John Hancock Funds
Special
Value
Fund
SEMI-ANNUAL REPORT
June 30, 1996
TRUSTEES
Edward J. Boudreau, Jr.
Chairman
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Gail D. Fosler*
Anne C. Hodsdon
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
James B. Little
Senior Vice President and
Chief Financial Officer
Susan S. Newton
Vice President and Secretary
James J. Stokowski
Vice President and Treasurer
Thomas H. Connors
Second Vice President and
Compliance Officer
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.
6501 Americas Parkway Suite 950
Albuquerque, NM 87110-5372
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
Since late 1994, prospectus simplification has been a major topic in
the mutual fund industry. At that time, Securities and Exchange
Commission Chairman Arthur Levitt called on fund companies to make
their prospectuses more user-friendly. He noted that prospectuses are
often overloaded with technical detail and are hard for most investors
to understand. Many industry observers agreed, and rightly so.
So it is my pleasure to let you know that John Hancock Funds has
introduced the first in a series of new prospectuses. Covering the
John Hancock growth funds, the new prospectus made its debut on July 1
after being under development for a year. It is simplified, using
shorter, clearer language with a streamlined design, and consolidated,
incorporating several funds with similar investment objectives into
one document. We are excited about our new prospectus because we
believe it is a bold but sensible step forward. And while it is easier
to read, it still complies with all federal and state guidelines.
We have taken the initiative to create a prospectus that dramatically
departs from the norm. Among its most innovative features is a two-
page spread highlighting each fund's goals and investment strategy,
the types of securities it buys, its portfolio management and risk
factors, all in plainer language. Fund expenses and financial
highlights are now found here, too, as is a new bar chart that shows
year-to-year volatility for each fund. Other features include a better
presentation of fund services, a new glossary of investment risks and
a discussion about how funds are organized, including a diagram
showing the connection of the various players that provide services to
your Hancock fund(s).
In the coming months, we will introduce similar prospectuses for our
growth and income, income, tax-free income, international/global and money
market funds. We believe we have made a significant advancement in the
drive toward better mutual fund prospectuses. We hope you will agree
because in the end, we did it for you, our shareholders.
Sincerely,
/S/ Edward J. Boudreau Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
BY ANGELA J. BRISTOW, CFA,
FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Special Value Fund
Stock market turns turbulent,
but still produces gains in first half of '96
The stock market continued to climb in the first six months of 1996,
although the going got rougher. The year began with optimism that the
conditions that produced 1995's bull market remained in place: slow
economic growth and low inflation. But as the year progressed, there
were many indications, including stronger-than-expected employment
numbers, suggesting the economy was growing faster than hoped. That
raised inflation fears, caused uncertainty about the economy's
direction and produced mixed stock market results. Nonetheless, the
broad market, as measured by the Standard & Poor's 500-Stock Index,
returned 10.10% in the first six months of 1996.
John Hancock Special Value Fund also realized gains in the period. For
the six months ending June 30, 1996, the Fund's Class A and Class B
shares posted total returns of 7.68% and 7.32%, respectively, at net
asset value. That compared to the average growth and income fund's
9.24% return, according to Lipper Analytical Services.1 See pages six
and seven for longer-term Fund performance information. The Fund's
emphasis on smaller capitalization value stocks may have penalized its
relative performance, as the Wilshire Small Company Value Index also
lagged the broader indices, gaining only 4.68% during the first six
months of the year.
"The stock
market
continued to
climb in the
first six
months of
1996..."
A 2 1/4" x 3 1/2" photo of the Special Value portfolio management team
at bottom right. Caption reads: "The Special Value Portfolio Management
Team: (l-r): Angela Bristow, Thomas Christopher and Douglas Manz."
Chart with heading "Top Five Common Stock Holdings" at the top of the
left hand column. The chart lists five holdings: 1) Burlington
Industries 4.7% 2) Calgon Carbon 4.4% 3) ACX Technologies 4.4% 4) Coors
4.2% 5) Savannah Foods & Industries 4.1%. Footnote below reads "As a
percentage of net assets on June 30, 1996."
"The Fund
benefited
during the
period from
the profitable
sale of a
number of
stocks..."
Profit taking
The Fund benefited during the period from the profitable sale of a
number of stocks that had reached or exceeded our target levels. Among
the more outstanding profit opportunities were Cooper Cameron and Ross
Stores, both of which provided gains in excess of 65% in less than a
six-month holding period. We also took equally rewarding profits in
several of our longer-term holdings, including Boeing, Dole,
Harnischfeger, Learronal, Times Mirror, Great A&P and Mercantile
Stores. This amount of turnover was somewhat unusual in a six month
period, considering that, as you may recall, we did not sell a single
stock in 1994 and experienced a low turnover rate of 9% in 1995. But
the increased turnover reflects our determination to sell stocks when
they approach our estimates of fair value, especially when we find
attractive new investment opportunities in which to reinvest the
proceeds.
Noteworthy additions
We did indeed find a number of attractive alternatives to add to the
Special Value line-up. Among them was Morrison Restaurants, an
interesting restructuring candidate that split into three new
companies after we bought the stock. We are most interested in the
potential at two of the surviving companies: Ruby Tuesday, which
provides casual dining in a low price/high value format and has
substantial franchise growth opportunities, and Morrison Fresh
Cooking, purveyor of "home-style" cooking in both traditional
cafeteria and smaller, more modern settings. Morrison is currently
selling at less than half the price that private investors were
recently willing to pay for a comparable cafeteria operator. Another
addition was ACX Technologies. We believe ACX's earnings power should
become evident to investors over the next few years, as the growth and
profitability inherent in two of its businesses -- high-quality
specialty packaging and ceramics technology -- emerge from the burden
of an underperforming aluminum division. A third, Sybron Chemicals,
provided the Fund with an overlooked "back door" to investing in
Italy's dynamic specialty textile industry, since Sybron is the
dominant provider of specialty chemicals to the European textile
industry. We find Sybron to be a value investment because we believe
its current stock price is half of its private market value.
Textile buys
During this period, the Fund also established a position in Ruddick
Corp., a company whose lack of Wall Street sponsorship causes the
shares to fall into a group we like to describe as being "orphaned."
An "orphan" is a stock that investors have simply failed to notice,
even if it has obvious appreciation potential. Ruddick is neglected by
Wall Street because its hybrid structure -- half thread manufacturer,
half grocery store -- prevents it from being tracked by any group of
traditional industry analysts. We believe this has resulted in
investors missing some extremely promising company developments. For
example, earnings power has been unfolding, driven by Ruddick's
assimilation of a major rival to its thread operations and by a
cyclical recovery in the U.S. textile industry. And revenue growth
continues to exceed historic rates as the grocery division pursues its
successful expansion in the dynamic growth markets of the Southeast.
Bar chart with heading "Fund Performance" top of the left hand column.
Under the heading is the footnote: "For the six months ended June 30,
1996". The chart is scaled in increments of 5% from top to bottom, with
10% at the top and 0% at the bottom. Within the chart there are three
solid bars. The first represents the 7.68% total return for John Hancock
Special Value Fund: Class A. The second represents the 7.32% total
return for John Hancock Special Value Fund: Class B. The third
represents the 9.24% total return for the average growth and income
fund. Footnote below reads: "The total returns for John Hancock Special
Value Fund are at net asset value with all distributions reinvested. The
average growth and income fund is tracked by Lipper Analytical Services.
See following page for historical performance information."
Finally, we added shares of Burlington Industries to the Fund. The stock
is currently selling at a low multiple of less than 1.5 times book value
- -- a classic measurement of an undervalued stock -- and 12 times current
earnings. It's also selling at less than six times our estimate of normalized
earnings power. Given that profile, this strong survivor of decades of
restructuring and consolidation in the U.S. textile industry appears
to be ideally positioned to benefit from what we believe may be a period
of revitalized profitability for this long-suffering industrial sector.
In addition, Burlington's own internal restructuring and programs to
reduce debt should incrementally enhance returns. None of this potential
appears to be reflected in the current stock price.
On the horizon
As investors and spectators alike avidly speculate on which direction
the market will head next, we remain confident in our conviction that
disciplined, long-term value investing provides a stalwart craft for
seeking exceptional cumulative returns over time. Perhaps a nautical
analogy best expresses our philosophy. We set forth upon the investment
seas to navigate both troubled and tame waters in solid, storm-tested
freighters. Even if refurbished with the latest navigation technology,
they're still essentially solid boats. We buy our vessels at very cheap
prices and wait until the crowd once again remembers that you get on a
boat to travel safely across water, even if it means not taking the
fastest or most exciting route. And if you want to realize a profit
on the voyage, you buy your boat as cheaply as possible. We are trying
to win the long race with our fund, not the short-term sprints. If
we believe our stocks are still seaworthy, we stay with them and sail
through any storm. Because we buy our stocks so cheaply in the first
place, we not only complete the voyages we set out on, we're often
able to book a good profit on them as well. After all, that's the
idea behind investing in stocks.
The Fund
will stick
to its disci-
plined, long-
term
value
investing.
- -------------------------------------------------------------------
This commentary reflects the views of the portfolio management team
through the end of the Fund's period discussed in this report. Of
course, the team's views are subject to change as market and other
conditions warrant.
1 Figures from Lipper Analytical Services include reinvested dividends
and do not take into account sales charges. Actual load-adjusted
performance is lower.
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the
average annual total returns for the John Hancock Special Value Fund.
Total return is a performance measure that equals the sum of all
income and capital gain distributions, assuming reinvestment of these
distributions and the change in the price of the Fund's net asset
value per share. Performance figures include the maximum applicable
sales charge of 5% for Class A shares. The effect of the maximum
contingent deferred sales charge for Class B shares (maximum
5% and declining to 0% over six years) is included in Class B
performance. Performance is affected by a 12b-1 plan, which commenced
on January 3, 1994 for both Class A shares and Class B shares.
Remember that all figures represent past performance and are no
guarantee of how the Fund will perform in the future. Also, keep in
mind that the total return and share price of the Fund's investments
will fluctuate. As a result, your Fund's shares may be worth more or
less than their original cost, depending on when you sell them.
CULMULATIVE TOTAL RETURNS
For the period ended June 30, 1996
One Life of
Year Fund
------------ ------------
John Hancock Special Value Fund: Class A 9.99% 32.59%(1)
John Hancock Special Value Fund: Class B 9.82% 33.96%(1)
AVERAGE ANNUAL TOTAL RETURNS
For the period ended June 30, 1996
One Life of
Year Fund
------------ ------------
John Hancock Special Value Fund: Class A 9.99% 11.99%(1,2)
John Hancock Special Value Fund: Class B 9.82% 12.45%(1,2)
Notes to Performance
(1) Class A shares and Class B shares started on January 3, 1994.
(2) The Adviser has undertaken voluntarily to limit the Fund's
expenses, including the management fee (but not including the
transfer agent fee and the 12b-1 fee), to the extent required to
prevent expenses from exceeding 0.40% of the Fund's daily net asset
value. Without the limitation of expenses, the average annualized
total returns for the one-year period and since inception for Class
A shares would have been 9.23% and 9.89%, respectively. The average
annualized total returns for the one-year period and since
inception for Class B shares would have been 9.06% and 10.35%,
respectively.
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John
Hancock Special Value Fund would be worth on June 30, 1996, assuming
you have been invested and have reinvested all distributions for the
entire time periods presented in the graphs. For comparison, we've
shown the same $10,000 investment in the Standard & Poor's 500 Stock
Index -- an unmanaged index that includes 500 widely traded common
stocks and is used often as a measure of stock market performance.
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 Standard & Poor's 500 Stock
Index and is equal to $15,340 as of June 30, 1996. The second line
represents the value of the hypothetical $10,000 investment made in
the Special Value Fund on January 3, 1994, before sales charge, and
is equal to $13,960 as of June 30, 1996. The third line represents
the Special Value Fund after sales charge and is equal to $13,259
as of June 30, 1996.
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 Standard & Poor's 500 Stock
Index and is equal to $15,340 as of June 30, 1996. The second 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 $13,696 as of June 30, 1996. The third
line represents the Special Value Fund after contingent deferred sales
charge and is equal to $13,396 as of June 30, 1996.
<TABLE>
<CAPTION>
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 June 30,
1996. You'll also find the net asset value and the maximum offering
price per share as of that date.
Statement of Assets and Liabilities
June 30, 1995 (Unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common stocks (cost - $31,720,308) $ 32,316,010
Joint repurchase agreement (cost - $5,208,000) 5,208,000
Corporate savings account 1,145
-------------
37,525,155
Receivable for shares sold 294,131
Interest receivable 808
Dividends receivable 75,054
Receivable from John Hancock Advisers, Inc. - Note B 40,783
Deferred organization expenses - Note A 56,686
Other assets 557
-------------
Total Assets 37,993,174
- ------------------------------------------------------------------------------------------------
Liabilities:
Payable for investments purchased 1,703,400
Payable for shares repurchased 279,003
Payable to John Hancock Advisers, Inc.
and affiliates - Note B 11,186
Accounts payable and accrued expenses 20,957
-------------
Total Liabilities 2,014,546
- ------------------------------------------------------------------------------------------------
Net Assets:
Capital paid-in 31,562,113
Accumulated net realized gain on investments 3,821,046
Net unrealized appreciation of investments 595,732
Distributions in excess of net investment income (263)
-------------
Net Assets $ 35,978,628
===============================================================================================
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 - $15,215,702 / 1,370,090 $ 11.11
===============================================================================================
Class B - $20,762,926 / 1,869,937 $ 11.10
===============================================================================================
Maximum Offering Price Per Share *
Class A - ($11.11 x 105.26%) $ 11.69
===============================================================================================
* 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.
</TABLE>
<TABLE>
<CAPTION>
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
Six months ended June 30, 1996 (Unaudited)
- ------------------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of foreign withholding taxes of $7,517) $ 310,087
Interest 81,723
-----------
391,810
-----------
Expenses:
Investment management fee - Note B 112,807
Distribution/service fee - Note B
Class A 20,175
Class B 93,902
Transfer agent fee - Note B 44,903
Registration and filing fees 20,635
Custodian fee 20,432
Organization Expense - Note A 11,249
Printing 7,650
Auditing fee 3,443
Financial services fee - Note B 3,022
Trustees' fees 1,297
Miscellaneous 755
Legal fees 432
-----------
Total Expenses 340,702
- ------------------------------------------------------------------------------------------------
Less Expenses Reimbursable
by John Hancock Advisers,
Inc. - Note B (119,191)
- ------------------------------------------------------------------------------------------------
Net Expenses 221,511
- ------------------------------------------------------------------------------------------------
Net Investment Income 170,299
- ------------------------------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold 3,820,855
Change in net unrealized appreciation/depreciation
of investments (1,714,692)
-----------
Net Realized and Unrealized
Gain on Investments 2,106,163
- ------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $ 2,276,462
===============================================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
Statement of Changes in Net Assets
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
------------ --------------
<S> <C> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income $ 319,288 $ 170,299
Net realized gain on investments sold 591,659 3,820,855
Change in net unrealized appreciation/depreciation of investments 2,253,318 (1,714,692)
------------ ------------
Net Increase in Net Assets Resulting from Operations 3,164,265 2,276,462
------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.1978 and $0.0770 per share, respectively) (194,536) (100,252)
Class B - ($0.1215 and $0.0389 per share, respectively) (141,070) (70,406)
Distributions from net realized gain on investments sold
Class A - ($0.2115 and none per share, respectively) (255,578) --
Class B - ($0.2115 and none per share, respectively) (335,890) --
------------ ------------
Total Distributions to Shareholders (927,074) (170,658)
------------ ------------
From Fund Share Transactions - Net* 19,885,478 4,034,088
Net Assets:
Beginning of period 7,716,067 29,838,736
------------ ------------
End of period (including undistributed net investment income of $96 and
distributions in excess of net investment income of $263, respectively) $ 29,838,736 $ 35,978,628
============ ============
* Analysis of Fund Share Transactions:
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30, 1996
1995 (UNAUDITED)
--------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- --------- ----------
CLASS A
Shares sold 1,025,002 $ 10,116,634 525,593 $ 5,796,349
Shares issued to shareholders in reinvestment of distributions 39,907 410,057 8,581 94,221
--------- ------------ ------- ------------
1,064,909 10,526,691 534,174 5,890,570
Less shares repurchased (319,719) (3,191,389) (400,726) (4,381,143)
--------- ------------ ------- ------------
Net increase 745,190 $7,335,302 133,448 $1,509,427
========= ============ ======= ============
CLASS B
Shares sold 1,444,369 $ 14,296,298 430,033 $ 4,679,504
Shares issued to shareholders in reinvestment of distributions 39,383 406,436 5,464 59,995
--------- ------------ ------- ------------
1,483,752 14,702,734 435,497 4,739,499
Less shares repurchased (213,668) (2,152,558) (202,080) (2,214,838)
--------- ------------ ------- ------------
Net increase 1,270,084 $ 12,550,176 233,417 $ 2,524,661
========= ============ ======= ============
SEE NOTES TO FINANCIAL STATEMENTS.
</TABLE>
<TABLE>
<CAPTION>
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:
- --------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
--------------------------------- JUNE 30, 1996
1994 (1) 1995 (UNAUDITED)
--------- --------- --------------
<S> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 8.50 $ 8.99 $ 10.39
------- ------- -------
Net Investment Income 0.18(2) 0.21(2) 0.08
Net Realized and Unrealized Gain on Investments 0.48 1.60 0.72
------- ------- -------
Total from Investment Operations 0.66 1.81 0.80
------- ------- -------
Less distributions:
Dividends from Net Investment Income (0.17) (0.20) (0.08)
Distributions from Net Realized Gain on Investments Sold -- (0.21) --
------- ------- -------
Total Distributions (0.17) (0.41) (0.08)
------- ------- -------
Net Asset Value, End of Period $ 8.99 $ 10.39 $ 11.11
======= ======= =======
Total Investment Return at Net Asset Value (3) 7.81%(4) 20.26% 7.68%(4)
Total Adjusted Investment Return at Net Asset Value (3,5) 7.30%(4) 19.39% 6.94%(4)
Ratios and supplemental data
Net Assets, End of Period (000's omitted) $ 4,420 $12,845 $15,216
Ratio of Expenses to Average Net Assets 0.99%(7) 0.98% 0.97%(7)
Ratio of Adjusted Expenses to Average Net Assets (6) 4.98%(7) 1.85% 1.71%(7)
Ratio of Net Investment Income to Average Net Assets 2.10%(7) 2.04% 1.45%(7)
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets (6) (1.89%)(7) 1.17% 0.71%(7)
Portfolio Turnover Rate 0.3% 9% 37%
Fee Reduction Per Share $ 0.34(2) $ 0.09(2) $ 0.04(2)
Average Broker Commission Rate (8) N/A N/A $0.0666
The Financial Highlights summarizes the impact of the following factors on a single share for the period indicated: net investment
income, gains (losses), dividends 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
</TABLE>
<TABLE>
<CAPTION>
Financial Highlights
- -----------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------- JUNE 30, 1996
1994 (1) 1995 (UNAUDITED)
--------- -------- -----------
<S> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period $ 8.50 $ 9.00 $ 10.38
------- ------- -------
Net Investment Income 0.13(2) 0.12(2) 0.04
Net Realized and Unrealized Gain on Investments 0.48 1.59 0.72
------- ------- -------
Total from Investment Operations 0.61 1.71 0.76
------- ------- -------
Less Distributions:
Dividends from Net Investment Income (0.11) (0.12) (0.04)
Distributions from Net Realized Gain on Investments Sold -- (0.21) --
------- ------- -------
Total Distributions (0.11) (0.33) (0.04)
------- ------- -------
Net Asset Value, End of Period $ 9.00 $ 10.38 $ 11.10
======= ======= =======
Total Investment Return at Net Asset Value (3) 7.15%(4) 19.11% 7.32%(4)
Total Adjusted Investment Return at Net Asset Value (3,5) 6.64%(4) 18.24% 6.58%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000's omitted) $ 3,296 $16,994 $20,763
Ratio of Expenses to Average Net Assets 1.72%(7) 1.73% 1.67%(7)
Ratio of Adjusted Expenses to Average Net Assets (6) 5.71%(7) 2.60% 2.41%(7)
Ratio of Net Investment Income to Average Net Assets 1.53%(7) 1.21% 0.77%(7)
Ratio of Adjusted Net Investment Income (Loss) to
Average Net Assets (6) (2.46%)(7) 0.34% 0.03%(7)
Portfolio Turnover Rate 0.3% 9% 37%(7)
Fee Reduction Per Share $ 0.34(2) $ 0.09(2) $ 0.04(2)
Average Broker Commission Rate (8) N/A N/A $0.0666
(1) Class A and Class B shares commenced operations on January 3, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into consideration fee reductions by the adviser during the periods
shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
(8) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
See notes to financial statements
</TABLE>
<TABLE>
<CAPTION>
Schedule of Investments
June 30, 1996 (Unaudited)
- ---------------------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned
by the Special Value Fund on June 30, 1996. It's divided into two main
categories: common stocks and short-term investments. Common stocks
are further broken down by industry group. Short-term investments,
which represent the Fund's "cash" position, are listed last.
NUMBER OF MARKET
ISSUER, DESCRIPTION SHARES VALUE
- ------------------- ----------- ----------
COMMON STOCK
<S> <C> <C>
Aerospace (1.70%)
AAR Corp. 30,000 $ 611,250
------------
Beverages (4.17%)
Coors (Adolph) Co. (Class B) 84,000 1,501,500
------------
Chemicals (3.57%)
Sybron Chemicals, Inc.* 88,700 1,286,150
------------
Diversified Operations (11.76%)
ACX Technologies, Inc.* 80,000 1,590,000
Hanson PLC 88,000 1,254,000
Horsham Corp. 100,000 1,387,500
------------
4,231,500
------------
Food (8.38%)
Archer-Daniels-Midland Co. 59,445 1,136,886
Morrison Health Care, Inc. 28,333 396,662
Savannah Foods & Industries, Inc. 115,000 1,480,625
------------
3,014,173
------------
Leisure (2.86%)
Outboard Marine Corp. 56,700 1,027,687
------------
Machinery (1.44%)
Twin Disc, Inc. 22,200 518,925
------------
Office (2.09%)
Cross (A.T.) Co. 42,300 750,825
------------
Oil & Gas (4.34%)
Daniel Industries, Inc. 78,300 1,135,350
Parker Drilling Co.* 74,200 426,650
------------
1,562,000
-----------
Paper & Paper Products (5.88%)
Gibson Greetings, Inc.* 50,900 699,875
Glatfelter (P.H.) Co. 60,700 1,115,362
James River Corp. of Virginia 11,400 300,675
-----------
2,115,912
-----------
Pollution Control (4.42%)
Calgon Carbon Corp. 117,800 1,590,300
-----------
Real Estate Operations (2.64%)
Tejon Ranch Co. 58,000 949,750
-----------
Retail (16.68%)
Brown Group, Inc. 68,000 1,181,500
Morrison Fresh Cooking, Inc. 221,250 1,161,562
Ruby Tuesday, Inc. 42,500 961,563
Ruddick Corp. 100,000 1,225,000
Russ Berrie & Co., Inc. 80,000 1,470,000
-----------
5,999,625
-----------
Telecommunications (3.97%)
ANTEC Corp. * 90,000 1,428,750
-----------
Textile (9.16%)
Burlington Industries Inc.* 120,000 1,695,000
Delta Woodside Industries, Inc. 53,800 275,725
Garan, Inc. 78,000 1,326,000
-----------
3,296,725
-----------
Transport (3.46%)
Overseas Shipholding Group, Inc. 68,700 1,245,188
-----------
Utilities (3.30%)
Destec Energy, Inc.* 93,000 1,185,750
-----------
TOTAL COMMON STOCK
(Cost $31,720,308) (89.82%) $32,316,010
----- -----------
<CAPTION>
Interest Par Value Market
Rate (000'S OMITTED) Value
------- ------------- -------
<S> <C> <C> <C>
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (14.48%)
Investment in a joint repurchase
agreement transaction with
Toronto-Dominion Bank Ltd. -
Dated 06-28-96, Due
07-01-96 (secured by
U.S. Treasury Bills, 5.38%
Due 12-12-96 and 5.69%
Due 06-26-97, U.S
Treasury Bonds,7.25%
Due 05-15-16 and 7.50%
Due 11-15-16, and
U.S. Treasury Notes,
4.375% thru 7.75% Due
08/15/96 thru 11/15/01)
Note A 5.50% $ 5,208 $5,208,000
------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.75% 1,145
------------
TOTAL SHORT-TERM INVESTMENTS (14.48%) 5,209,145
------ ------------
TOTAL INVESTMENTS (104.30%) $ 37,525,155
====== ============
* Non-income producing security
The percentages 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.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A --
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust") is a diversified open-end
management investment company, registered under the Investment Company
Act of 1940. Until June 30, 1996 the Trust consisted of two series
portfolios: John Hancock Special Value Fund (the "Fund") and John
Hancock Growth Fund. As of July 1, 1996, John Hancock Growth Fund
became a series of Freedom Investment Trust II. The investment
objective of the Fund is to seek capital appreciation with income as a
secondary consideration by investing primarily in equity securities
that are undervalued when compared to alternative equity investments.
The Trustees have authorized the issuance of multiple classes of
shares of the Fund, designated as Class A and Class B shares. 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 of its taxable
income, including any net realized gain on investment, to its
shareholders. Therefore, no federal income tax provision is required.
DIVIDENDS, INTEREST AND DISTRIBUTIONS 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
principals. 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 calculated at the Fund level and allocated daily to
each class of shares based on the appropriate net assets of the
respective classes. Distribution/service fees if any, are calculated
daily at the class level based on the appropriate net assets of each
class and the specific expense rate(s) applicable to each class.
FOREIGN CURRENCY TRANSLATION All assets and 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 or losses arise from changes in the value of
assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
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.
USE OF ESTIMATES The preparation of these financial statements in
accordance with generally accepted accounting principles incorporates
estimates made by management in determining the reported amounts of
assets, liabilities, revenues, and expenses 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 sub-advisory
agreement between the Adviser and an affiliated company of the
Adviser, NM Capital Management, Inc. (the "Sub-Adviser"), under which
the Sub-Adviser provides the Fund with investment research and
portfolio management services, the Adviser pays the Sub-Adviser
annually 40% of the fee received by the Adviser for managing the Fund.
The Fund is not responsible for the payment of the Sub-Adviser's 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,
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 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 reduction in the Adviser's fee amounted to $119,191 for the period
ended June 30, 1996. The Adviser reserves the right to terminate this
limitation in the future.
The Fund has a distribution agreement with John Hancock Funds, Inc.
("JH Funds"), a wholly owned subsidiary of the Adviser. For the period
ended June 30, 1996, net sales charges received with regard to sales
of Class A shares amounted to $72,813. Out of this amount, $11,227 was
retained and used for printing prospectuses, advertising, sales
literature and other purposes, $24,109 was paid as sales commissions
to unrelated broker-dealers and $37,477 was paid as sales commissions
to sales personnel of John Hancock Distributors, Inc.
("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and
Sutro & Co., Inc. ("Sutro"), all of which are broker dealers. 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.
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 June 30, 1996, contingent
deferred sales charges paid to JH Funds amounted to $35,439.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted a Distribution
Plan 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
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. The Fund pays Investor Services a fee
based on the number of shareholder accounts and certain out-of-pocket
expenses.
On March 5, 1996, the Board of Trustees approved retroactively to
January 1, 1996, an agreement with the Adviser to perform necessary
tax and financial management services for the Funds. The compensation
for 1996 is estimated to be at an annual rate of 0.01875% of the
average net assets of each Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. 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. Effective with the fees
paid for 1995, the unaffiliated Trustees may elect to defer for tax
purposes their receipt of this compensation under the John Hancock
Group of Funds Deferred Compensation Plan. The Fund makes investments
into other John Hancock funds, as applicable, to cover its liability
for the deferred compensation. Investments to cover the Fund's
deferred compensation liability are recorded on the Fund's books as an
other asset. The deferred compensation liability and the related other
asset are always equal and are marked to market on a periodic basis to
reflect any income earned by the investment as well as any unrealized
gains or losses. At June 30, 1996, the Fund's investments to cover the
deferred compensation liability had unrealized appreciation of $30.
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 June 30, 1996, aggregated
$13,451,185 and $11,086,209, respectively. There were no purchases or
sales of obligations of the U.S. government and its agencies during
the period ended June 30, 1996.
The cost of investments owned at June 30, 1996 (excluding the
corporate savings account), for federal income tax purposes was
$36,928,308. Gross unrealized appreciation and depreciation of
investments aggregated $2,540,635 and $1,944,933, respectively,
resulting in net unrealized appreciation of $595,702.
NOTES
John Hancock Funds - Special Value Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - Special Value Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
NOTES
John Hancock Funds - Special Value Fund
[THIS PAGE INTENTIONALLY LEFT BLANK]
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Permit No. 75
This report is for the information of shareholders of the John Hancock
Special Value Fund. It may be used as sales literature when preceded
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370SA 6/96
8/96
