund's ordinary taxable income for the fiscal year
ended December 31, 1994, 85.28% of the dividends qualify for the corporate
dividends received deduction.
For specific information on exemption provisions in your state, consult
your local state tax office or your tax adviser.
16
<PAGE> 37
NOTES
John Hancock Funds - Special Value Fund
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 38
NOTES
John Hancock Funds - Special Value Fund
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 39
NOTES
John Hancock Funds - Special Value Fund
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 40
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
[A 1/2" by 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below
reads: "A Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Special Value Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with the caption " Printed on
Recycled Paper."]
JH 3700A 12/94
