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John Hancock Funds
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Independence
Equity Fund
SEMIANNUAL REPORT
June 30, 1997
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TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore*
Patti McGill Peterson*
John W. Pratt*
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
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
SUB-INVESTMENT ADVISER
Independence Investment Associates, Inc.
53 State Street
Boston, Massachusetts 02109
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the year. Stocks
began 1997 on the high wires, bolstered by a near-perfect "Goldilocks" economy -
not too hot, not too cold. In almost a straight shot, the Dow Jones Industrial
Average soared through the 7000 level for the first time in early March. Just
days later, stocks lost their footing and staged a month-long free-fall in a
nervous reaction to rising interest rates and economic data that showed the
economy was picking up steam. Stocks gave back all of their year's gain and
suffered their worst decline since 1990 during this period. No sooner had real
fears begun to beset investors then they were gone, erased in a euphoric rally
caused by strong earnings and no signs of inflation. By the end of June, both
the Dow and the broader Standard & Poor's 500 Stock Index had risen by 20% - a
level not many thought the market would reach all year, let alone in six months.
Bondholders have not enjoyed the same bounty, as the bond market has mostly
stayed worried about the strength of the economy, the direction of interest
rates, and the Federal Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left
them pondering their valuation models, since the market is now more expensive
than it has been in decades. It's impossible to know what will happen next in
the markets. But whether it's another strong move forward or a retreat, we
recommend keeping a long-term perspective, rather than over-focusing on the
market's daily twists and turns. While the economic backdrop seems to remain
near perfect, the one thing we believe investors should be prepared for is more
market volatility. It also makes sense to do something we've always advocated:
set realistic expectations, since, as we've also seen this year, markets can
move down as fast as they go up.
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A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.
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Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After such a
strong advance in equities over the last two and a half years, it could be time
to rebalance your portfolio, if you haven't already, to maintain your desired
targets of diversification. As part of that process, make sure that your
investment strategies still reflect your individual time horizons, objectives
and risk tolerance. Despite turbulence, one thing remains constant. A
well-constructed plan and a cool head can be the best tools for reaching your
financial goals.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
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By Paul McManus for the Portfolio Management Team
John Hancock
Independence Equity Fund
Favorable economic environment pushes stocks to new highs
The stock market turned in an amazing performance over the last six months. Amid
almost ideal economic conditions, stocks continued their bull market advance,
with both the Dow Jones Industrial Average and the Standard & Poor's 500 Stock
Index ending the month of June at record highs. The feat was particularly
amazing because it came on the heels of two years of strong stock advances that
many thought would moderate this year. It also was accomplished despite a
correction in March when investors turned fearful that the torrid pace of first
quarter growth would prompt the Federal Reserve to raise interest rates. The Fed
did raise rates one-quarter percentage point in late March. But investors' fears
were short lived. In mid-April, the market rebounded sharply and stocks moved
into record high territory, prompted by strong first quarter earnings, and signs
that inflation remained at bay and that the economy was slowing to a more
moderate pace.
"The stock
market
turned in
an amazing
performance
over the last
six months."
For the first six months of the year, the Dow Jones Industrial Average and
the S&P 500 each advanced by 20%, including reinvested dividends. John Hancock
Independence Equity Fund also produced very strong returns on an absolute and
relative basis. For the six months ended June 30, 1997, the Fund's Class A and
Class B shares posted total returns of 16.05% and 15.68%, respectively, at net
asset value. That compared favorably with the 15.52% return for the average
growth and
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A 2 1/4" x 3 3/4" photo of Independence Equity Fund management team at bottom
right. Caption reads: "Independence Equity Fund management team members: (l-r)
Paul McManus, Jane Shigley, Jeff Saef, David Canavan, Coreen Kraysler."
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3
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John Hancock Funds - Independence Equity Fund
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Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) General Electric 3.2%2) Merck 2.9% 3) United
Technologies 2.8% 4) General Re 2.8% 5) Home Depot 2.5%. A footnote below reads
"As a percentage of net assets on June 30, 1997."
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income fund, according to Lipper Analytical Services, Inc.1 Longer-term
performance information can be found on pages six and seven.
"One stock at
a time, we
seek to
create a
diversified
portfolio..."
Financial and health-care stocks work The Fund continues to pursue its
objectives of growth and income through its disciplined investment strategy.
That involves applying fundamental company analysis and computer modeling to the
task of finding companies with improving earnings prospects and inexpensive
stock prices. One stock at a time, we seek to create a diversified portfolio
with a risk level that is comparable to the S&P 500.
As was the case late last year, the market's performance was dominated
during the first half of 1997 by the largest growth companies of the Dow and the
S&P, and the Fund benefited from holding such large-company growth stocks as
Home Depot and consumer product giant Procter & Gamble.
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Table entitled "Scorecard" at bottom 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 "Compaq
Computer" followed by an up arrow and the phrase "Strong PC demand". The second
listing is "Juhnson & Johnson" followed by an up arrow and the phrase "New
product flow". The third listing is "Phillips Petroleum" followed by a down
arrow and the phrase "Lower oil prices". Footnote below reads: "See "Schedule
of Investments." Investment holdings are subject to change."
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Over the last six months, the financial and health-care sectors were two of
the largest contributors to the Fund's performance. The financial area-including
banks, insurance companies and brokerage firms-was lifted by continuing industry
consolidation and the more positive interest-rate environment that followed the
brief rate spike in the spring. Some of our best performers were the larger
banks including BankAmerica, Bank of New York and BankBoston. Insurance
companies, which have large investment portfolios of bonds, also benefited from
the improved interest-rate environment, including Fund holdings CIGNA and
General Re. Health-care stocks, particularly the large pharmaceutical companies,
continue to be propelled by the strong flow of new products and industry
consolidation. As a result, companies such as Johnson & Johnson, Merck and
Abbott Labs have seen strong and predictable growth in both sales and earnings.
At the same time, their stock price levels have remained attractively valued
relative to their prospects.
Technology spotty, energy disappoints
The Fund's technology holdings turned in a mixed result. Many high-tech stocks
suffered over the last six months from fears of a slowdown in earnings growth,
and from a strong dollar that erodes U.S. company profits made overseas-often a
large component of U.S. technology companies' results. The Fund's holdings in
large software companies Sun Microsystems and Microsoft turned in strong
performances based on their dominant market positions. AT&T spin-off Lucent
Technologies saw its business prospects boosted by its ability to sell its
network technology to other companies. On the other hand, Hewlett Packard and
Intel let us
4
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John Hancock Funds - Independence Equity Fund
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Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote "For the six months ended June 30, 1997. " The chart is
scaled in increments of 5% from top to bottom with 20% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
16.05% total return for John Hancock Independence Equity Fund: Class A. The
second represents the 15.68% total return for John Hancock Independence Equity
Fund: Class B. The third represents the 15.52% total return for the average
growth and income fund. Footnote below reads: "The total returns for John
Hancock Independence Equity Fund are at net asset value with all distributions
reinvested. The average growth and income fund is tracked by Lipper Analytical
Services. (1) See the following two pages for historical performance
information.
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down in the short term. Although Hewlett Packard reported below-expected first
quarter earnings, we're holding onto the stock because we firmly believe it is
undervalued and that the company will regain its footing. Likewise, Intel's
announcement of declining gross margins due to a changing product mix has not
swayed us from our belief in the future growth potential of this premier
semiconductor company.
Over the last six months, our energy stocks were lackluster due to lower
oil prices stemming from a milder-than-expected winter in most parts of the
country. That hurt companies like Anadarko Petroleum and Atlantic Richfield, and
had a spill-over effect on oil services companies such as Baker Hughes.
By far our biggest disappointment was AT&T. After holding on through four
quarters of weaker-than-expected results, we sold nearly all of our AT&T
position upon concluding that the telephone giant still needed more time and
greater capital layout to reach the results it had expected following its
breakup more than a year ago.
A look ahead
For now, the economic climate remains almost perfect, which suggests that stocks
could continue to move ahead as long as inflation stays low and growth keeps to
a slow and steady pace. But we wouldn't be surprised to see a downturn on a very
near-term basis, which could be triggered by either a commodity price spike or
an unexpected change in the economy's growth pace. The market is especially
vulnerable now to such an event, given that stock prices already reflect the
excellent environment.
"Whatever
the market
does next,
we will
stick to our
discipline..."
For the longer term, we are encouraged simply because we believe that the
market's performance will inevitably broaden further. At some point, we believe
investors will no longer be willing to pay the high levels of price-to-earnings
multiples (a measure of how much you're paying for earnings growth) now being
commanded by the leading large-company stocks. When that happens, investors'
attention could well turn back to a broader universe of companies whose
fundamentals are sound, but that are currently being overlooked. That bodes well
for such broadly diversified portfolios as John Hancock Independence Equity
Fund. Whatever the market does next, we will stick to our discipline,
maintaining a well-balanced portfolio of companies whose stock prices are
inexpensive while their earnings prospects are improving. We believe it is the
best way to both manage risk and produce consistent results over the long term.
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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.
1Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
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A LOOK AT PERFORMANCE
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The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Independence Equity Fund. Total return is a
performance measure that equals the sum of all income and capital gains
distributions, assuming reinvestment of these distributions and the change in
the price of the Fund's shares, expressed as a percentage 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. 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.
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CUMULATIVE TOTAL RETURNS
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For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
------- ------- --------
John Hancock Independence
Equity Fund: Class A 21.06% 125.25% 146.82%(1)
John Hancock Independence
Equity Fund: Class B 21.46% N/A 46.51%(2)
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AVERAGE ANNUAL TOTAL RETURNS
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For the period ended June 30, 1997
ONE FIVE LIFE OF
YEAR YEARS FUND
------- ------- --------
John Hancock Independence
Equity Fund: Class A(3) 21.06% 17.67% 16.09%(1)
John Hancock Independence
Equity Fund: Class B(3) 21.46% N/A 23.44%(2)
Notes to Performance
(1) Class A shares commenced on June 10, 1991.
(2) Class B shares commenced on September 7, 1995.
(3) From September 1, 1995 through February 28, 1997, the Adviser limited the
Fund's expenses to 1.30% and 2.00% for Class A and Class B shares,
respectively, of the Fund's daily net asset value. Prior to September 1,
1995, and the creation of Class B shares, the limitation of expenses was
0.70% of the Fund's daily net asset value. Without the limitation of
expenses, the average annualized total returns for the one-year period,
five-year period and since inception for Class A shares would have been
21.04%, 16.99% and 15.22%, respectively.Without the limitation of expenses,
the average annualized total returns for the one-year period and since
inception for Class B shares would have been 21.44% and 22.83%,
respectively.
6
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WHAT HAPPENED TO A $10,000 INVESTMENT...
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The charts on the right show how much a $10,000 investment in the John Hancock
Independence Equity Fund would be worth on June 30, 1997 assuming you had
invested on the day each class of shares started, and have reinvested all
distributions. 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 a commonly used measure of stock market performance.
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Independence Equity Fund
Class A shares
Line chart with the heading Independence Equity 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 $26,653 as of June 30, 1997. The second
line represents the value of the hypothetical $10,000 investment made in the
Independence Equity Fund, before sales charge, on June 10, 1991 and is equal to
$25,981 as of June 30, 1997. The third line represents the Independence Equity
Fund, after sales charge, and is equal to $24,682 as of June 30, 1997.
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Independence Equity Fund
Class B shares
Line chart with the heading Independence Equity 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 $16,382 as of June 30, 1997. The second
line represents the value of the hypothetical $10,000 investment made in the
Independence Equity Fund, before sales charge, on September 7, 1995, and is
equal to $15,051 as of June 30, 1997. The third line represents the value of the
Independence Equity Fund, after sales charge, and is equal to $14,651 as of June
30, 1997.
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7
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FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity 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, 1997. 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, 1997 (Unaudited)
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Assets:
Investments at value - Note C:
Common stocks (cost - $132,396,135) .......................... $153,359,259
Joint repurchase agreement (cost - $5,024,000) ............... 5,024,000
Corporate savings account .................................... 4,941
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................................................................. 158,388,200
Receivable for shares sold ..................................... 263,773
Dividends and interest receivable .............................. 238,565
Other assets ................................................... 2,468
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Total Assets ....................... 158,893,006
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Liabilities:
Payable for shares repurchased ................................. 35,778
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ...................................... 21,770
Accounts payable and accrued expenses .......................... 117,307
Total Liabilities .................. 174,855
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Net Assets:
Capital paid-in ................................................ 134,683,718
Accumulated net realized gain on investments ................... 3,082,416
Net unrealized appreciation of investments ..................... 20,963,648
Distributions in excess of net investment income ...............( 11,631)
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Net Assets ......................... $158,718,151
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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 - $61,404,205/2,730,812 ................................ $ 22.49
=============================================================================
Class B - $97,313,946/4,336,151 ................................ $ 22.44
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Maximum Offering Price Per Share*
Class A - ($22.49 x 105.26%) ................................... $ 23.67
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* 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
Six months ended June 30, 1997 (Unaudited)
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Investment Income:
Dividends (net of foreign withholding taxes of $3,584) ......... $ 1,049,156
Interest ....................................................... 145,402
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1,194,558
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Expenses:
Investment management fee - Note B ........................... 434,773
Distribution and service fee - Note B
Class A .................................................... 70,726
Class B .................................................... 343,944
Transfer agent fee - Note B .................................. 154,319
Registration and filing fees ................................. 50,781
Custodian fee ................................................ 20,316
Financial services fee - Note B .............................. 10,869
Auditing fee ................................................. 8,904
Printing ..................................................... 5,306
Trustees' fees ............................................... 2,785
Legal fees ................................................... 1,011
Miscellaneous ................................................ 820
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Total Expenses ..................... 1,104,554
Less Expense Reductions - Note B ... ( 30,674)
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Net Expenses ....................... 1,073,880
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Net Investment Income .............. 120,678
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Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold .......................... 2,494,733
Change in net unrealized appreciation/depreciation
of investments ............................................... 15,005,623
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Net Realized and Unrealized
Gain on Investments ................ 17,500,356
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Net Increase in Net Assets
Resulting from Operations .......... $17,621,034
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SEE NOTES TO FINANCIAL STATEMENTS.
8
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FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
Statement of Changes in Net Assets
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<TABLE>
<CAPTION>
YEAR ENDED PERIOD FROM SIX MONTHS ENDED
MAY 31, JUNE 1, 1996 TO JUNE 30, 1997
1996 DECEMBER 31, 1996 (1) (UNAUDITED)
------------ --------------------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................... $ 224,281 $ 225,132 $ 120,678
Net realized gain on investments sold ..................................... 13,818,303 1,034,147 2,494,733
Change in net unrealized appreciation/depreciation of investments ......... ( 9,915,169) 4,069,742 15,005,623
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations .................. 4,127,415 5,329,021 17,621,034
------------ ------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.2181, $0.1414 and $0.0427 per share, respectively) ........ ( 468,688) ( 167,880) ( 98,930)
Class B - ($0.0934, $0.0456 and $0.0127 per share, respectively) ........ ( 13,068) ( 55,164) ( 41,909)
Distributions from net realized gain on investments sold
Class A - ($0.2907, $0.2683 and none per share, respectively) ........... ( 2,049,001) ( 414,417) -
Class B - (none, $0.2683 and none per share, respectively) .............. - ( 564,553) -
Total Distributions to Shareholders ................................... ( 2,530,757) ( 1,202,014) ( 140,839)
From Fund Share Transactions - Net*: ........................................ ( 73,011,934) 39,344,533 67,763,381
Net Assets:
Beginning of period ....................................................... 101,418,291 30,003,035 73,474,575
End of period (including undistributed net investment income
of $6,442, $8,530 and distributions in excess of net investment
income of $11,631, respectively) ........................................ $ 30,003,015 $ 73,474,575 $158,718,151
<CAPTION>
YEAR ENDED PERIOD FROM SIX MONTHS ENDED
MAY 31, JUNE 1, 1996 TO JUNE 30, 1997
1996 DECEMBER 31, 1996 (1) (UNAUDITED)
------------------------- ----------------------- ------------------------
*Analysis of Fund Share Transactions: SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- ------------ --------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ................................... 950,002 $ 15,689,378 1,124,587 $20,898,365 1,425,832 $29,327,677
Shares issued to shareholders in reinvestment
of distributions ............................ 176,962 2,504,943 27,332 526,305 4,295 87,469
--------- ------------ --------- ----------- --------- -----------
................................................ 1,126,964 18,194,321 1,151,919 21,424,670 1,430,127 29,415,146
Less shares repurchased ....................... (7,336,631) ( 105,475,141) ( 382,213) ( 7,170,830) ( 296,544) ( 6,151,351)
--------- ------------ --------- ----------- --------- -----------
Net increase (decrease) ....................... (6,209,667) ($ 87,280,820) 769,706 $14,253,840 1,133,583 $23,263,795
========= ============ ========= =========== ========= ===========
CLASS B **
Shares sold ................................... 904,689 $ 15,323,273 1,443,084 $26,902,723 2,479,016 $51,275,344
Shares issued to shareholders in reinvestment
of distributions ............................ 1,324 21,802 28,065 544,384 2,036 41,289
--------- ------------ --------- ----------- --------- -----------
906,013 15,345,075 1,471,149 27,447,107 2,481,052 51,316,633
Less shares repurchased ....................... ( 63,879) ( 1,076,189) ( 126,145) ( 2,356,414) ( 332,039) ( 6,817,047)
--------- ------------ --------- ----------- --------- -----------
Net Increase .................................. 842,134 $14,268,886 1,345,004 $25,090,693 2,149,013 $44,499,586
========= ============ ========= =========== ========= ===========
** Class B shares commenced operations on September 7, 1995.
(1) Effective December 31, 1996, the fiscal year end changed from May 31 to December 31.
</TABLE>
The Statement of Changes in Net Assets shows how the value of the
Fund's net assets has changed since the end of the previous period. The
difference reflects earnings less expenses, any investment gains and losses,
distributions paid to shareholders, and any increase or decrease in money
shareholders invested in the Fund. The footnote illustrates the number of Fund
shares sold, reinvested and repurchased during the last three periods, along
with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
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FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
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<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS
YEAR ENDED MAY 31, JUNE 1, 1996 TO ENDED JUNE 30,
-------------------------------------------------- DECEMBER 31, 1997
1992(1) 1993 1994 1995 1996 1996(9) (UNAUDITED)
-------- ------- ------- -------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .......... $ 10.00 $ 10.98 $ 12.16 $ 12.68 $ 14.41 $ 17.98 $ 19.42
------- ------- ------- -------- ------- ------- -------
Net Investment Income ......................... 0.15 0.22 0.28(2) 0.32(2) 0.20(2) 0.13(2) 0.07(2)
Net Realized and Unrealized Gain
on Investments .............................. 0.94 1.25 0.52 1.77 3.88 1.72 3.04
------- ------- ------- -------- ------- ------- -------
Total from Investment Operations .......... 1.09 1.47 0.80 2.09 4.08 1.85 3.11
------- ------- ------- -------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income ........ ( 0.11) ( 0.23)( 0.23) ( 0.28) ( 0.22) ( 0.14) ( 0.04)
Distributions from Net Realized Gain on
Investments Sold ............................ - ( 0.06)( 0.05) ( 0.08) ( 0.29) ( 0.27) -
------- ------- ------- -------- ------- ------- -------
Total Distributions ....................... ( 0.11) ( 0.29)( 0.28) ( 0.36) ( 0.51) ( 0.41) ( 0.04)
======= ======= ======= ======== ======= ======= =======
Net Asset Value, End of Period ................ $ 10.98 $ 12.16 $ 12.68 $ 14.41 $ 17.98 $ 19.42 $ 22.49
Total Investment Return
at Net Asset Value (3) ...................... 10.95%(4) 13.58% 6.60% 16.98% 29.12% 10.33%(4) 16.05%(4)
Total Adjusted Investment Return
at Net Asset Value (3,5) .................... 9.23%(4) 11.40% 6.15% 16.94% 28.47% 10.08%(4) 16.03%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...... $2,622 $12,488 $66,612 $101,418 $14,878 $31,013 $61,404
Ratio of Expenses to Average Net Assets ....... 1.66%(6) 0.76% 0.70% 0.70% 0.94% 1.30%(6) 1.44%(6)
Ratio of Adjusted Expenses to Average
Net Assets (7) .............................. 3.38%(6) 2.94% 1.15% 0.74% 1.59% 1.73%(6) 1.49%(6)
Ratio of Net Investment Income to Average
Net Assets .................................. 1.77%(6) 2.36% 2.20% 2.43% 1.55% 1.16%(6) 0.63%(6)
Ratio of Adjusted Net Investment Income to
Average Net Assets (7) ...................... 0.05%(6) 0.18% 1.75% 2.39% 0.90% 0.73%(6) 0.58%(6)
Portfolio Turnover Rate ....................... 53% 53% 43% 71% 157% 35% 26%
Fee Reduction Per Share ....................... $ 0.15 $ 0.20 $ 0.06(2) $ 0.005(2) $ 0.08(2) $ 0.05(2) $ 0.01(2)
Average Brokerage Commission Rate (8) ......... N/A N/A N/A N/A N/A $0.0326 $0.0408
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each 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.
10
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
PERIOD ENDED JUNE 1, 1996 TO JUNE 30, 1997
MAY 31, 1996(1) DECEMBER 31, 1996(9) (UNAUDITED)
--------------- -------------------- -----------
<S> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period ........................................ $ 15.25 $ 17.96 $ 19.41
------- ------- -------
Net Investment Income (2) ................................................... 0.09 0.05 ( 0.01)
Net Realized and Unrealized Gain on Investments ............................. 2.71 1.72 3.05
------- ------- -------
Total from Investment Operations ........................................ 2.80 1.77 3.04
------- ------- -------
Less Distributions:
Dividends from Net Investment Income ...................................... ( 0.09) ( 0.05) ( 0.01)
Distributions from Net Realized Gain on Investments Sold .................. - ( 0.27) -
------- ------- -------
Total Distributions ..................................................... ( 0.09) ( 0.32) ( 0.01)
------- ------- -------
Net Asset Value, End of Period .............................................. $ 17.96 $ 19.41 $ 22.44
======= ======= =======
Total Investment Return at Net Asset Value (3) .............................. 18.46%(4) 9.83%(4) 15.68%(4)
Total Adjusted Investment Return at Net Asset Value (3,5) ................... 17.59%(4) 9.58%(4) 15.66%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) .................................... $15,125 $42,461 $97,314
Ratio of Expenses to Average Net Assets ..................................... 2.00%(6) 2.00%(6) 2.14%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ........................ 3.21%(6) 2.43%(6) 2.19%(6)
Ratio of Net Investment Income (Loss) to Average Net Assets ................. 0.78%(6) 0.45%(6) ( 0.08%)(6)
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (7) .... ( 0.43%)(6) 0.02%(6) ( 0.13%)(6)
Portfolio Turnover Rate ..................................................... 157% 35% 26%
Fee Reduction Per Share (2) ................................................. $ 0.13 $ 0.05 $ 0.01
Average Brokerage Commission Rate (8) ....................................... N/A $0.0326 $0.0408
(1) Class A and Class B shares commenced operations on June 10, 1991 and September 7, 1995, respectively.
(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) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
(9) Effective December 31, 1996, the fiscal year end changed from May 31 to December 31.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
Schedule of Investments
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Independence Equity Fund on June 30, 1997. 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.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS
Aerospace (3.81%)
Northrop Grumman Corp. ................ 13,200 $ 1,159,125
Precision Castparts Corp. ............. 6,900 411,412
United Technologies Corp. ............. 54,000 4,482,000
------------
6,052,537
------------
Automobile / Trucks (3.37%)
Chrysler Corp. ........................ 22,600 741,562
Dana Corp. ............................ 6,000 228,000
Ford Motor Co. ........................ 62,600 2,363,150
General Motors Corp. .................. 36,200 2,015,887
------------
5,348,599
------------
Banks (6.80%)
Bank of New York Co., Inc. ............ 5,900 256,650
BankAmerica Corp. ..................... 59,800 3,860,837
BankBoston Corp. ...................... 10,000 720,625
Chase Manhattan Corp. ................. 26,600 2,581,862
Citicorp .............................. 19,300 2,326,856
Morgan (J.P.) & Co., Inc. ............. 5,200 542,750
Norwest Corp. ......................... 9,000 506,250
------------
10,795,830
------------
Beverages (0.33%)
PepsiCo, Inc. ......................... 14,000 525,875
------------
Broker Services (1.40%)
Morgan Stanley, Dean Witter,
Discover & Co. ....................... 51,500 2,217,719
------------
Chemicals (2.54%)
Air Products & Chemicals, Inc. ........ 26,900 2,185,625
Monsanto Co. .......................... 22,600 973,212
Praxair, Inc. ......................... 15,600 873,600
------------
4,032,437
------------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Computers (9.35%)
Adobe Systems, Inc. ................... 16,400 $ 575,025
Cadence Design Systems, Inc.* ......... 10,000 335,000
Compaq Computer Corp.* ................ 15,800 1,568,150
Computer Associates International, Inc. 20,800 1,158,300
Electronic Data Systems Corp........... 19,500 799,500
Hewlett Packard Co. 51,300 2,872,800
International Business Machines Corp. . 17,600 1,587,300
Microsoft Corp.* ...................... 27,600 3,487,950
Oracle Corp.* ......................... 17,200 866,450
Parametric Technology Corp.* .......... 9,400 400,087
Sun Microsystems, Inc.* ............... 32,000 1,190,998
------------
14,841,560
------------
Cosmetics & Personal Care (0.23%)
Revlon, Inc. (Class A) * .............. 7,100 367,869
------------
Diversified Operations (5.08%)
AlliedSignal, Inc. .................... 10,300 865,200
Canadian Pacific, Ltd. (Canada) ....... 44,700 1,271,156
Du Pont (E.I.) De Nemours & Co. ....... 43,600 2,741,350
Lockheed Martin Corp. ................. 8,672 898,094
Textron, Inc. ......................... 34,500 2,289,937
------------
8,065,737
------------
Electronics (6.92%)
General Electric Co. .................. 78,500 5,131,937
Honeywell, Inc. ....................... 20,200 1,532,675
Intel Corp. ........................... 23,800 3,375,137
Raychem Corp. ......................... 12,800 952,000
------------
10,991,749
------------
Finance (1.26%)
Ahmanson (H.F.) & Co. ................. 5,000 215,000
American Express Co. .................. 15,400 1,147,300
Household International, Inc. ......... 3,000 352,312
MBNA Corp. ............................ 7,700 282,012
------------
1,996,624
------------
Food (1.25%)
ConAgra, Inc. ......................... 29,000 1,859,625
General Mills, Inc. ................... 2,000 130,250
------------
1,989,875
------------
Instruments - Scientific (0.82%)
Perkin-Elmer Corp. .................... 16,400 1,304,825
------------
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Insurance (7.01%)
American International Group, Inc. .... 4,600 $ 687,125
CIGNA Corp. ........................... 9,700 1,721,750
Equitable Cos., Inc. .................. 11,900 395,675
General Re Corp. ...................... 24,400 4,440,800
Hartford Financial Services Group,
Inc. (The) ........................... 18,900 1,563,975
Marsh & McLennan Cos., Inc. ........... 32,400 2,312,550
------------
11,121,875
------------
Leisure (1.98%)
Eastman Kodak Co. ..................... 13,400 1,028,450
HFS, Inc.* ............................ 28,100 1,629,800
Hilton Hotels Corp. ................... 18,100 480,781
------------
3,139,031
------------
Machinery (0.58%)
Cooper Industries, Inc. ............... 12,000 597,000
Dover Corp. ........................... 5,300 325,950
------------
922,950
------------
Media (0.45%)
Time Warner, Inc. ..................... 15,000 723,750
------------
Medical (12.45%)
Abbott Laboratories ................... 19,300 1,288,275
Allegiance Corp. ...................... 26,000 708,500
Amgen, Inc.* .......................... 4,100 238,313
Becton, Dickinson & Co. ............... 9,400 475,875
Bristol-Myers Squibb Co. .............. 17,800 1,441,800
Cardinal Health, Inc. ................. 25,000 1,431,250
Columbia/HCA Healthcare Corp. ......... 7,650 300,741
Glaxo Wellcome PLC American Depositary
Receipt (ADR) (United Kingdom) ...... 20,700 865,519
Health Management Associates, Inc.
(Class A)* .......................... 7,500 213,750
HEALTHSOUTH Corp.* .................... 59,600 1,486,275
Johnson & Johnson ..................... 30,400 1,957,000
Medtronic, Inc. ....................... 5,400 437,400
Merck & Co., Inc. ..................... 44,100 4,564,350
Schering-Plough Corp. ................. 19,800 947,925
SmithKline Beecham PLC ADR
(United Kingdom) .................... 9,200 842,950
Warner-Lambert Co. .................... 20,600 2,559,550
------------
19,759,473
------------
Office (2.04%)
Avery Dennison Corp. .................. 15,600 625,950
Pitney Bowes, Inc. .................... 8,700 604,650
Xerox Corp. ........................... 25,400 2,003,425
------------
3,234,025
------------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Oil & Gas (10.04%)
Anadarko Petroleum Corp. .............. 12,800 $ 768,000
Atlantic Richfield Co. ................ 29,000 2,044,500
Baker Hughes, Inc. .................... 25,400 982,663
British Petroleum Co. PLC ADR
(United Kingdom) .................... 7,000 524,125
Chevron Corp. ......................... 4,100 303,144
Dresser Industries, Inc. .............. 27,500 1,024,375
El Paso Natural Gas Co. ............... 14,000 770,000
Exxon Corp. ........................... 25,500 1,568,250
Kerr - McGee Corp. .................... 15,900 1,007,663
Phillips Petroleum Co. ................ 55,500 2,428,125
Rowan Cos., Inc.* ..................... 14,000 394,625
Texaco Inc. ........................... 10,500 1,141,875
Unocal Corp. .......................... 44,700 1,734,919
USX - Marathon Group .................. 42,900 1,238,738
------------
15,931,002
------------
Retail (5.08%)
Costco Cos., Inc.* .................... 25,300 831,738
Federated Department Stores, Inc.* .... 13,200 458,700
Home Depot, Inc. ...................... 58,300 4,019,056
Lowe's Cos., Inc. ..................... 33,300 1,236,263
Staples, Inc.* ........................ 33,150 770,738
TJX Cos., Inc. ........................ 9,000 237,375
Wal-Mart Stores, Inc. ................. 14,900 503,806
------------
8,057,676
------------
Shoes & Related Apparel (1.09%)
Nike, Inc. (Class B) .................. 20,000 1,167,500
Nine West Group, Inc.* ................ 14,900 568,994
------------
1,736,494
------------
Soap & Cleaning Preparations (2.14%)
Procter & Gamble Co. (The) ............ 24,000 3,390,000
------------
Steel (0.24%)
British Steel PLC ADR (United Kingdom) 15,000 378,750
------------
Telecommunications (0.88%)
AT&T Corp. ............................ 7,600 266,475
Harris Corp. .......................... 2,000 168,000
Lucent Technologies, Inc. ............. 13,363 962,971
------------
1,397,446
------------
Textile (0.65%)
Fruit of the Loom, Inc. (Class A)* .... 7,200 223,200
Liz Claiborne, Inc. ................... 10,800 503,550
Tommy Hilfiger Corp.* ................. 7,400 297,388
------------
1,024,138
------------
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Tobacco (1.66%)
Philip Morris Cos., Inc. .............. 59,400 $ 2,635,875
------------
Transport (0.80%)
CSX Corp. ............................. 12,400 688,200
Halter Marine Group, Inc.* ............ 1 24
Norfolk Southern Corp. ................ 5,800 584,350
------------
1,272,574
------------
Utilities (6.37%)
Baltimore Gas & Electric Co. .......... 51,900 1,385,081
BellSouth Corp. ....................... 12,700 588,963
CINergy Corp. ......................... 9,000 313,313
Consolidated Natural Gas Co. .......... 22,800 1,226,925
Dominion Resources, Inc. .............. 32,800 1,201,300
Duke Energy Corp. ..................... 3,655 175,231
Entergy Corp. ......................... 26,300 719,963
GTE Corp. ............................. 50,600 2,220,075
Houston Industries, Inc. .............. 22,200 475,913
SBC Communications, Inc. .............. 18,900 1,169,437
Texas Utilities Co. ................... 18,200 626,763
------------
10,102,964
------------
TOTAL COMMON STOCKS
(Cost $132,396,135) ( 96.62%) 153,359,259
-------- ------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.17%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities USA, Inc.
Dated 06-30-97, Due 07-01-97
(Secured by U.S. Treasury Notes,
5.625% thru 8.125%, Due 07-31-97
thru 11-15-04) - Note A 5.97% $ 5,024 $ 5,024,000
------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% 4,941
------------
TOTAL SHORT-TERM INVESTMENTS ( 3.17%) $ 5,028,941
-------- ------------
TOTAL INVESTMENTS ( 99.79%) $158,388,200
======== ============
* 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.
14
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
(UNAUDITED)
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 three series portfolios: John Hancock Independence Equity Fund (the "Fund"),
John Hancock Utilities Fund and John Hancock Special Value Fund. The other two
series of the Trust are reported in separate financial statements. The
investment objective of the Fund is to seek above-average total return,
consisting of capital appreciation plus current income.
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 and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant 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 instruments 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 obli-gations 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. Capital gains realized
on some foreign securities are subject to foreign taxes and are accrued, as
applicable.
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.
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.
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 relative net assets of the respective classes. Distribution
and 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.
EXPENSES The majority of the expenses of the Trust are directly identifiable
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
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.
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. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Fund had no borrowing
activity for the period ended June 30, 1997.
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 at fiscal
year end, resulting from changes in the exchange rate.
NOTE B -
MANAGEMENT FEE AND
TRANSACTIONS WITH AFFILIATES AND OTHERS
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) 0.75% of
the first $750,000,000 of the Fund's average daily net asset value and (b) 0.70%
of the Fund's average daily net asset value in excess of $750,000,000. Prior to
September 1, 1995, the investment management fee was 0.50% of the Fund's average
daily net asset value.
The Fund and the Adviser have a sub-investment management contract with
Independence Investment Associates, Inc. (the "Sub-Adviser"), a wholly owned
subsidiary of John Hancock Asset Management, under which the Sub-Adviser
provides the Fund with investment research and portfolio management services.
The Adviser pays the Sub-Adviser a quarterly fee at an annual rate of 55% of the
investment management fee paid by the Fund to the Adviser for the preceding
three months. The Fund is not responsible for payment of the Sub-Adviser's fee.
For the period from July 1, 1995 through February 28, 1997, the Sub-Adviser
waived its fee.
The Adviser limited Fund expenses to 1.30% and 2.00% attributable to Class
A and Class B shares, respectively, of the class' average daily net assets
through February 28, 1997. Accordingly, the reduction in the Adviser's fee
collectively with any additional amounts not borne by the Fund by virtue of the
expense limit amounted to $30,674.
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
30,1997, JH Funds received net sales charges of $453,777 with regard to sales of
Class A shares. Out of this amount, $72,818 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $190,038 was
paid as sales commissions to unrelated broker-dealers, and $190,921 was paid as
sales commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent,
16
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Independence Equity Fund
John Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase are subject
to a contingent deferred sales charge ("CDSC") at declining rates beginning at
5.00% 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 for
providing distribution related services to the Fund in connection with the sale
of Class B shares. For the period ended June 30,1997, the contingent deferred
sales charges received by JH Funds amounted to $60,470.
In addition, to reimburse JH Funds for the services it provides as
distributors 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 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 Signature
Services, Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period was
at an annual rate of 0.01875% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Mr. Richard S. Scipione and Ms. Anne C.
Hodsdon are trustees and officers of the Adviser and its affiliates, as well as
Trustees of the Fund. The compensation of unaffiliated Trustees is borne by the
Fund. 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, 1997, the Fund's investments to cover the defined
compensation liability had unrealized appreciation of $524.
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 30,1997, aggregated $94,536,574 and $29,400,089, respectively. There
were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30,1997.
The cost of investments owned at June 30,1997 (including the joint
repurchase agreement) for federal income tax purposes was $137,420,135. Gross
unrealized appreciation and depreciation of investments aggregated $21,964,774
and $1,001,650, respectively, resulting in net unrealized appreciation of
$20,963,124.
17
<PAGE>
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NOTES
John Hancock Funds - Independence Equity Fund
18
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 Huntington Avenue, Boston, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
Internet: www.jhancock.com/funds
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Independence Equity Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[RECYCLE LOGO] Printed on Recycled Paper 250SA 6/97
8/97
<PAGE>
- --------------------------------------------------------------------------------
John Hancock Funds
- --------------------------------------------------------------------------------
Utilities Fund
SEMIANNUAL REPORT
June 30, 1997
<PAGE>
================================================================================
TRUSTEES
Edward J. Boudreau, Jr.
Dennis S. Aronowitz*
Richard P. Chapman, Jr.*
William J. Cosgrove*
Douglas M. Costle*
Leland O. Erdahl*
Richard A. Farrell*
Gail D. Fosler*
William F. Glavin*
Anne C. Hodsdon
Dr. John A. Moore*
Patti McGill Peterson*
John W. Pratt*
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
200 Clarendon Street
Boston, Massachusetts 02116
TRANSFER AGENT
John Hancock Signature Services, Inc.
1 John Hancock Way, Suite 1000
Boston, Massachusetts 02217-1000
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
LEGAL COUNSEL
Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
Chairman's Message
DEAR FELLOW SHAREHOLDERS:
The stock market has certainly put on a show since the start of the year. Stocks
began 1997 on the high wires, bolstered by a near-perfect "Goldilocks"
economy-not too hot, not too cold. In almost a straight shot, the Dow Jones
Industrial Average soared through the 7000 level for the first time in early
March. Just days later, stocks lost their footing and staged a month-long
free-fall in a nervous reaction to rising interest rates and economic data that
showed the economy was picking up steam. Stocks gave back all of their year's
gain and suffered their worst decline since 1990 during this period. No sooner
had real fears begun to beset investors then they were gone, erased in a
euphoric rally caused by strong earnings and no signs of inflation. By the end
of June, both the Dow and the broader Standard & Poor's 500 Stock Index had
risen by 20%-a level not many thought the market would reach all year, let alone
in six months. Bondholders have not enjoyed the same bounty, as the bond market
has mostly stayed worried about the strength of the economy, the direction of
interest rates, and the Federal Reserve's next moves to pre-empt inflation.
But the stock market's latest advance has amazed many analysts and left
them pondering their valuation models, since the market is now more expensive
than it has been in decades. It's impossible to know what will happen next in
the markets. But whether it's another strong move forward or a retreat, we
recommend keeping a long-term perspective, rather than over-focusing on the
market's daily twists and turns. While the economic backdrop seems to remain
near perfect, the one thing we believe investors should be prepared for is more
market volatility. It also makes sense to do something we've always advocated:
set realistic expectations, since, as we've also seen this year, markets can
move down as fast as they go up.
- --------------------------------------------------------------------------------
A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.
- --------------------------------------------------------------------------------
Use this time of heightened volatility as an opportunity to review your
portfolio's asset allocations with your investment professional. After such a
strong advance in equities over the last two and a half years, it could be time
to rebalance your portfolio, if you haven't already, to maintain your desired
targets of diversification. As part of that process, make sure that your
investment strategies still reflect your individual time horizons, objectives
and risk tolerance. Despite turbulence, one thing remains constant. A
well-constructed plan and a cool head can be the best tools for reaching your
financial goals.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE>
================================================================================
By Gregory K. Phelps, Portfolio Manager
John Hancock
Utilities Fund
Mergers boost telecommunications stocks;
electric utilities volatile with interest-rate moves
A wave of merger and acquisition activity propelled telecommunications stocks to
the near-top of the stock market pack during the past six months. The Federal
Communications Commission cleared the way for "baby bells" Bell Atlantic and
NYNEX to combine, long-distance provider MCI and British Telecom progressed
toward their proposed union and the rumor mill churned with speculation of a
possible marriage between telecom giant AT&T and baby bell SBC Communications.
Excited about the prospect of further merger and acquisition activity-and the
cost savings and higher profits that could potentially emerge from those
unions-investors sent tele-communications stock prices higher in the first half
of 1997.
Investors didn't share the same enthusiasm for natural gas stocks, however.
Unlike their telecommunications counterparts, natural gas companies suffered
when expected mergers between electric and natural gas utilities failed to
materialize. Moreover, lower natural gas prices resulting from a relatively warm
winter and higher interest rates kept a lid on natural gas stock prices.
"...electric
utility stocks
battled a
major bout
of volatility
during the
period..."
Meanwhile, electric utility stocks battled a major bout of volatility
during the period. Electric stocks spent the first quarter of 1997 hamstrung by
higher interest rates and falling bond prices (electric stock prices generally
correlate with price movements in the bond market). But in May and June,
electric stocks rebounded thanks to renewed investor interest due in part to
their attractive prices and relatively high dividend yields.
- --------------------------------------------------------------------------------
A 2 1/4" by 3 1/2" photo of Gregory Phelps. Caption reads "Gregory K. Phelps."
- --------------------------------------------------------------------------------
3
<PAGE>
================================================================================
John Hancock Funds - Utilities Fund
- --------------------------------------------------------------------------------
Pie chart entitled "Portfolio Diversification" at top left hand column. The
chart is divided into six sections. Going from top right to left: Natural Gas
Utilities 37%; Oil & Gas 2%; Telephone & Other Utilities 15%; Telecommunications
3%; Electric Utilities 37%; Short-Term Investments & Other 6%. Footnote below
states "As a percentage of net assets on June 30, 1997."
- --------------------------------------------------------------------------------
"...we
decreased
the Fund's
holding in
gas utility
stocks..."
Performance overview
John Hancock Utilities Fund's Class A and Class B shares had total returns of
4.87% and 4.52%, respectively, at net asset value. By comparison, the average
utilities fund had a total return of 7.55%, according to Lipper Analytical
Services, Inc.1 Please see pages six and seven for longer-term performance
information. The Fund's underperformance can be attributed to two factors.
First, we maintained a defensive stance throughout the period, keeping higher
levels of cash and a larger weighting in cushion-preferred stocks, those with
above-average dividend yields that tend to "cushion" them against price swings.
While that posture served the Fund well in the early part of 1997 when interest
rates were rising, it detracted from performance in May and June when the stock
and bond markets rallied. While we were able to capture some of the recent surge
by paring back our cash and preferred-stock positions and investing in more
telecommunications and electric companies, in hindsight our posture remained too
defensive for too long.
- --------------------------------------------------------------------------------
Table entitled "Scorecard" at bottom of left hand column. The header for the
left hand column is "Investment"; the header for the right column is "Recent
performance .. and what's behind the numbers." The first listing is "Natural gas
stocks" followed by a down arrow and the phrase "Warm winter, lack of takeovers
curtails price gains." The second listing is "Telebras" followed by an up arrow
and the phrase "Continued growth in Brazil for phone service." The third listing
is "Bell Atlantic" followed by an up arrow and the phrase "Progress toward
proposed merger with Nynex." Footnote below states "See "Schedule of
Investments." Investment holdings are subject to change."
- --------------------------------------------------------------------------------
Strategic shifts
Throughout the period, we decreased the Fund's holding in gas utility stocks to
37% of net assets at the end of June, from 43% at the end of 1996. In our view,
long-term trends continue to favor this sector, even though shorter-term
declines made us temporarily cautious. Many cash-rich electric utilities have
their eye on gas utilities as a way to broaden their energy offerings and as a
defensive tactic to prevent competitors from gaining access to their service
areas. Unfortunately, only a tiny handful of these transactions were announced
during the past six months. Given their recent weak performance, it seemed
prudent to sell some of our smaller-capitalization gas distribution utility
stocks and look for more attractive opportunities elsewhere.
We deployed the proceeds from the sale of our gas utility stocks into
selected electric utility, telecommunications companies and foreign utilities.
In the electric sector, we looked for companies with low operating risk and good
total return potential. One example is Teco Energy, a combined electric and gas
provider to a fast-growing part of Florida. The company has no nuclear exposure
and is experiencing impressive revenue growth from its unregulated
energy-related business including coal and methane production, oil and gas
exploration and production and barge transportation. Another electric favorite
was UtiliCorp United, Inc. The company is partnering with AT&T, Peco Energy and
ADT to provide one-stop-shopping for elec-
4
<PAGE>
================================================================================
John Hancock Funds - Utilities Fund
- --------------------------------------------------------------------------------
Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended June 30, 1997." The chart is scaled
in increments of 2% from bottom to top, with 10% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
4.87% total return for John Hancock Utilities Fund: Class A. The second
represents the 4.52% total return for John Hancock Utilities Fund: Class B. The
third represents the 7.55% total return for the average utilities fund. The
footnote below states: "Total returns for John Hancock Utilities Fund are at net
asset value with all distributions reinvested. The average utilities fund is
tracked by Lipper Analytical Services. See the following two pages for
historical performance information."
- --------------------------------------------------------------------------------
tric, phone, gas and home security services, among others.
To our telecommunications roster we added GTE, which could be a very
attractive acquisition or partner candidate with another large
telecommunications company. But irrespective of a possible merger, we think that
the company is attractive in its own right because it is making major
investments in Internet servers and is taking steps to be a formidable
nationwide player in the long distance service. Moreover, the stock offers a
higher dividend yield than most telecom stocks. Two of our largest
telecommunications holdings were some of the best performers. NYNEX and Bell
Atlantic both did well as they proceeded toward their union.
Increase in foreign exposure
Foreign utilities have some advantages over domestic utilities. Most foreign
markets are comparatively underdeveloped, and millions of people don't have
phones or electricity. As nations modernize, many foreign utility companies
should enjoy attractive growth rates. During the period we added foreign
holdings as well as domestic utilities with foreign investments. One example is
Southern Company, which owns a large portion of Consolidated Electric Power of
Asia. In addition to its growing portfolio of foreign electric ventures, we also
like the company for its proven management team and its successful domestic
operations. We also added PowerGen, a U.K. electric generator with no nuclear
exposure and successful energy investments outside its borders.
"...electric
stocks are
priced
attractively
relative
to other
segments
of the
market..."
Outlook
By the end of June it appeared that some of the euphoria over telecommunications
merger activity was waning when the sector suffered from a bout of profit
taking. In our view, telecom stocks are unlikely to repeat their strong
performance in the second half. Therefore, we think that the most attractive
opportunities are in the electric and natural gas sectors. Because they have
underperformed the stock market as a whole, electric stocks are priced
attractively relative to other segments of the stock market, especially given
their high dividend yield. As always, the key to electric company stocks'
performance will be interest rates.
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio manager through the end of
the Fund's period discussed in this report. Of course, the manager's views are
subject to change as market and other conditions warrant.
1Figures from Lipper Analytical Services, Inc. include reinvested dividends and
do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Utilities Fund. Total return is a performance
measure that equals the sum of all income and capital gains distributions,
assuming reinvestment of these distributions and the change in the price of the
Fund's shares, expressed as a percentage 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. 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. Please see the prospectus for risks
associated with industry segment investing.
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
ONE LIFE OF
YEAR FUND
------- --------
John Hancock Utilities Fund: Class A 7.76% 31.77%(1)
John Hancock Utilities Fund: Class B 7.56% 32.48%(1)
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
For the period ended June 30, 1997
ONE LIFE OF
YEAR FUND
------- --------
John Hancock Utilities Fund: Class A(2) 7.76% 8.43%(1)
John Hancock Utilities Fund: Class B(2) 7.56% 8.60%(1)
Notes to Performance
(1) Class A shares and Class B shares commenced on February 1, 1994.
(2) 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 7.36% and 6.93%, respectively. Without the limitation of expenses, the
average annualized total returns for the one-year period and since
inception for Class B shares would have been 7.16% and 7.10%, respectively.
Note:
Due to a printer error in the annual report dated December 31, 1996, a line was
dropped from footnote (2) of the "Notes to Performance" section on Page 6. The
complete sentence was: "Without the limitation of expenses, the average
annualized total returns for the one-year period and since inception would have
been 7.36% and 6.45% for Class A shares and 7.18% and 6.75% for Class B shares,
respectively.
6
<PAGE>
================================================================================
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Utilities Fund would be worth on June 30, 1997. They assume that you either had
invested on the day each class of shares started, or that you have been invested
for the most recent 10 years. In either case, they also assume that you have
reinvested all distributions. For comparison, we've shown the same $10,000
investment in the Dow Jones Utilities Average-an unmanaged index that measures
the performance of the utility industry in the United States. It consists of 15
actively traded stocks representing a cross-section of corporations involved in
various phases of the utility industry.
- --------------------------------------------------------------------------------
Line chart with the heading Utilities Fund: Class A, representing the growth of
a hypothetical $10,000 investment over the life of the fund. Within the chart
there are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Utilities Fund on February 1, 1994, before sales charge, and is equal to
$13,871 as of June 30, 1997. The second line represents the Utilities Fund after
sales charge and is equal to $13,177 as of June 30, 1997. The third line
represents the value of the Dow Jones Utilities Average Index and is equal to
$10,035 as of June 30, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Line chart with the heading Utilities 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 Utilities Fund on February 1, 1994, before contingent deferred sales
charge, and is equal to $13,548 as of June 30, 1997. The second line represents
the Utilities Fund after sales charge and is equal to $13,248 as of June 30,
1997. The third line represents the value of the Dow Jones Utilities Average
Index and is equal to $10,035 as of June 30, 1997.
- --------------------------------------------------------------------------------
7
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Utilities 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, 1997. 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, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common Stocks (cost - $52,650,598) ......................... $ 59,563,169
Preferred Stocks (cost - $5,614,238) ....................... 5,783,050
Joint repurchase agreement (cost - $2,108,000) ............. 2,108,000
-------------
............................................................... 67,454,219
Receivable for investments sold .............................. 554,667
Receivable for shares sold ................................... 11,242
Dividends and interest receivable ............................ 402,891
Foreign tax receivable ....................................... 1,958
Deferred organization expense - Note A ....................... 14,646
Other assets ................................................. 1,956
-------------
Total Assets ..................... 68,441,579
-------------------------------------------------
Liabilities:
Payable for investments purchased ............................ 1,264,468
Payable for shares repurchased ............................... 129,562
Payable to John Hancock Advisers, Inc.
and affiliates - Note B .................................... 57,058
Accounts payable and accrued expenses ........................ 17,652
-------------
Total Liabilities ................ 1,468,740
-------------------------------------------------
Net Assets:
Capital paid-in .............................................. 57,575,958
Accumulated net realized gain on investments ................. 2,310,302
Net unrealized appreciation of investments ................... 7,081,776
Undistributed net investment income .......................... 4,803
-------------
Net Assets ....................... $ 66,972,839
=================================================
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 - $22,469,967 / 2,411,722 ............................ $ 9.32
=============================================================================
Class B - $44,502,872 / 4,790,787 ............................ $ 9.29
=============================================================================
Maximum Offering Price Per Share*
Class A - ($9.32 x 105.26%) .................................. $ 9.81
=============================================================================
* 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
Six months ended June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
Investment Income:
Dividends (net of foreign withholding taxes of $5,873) ....... $ 1,728,237
Interest ..................................................... 76,525
-----------
............................................................... 1,804,762
-----------
Expenses:
Investment management fee - Note B ......................... 244,170
Distribution and service fee - Note B
Class A .................................................. 34,166
Class B .................................................. 234,927
Transfer agent fee - Note B ................................ 99,244
Custodian fee .............................................. 20,100
Registration and filing fees ............................... 19,861
Auditing fee ............................................... 9,670
Printing ................................................... 8,489
Financial services fee - Note B ............................ 6,540
Organization expense - Note A .............................. 4,570
Trustees' fees ............................................. 2,840
Miscellaneous .............................................. 1,362
Legal fees ................................................. 678
-----------
Total Expenses ................... 686,617
-------------------------------------------------
Less Expense
Reductions - Note B .............. ( 139,899)
-------------------------------------------------
Net Expenses ..................... 546,718
-------------------------------------------------
Net Investment Income ............ 1,258,044
-------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain on investments sold ........................ 1,843,362
Change in net unrealized appreciation/depreciation
of investments ............................................. ( 125,396)
-----------
Net Realized and Unrealized
Gain on Investments .............. 1,717,966
-------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........ $ 2,976,010
=================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JUNE 1, 1996 TO JUNE 30, 1997
MAY 31, 1996 DECEMBER 31, 1996 (1) (UNAUDITED)
------------ --------------------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income ..................................................... $ 2,821,920 $ 2,112,347 $ 1,258,044
Net realized gain on investments sold and foreign currency transactions ... 3,976,064 2,892,488 1,843,362
Change in net unrealized appreciation/depreciation of investments ......... 2,347,755 2,412,392 ( 125,396)
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ...................... 9,145,739 7,417,227 2,976,010
------------ ------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.4066, $0.3540 and $0.1865 per share, respectively) ........ ( 1,082,445) ( 858,923) ( 462,623)
Class B - ($0.3441, $0.3052 and $0.1548 per share, respectively) ........ ( 1,783,735) ( 1,614,575) ( 788,822)
Distributions from net realized gain on investments sold
Class A - ($0.0963, $0.7294 and none per share, respectively) ........... ( 311,873) ( 1,758,261) -
Class B - ($0.0963, $0.7294 and none per share, respectively) ........... ( 513,330) ( 3,816,535) -
------------ ------------ ------------
Total Distributions to Shareholders ................................... ( 3,691,383) ( 8,048,294) ( 1,251,445)
------------ ------------ ------------
From Fund Share Transactions - Net*: ........................................ 7,306,556 5,121,469 ( 9,575,732)
------------ ------------ ------------
Net Assets:
Beginning of period ....................................................... 57,572,692 70,333,604 74,824,006
------------ ------------ ------------
End of period (including undistributed net investment income
of $361,151 and distributions in excess of net investment
income of $1,796, and undistributed net investment income
of $4,803, respectively) ................................................ $ 70,333,604 $ 74,824,006 $ 66,972,839
============ ============ ============
<CAPTION>
* Analysis of Fund Share Transactions: PERIOD FROM SIX MONTHS ENDED
YEAR ENDED JUNE 1, 1996 TO JUNE 30, 1997
MAY 31, 1996 DECEMBER 31, 1996 (1) (UNAUDITED)
----------------------- ----------------------- ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ----------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Shares sold ....................................... 4,072,162 $35,815,891 1,071,338 $ 9,968,327 218,953 $ 1,989,609
Shares issued to shareholders in reinvestment
of distributions ................................ 107,077 941,191 265,854 2,397,803 44,545 406,290
--------- ----------- --------- ----------- --------- -----------
.................................................... 4,179,239 36,757,082 1,337,192 12,366,130 263,498 2,395,899
Less shares repurchased ........................... (3,987,048) ( 35,252,919) (1,175,294) ( 10,956,893) ( 474,511) ( 4,289,642)
--------- ----------- --------- ----------- --------- -----------
Net increase (decrease) ........................... 192,191 $ 1,504,163 161,898 $ 1,409,237 ( 211,013) ($ 1,893,743)
--------- ----------- --------- ----------- --------- -----------
CLASS B
Shares sold ....................................... 2,183,807 $18,762,882 835,138 $ 7,777,441 323,248 $ 2,917,298
Shares issued to shareholders in reinvestment
of distributions ................................ 161,956 1,417,990 489,560 4,404,386 67,959 617,967
--------- ----------- --------- ----------- --------- -----------
.................................................... 2,345,763 20,180,872 1,324,698 12,181,827 391,207 3,535,265
Less shares repurchased ........................... (1,656,864) ( 14,378,479) ( 904,956) ( 8,469,595) (1,246,368) ( 11,217,254)
--------- ----------- --------- ----------- --------- -----------
Net increase (decrease) ........................... 688,899 $ 5,802,393 419,742 $ 3,712,232 ( 855,161) ($ 7,681,989)
========= =========== ========= =========== ========= ===========
(1) Effective December 31, 1996, the fiscal year end changed from May 31 to December 31.
</TABLE>
The Statement of Changes in Net Assets shows how the value of the Fund's net
assets has changed since the end of the previous period. The difference reflects
earnings less expenses, any investment gains and losses, distributions paid to
shareholders, and any increase or decrease in money shareholders invested in the
Fund. The footnote illustrates the number of Fund shares sold, reinvested and
repurchased, along with the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
Financial Highlights
Selected data for a share of beneficial interest outstanding throughout each
period indicated, investment returns, key ratios and supplemental data are
listed as follows:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 31, JUNE 1, 1996 TO SIX MONTHS ENDED
------------------------------ TO DECEMBER 31, JUNE 30, 1997
1994(1) 1995 1996 1996(9) (UNAUDITED)
-------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 8.50 $ 8.26 $ 8.48 $ 9.17 $ 9.07
------- ------- ------- ------- -------
Net Investment Income (2) ..................................... 0.12 0.44 0.41 0.30 0.18
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ........................... ( 0.36) 0.12 0.79 0.68 0.26
------- ------- ------- ------- -------
Total from Investment Operations ............................ ( 0.24) 0.56 1.20 0.98 0.44
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .......................... - ( 0.34) ( 0.41) ( 0.35) ( 0.19)
Distributions from Net Realized Gain on Investments Sold ...... - - ( 0.10) ( 0.73) -
------- ------- ------- ------- -------
Total Distributions ......................................... - ( 0.34) ( 0.51) ( 1.08) ( 0.19)
------- ------- ------- ------- -------
Net Asset Value, End of Period ................................ $ 8.26 $ 8.48 $ 9.17 $ 9.07 $ 9.32
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (3) ................ ( 2.82%)(4) 7.10% 14.44% 11.05%(4) 4.87%(4)
Total Adjusted Investment Return at Net Asset Value (3, 5) .... ( 13.89%)(4) 6.44% 14.01% 10.78%(4) 4.67%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ..................... $ 781 $19,229 $22,574 $23,781 $22,470
Ratio of Expenses to Average Net Assets ....................... 1.00%(6) 1.04% 1.04% 1.06%(6) 1.10%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) ...... 12.07%(6) 1.70% 1.47% 1.51%(6) 1.50%(6)
Ratio of Net Investment Income to Average Net Assets .......... 4.53%(6) 5.39% 4.49% 5.44%(6) 4.08%(6)
Ratio of Adjusted Net Investment Income (Loss)
to Average Net Assets (7) .................................. ( 6.54%)(6) 4.73% 4.06% 4.99%(6) 3.68%(6)
Portfolio Turnover Rate ...................................... 6% 98% 124% 48% 31%
Fee Reduction Per Share (2) ................................... $ 0.27 $ 0.05 $ 0.04 $ 0.02 $ 0.02
Average Brokerage Commission Rate (8) ...................... N/A N/A N/A $0.0700 $0.0700
</TABLE>
The Financial Highlights summarizes the impact of the following factors on a
single share for each periods indicated: the net investment income, gains
(losses), distributions and total investment returns 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>
================================================================================
FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 31, JUNE 1, 1996 TO SIX MONTHS ENDED
------------------------------ TO DECEMBER 31, JUNE 30, 1997
1994(1) 1995 1996 1996(9) (UNAUDITED)
-------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
CLASS B
Per Share Operating Performance
Net Asset Value, Beginning of Period .......................... $ 8.50 $ 8.25 $ 8.45 $ 9.14 $ 9.04
------- ------- ------- ------- -------
Net Investment Income (2) ..................................... 0.08 0.38 0.34 0.26 0.15
Net Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions ........................... ( 0.33) 0.12 0.79 0.68 0.25
------- ------- ------- ------- -------
Total from Investment Operations ............................ ( 0.25) 0.50 1.13 0.94 0.40
------- ------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income .......................... - ( 0.30) ( 0.34) ( 0.31) ( 0.15)
Distributions from Net Realized Gain on Investments Sold ...... - - ( 0.10) ( 0.73) -
------- ------- ------- ------- -------
Total Distributions ......................................... - ( 0.30) ( 0.44) ( 1.04) ( 0.15)
------- ------- ------- ------- -------
Net Asset Value, End of Period ................................ $ 8.25 $ 8.45 $ 9.14 $ 9.04 $ 9.29
======= ======= ======= ======= =======
Total Investment Return at Net Asset Value (3) ................ ( 2.94%)(4) 6.31% 13.68% 10.50%(4) 4.52%(4)
Total Adjusted Investment Return at Net Asset Value (3, 5) .... ( 14.01%)(4) 5.65% 13.25% 10.23%(4) 4.32%(4)
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ...................... $ 445 $38,344 $47,759 $51,043 $44,503
Ratio of Expenses to Average Net Assets ....................... 1.72%(6) 1.71% 1.77% 1.75%(6) 1.80%(6)
Ratio of Adjusted Expenses to Average Net Assets (7) .......... 12.79%(6) 2.37% 2.20% 2.20%(6) 2.20%(6)
Ratio of Net Investment Income to Average Net Assets .......... 4.20%(6) 4.64% 3.77% 4.74%(6) 3.38%(6)
Ratio of Adjusted Net Investment Income (Loss)
to Average Net Assets (7) ................................... ( 6.87%)(6) 3.98% 3.34% 4.29%(6) 2.98%(6)
Portfolio Turnover Rate ....................................... 6% 98% 124% 48% 31%
Fee Reduction Per Share (2) ................................... $ 0.27 $ 0.05 $ 0.04 $ 0.02 $ 0.02
Average Brokerage Commission Rate (8) ......................... N/A N/A N/A $0.0700 $0.0700
(1) Class A and Class B shares commenced operations on February 1, 1994.
(2) Based on the average of 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) Annualized.
(7) Unreimbursed, without fee reduction.
(8) Per portfolio share traded. Required for fiscal years that began September 1, 1995 or later.
(9) Effective December 31, 1996, the fiscal year end changed from May 31 to December 31.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
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FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
Schedule of Investments
June 30, 1997 (Unaudited)
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Utilities Fund on June 30, 1997. It's divided into three main categories: common
stocks, preferred stocks and short-term investments. Common and preferred stocks
are further broken down by industry group. Short-term investments, which
represent the Fund's "cash" position, are listed last.
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
COMMON STOCKS
Oil & Gas (7.87%)
Coastal Corp. (Class A) ............. 17,000 $ 904,188
Columbia Gas System, Inc. ........... 11,000 717,750
El Paso Natural Gas Co. ............. 14,500 797,500
Equitable Resources, Inc ............ 30,000 851,250
Tejas Gas Corp.* .................... 19,800 777,150
Williams Cos., Inc. (The) ........... 28,000 1,225,000
-----------
5,272,838
-----------
Telecommunications (8.69%)
Bell Atlantic Corp. ................. 14,750 1,119,156
BellSouth Corp. ..................... 20,000 927,500
GTE Corp. ........................... 20,000 877,500
NYNEX Corp. ......................... 20,000 1,152,500
SBC Communications, Inc. ............ 8,000 495,000
Telecomunicacoes Brasileiras S/A,
American Depositary Receipts
ADR (Brazil) ...................... 5,000 758,750
U.S. WEST Media * ................... 24,000 486,000
-----------
5,816,406
-----------
Utilities (72.38%)
Allegheny Power System, Inc. ........ 30,500 813,969
Bay State Gas Co. ................... 36,800 979,800
Boston Edison Co. ................... 40,000 1,055,000
Brooklyn Union Gas Co. .............. 20,000 572,500
CalEnergy Inc. * .................... 12,000 456,000
CMS Energy Corp. .................... 57,000 2,009,250
Colonial Gas Co. .................... 14,000 294,875
Connecticut Energy Corp. ............ 33,000 800,250
Consolidated Natural Gas Co. ........ 12,500 672,656
Delmarva Power & Light Co. .......... 44,000 838,750
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
DTE Energy Co. ...................... 18,500 $ 511,063
Duke Energy Corp. ................... 20,000 958,750
Eastern Enterprises ................. 27,000 936,562
Edison International ................ 22,000 547,250
EDP-Electricidade de portugal, S.A.
ADR (Portugal) * .................. 10,500 378,000
Energen Corp. ....................... 50,000 1,684,375
Florida Progress Corp. .............. 26,500 829,781
IPALCO Enterprises, Inc. ............ 29,000 906,250
KN Energy, Inc. ..................... 30,000 1,263,750
Long Island Lighting Co. ............ 70,000 1,610,000
MCN Energy Group Inc. ............... 20,000 612,500
MDU Resources Group, Inc. ........... 55,000 1,320,000
MidAmerican Energy Holdings Co. ..... 57,000 986,812
National Fuel Gas Co. ............... 36,000 1,509,750
National Power PLC, ADR
(United Kingdom) .................. 25,000 879,688
New England Electric System ......... 37,000 1,369,000
New Jersey Resources Corp. .......... 35,000 1,098,125
NICOR, Inc. ......................... 27,000 968,625
NUI Corp. ........................... 52,000 1,166,750
ONEOK Inc. .......................... 30,400 978,500
Pacific Enterprises ................. 50,000 1,681,250
PacifiCorp .......................... 50,000 1,100,000
People's Energy Corp ................ 30,000 1,123,125
Piedmont Natural Gas Co., Inc. ...... 30,000 770,625
PowerGen PLC, ADR (United Kingdom) .. 9,000 436,500
Providence Energy Corp. ............. 42,000 735,000
Public Service Enterprise Group, Inc. 32,000 800,000
Puget Sound Power & Light Co. ....... 37,000 980,500
Questar Corp. ....................... 20,000 807,500
SCANA Corp. ......................... 10,600 263,013
Sierra Pacific Resources ............ 30,000 960,000
South Jersey Industries, Inc. ....... 49,000 1,090,250
Southern Co. ........................ 31,000 678,125
Teco Energy, Inc. ................... 29,000 741,313
Unicom Corp. ........................ 20,000 445,000
United Cities Gas Co. ............... 60,000 1,410,000
UtiliCorp United, Inc. .............. 47,000 1,368,875
Washington Gas Light Co. ............ 43,500 1,092,937
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
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FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Utilities (continued)
Washington Water Power Co. ............ 48,500 951,812
Wicor, Inc. ........................... 30,100 $ 1,172,019
Yankee Energy System Inc. ............. 35,000 857,500
-----------
48,723,925
-----------
TOTAL COMMON STOCKS
(Cost $52,650,598) ( 88.94%) 59,563,169
------- -----------
PREFERRED STOCKS
Banks - United States (0.89%)
Chase Manhattan Corp., 10.84%, Ser C .. 19,300 594,681
Diversified Operations (1.53%)
El Paso Tennessee Pipeline Co.,
8.25%, Ser A ........................ 19,000 1,026,000
Finance (1.38%)
SI Financing Trust I, 9.50% ........... 35,000 925,313
Utilities (4.83%)
Capita Preferred Trust, 9.06% ......... 20,000 512,200
Kentucky Power, 8.72%, Ser A .......... 48,700 1,250,981
MCN Michigan L.P., 9.375%, Ser A ...... 30,000 787,500
Sprint Corp. 8.25% .................... 19,000 686,375
-----------
3,237,056
-----------
TOTAL PREFERRED STOCKS
(Cost $5,614,238) ( 8.63%) 5,783,050
------- -----------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE 000s OMITTED) VALUE
- ------------------- ---- ------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (3.15%)
Investment in a joint repurchase
agreement transaction with
Toronto Dominion Securities
USA, Inc. - Dated 06-30-97,
Due 07-01-97 (secured by
U.S. Treasury Notes, 5.625%
thru 8.125% Due 07-31-97
thru 11-15-04) - Note A .... 5.97% $ 2,108 $ 2,108,000
-----------
TOTAL SHORT-TERM INVESTMENTS ( 3.15%) 2,108,000
------- -----------
TOTAL INVESTMENTS (100.72%) $67,454,219
======= ===========
* 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.
13
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
(UNAUDITED)
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 three series portfolios: John Hancock Utilities Fund (the "Fund"), John
Hancock Independence Equity Fund and John Hancock Special Value Fund. The other
two series of the Trust are reported in separate financial statements. The
investment objective of the Fund is to seek current income and, to the extent
consistent with objective, growth of income and long-term growth of capital.
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 and service expenses under
terms of a distribution plan have exclusive voting rights to that distribution
plan.
Significant 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 instruments maturing within 60 days
are valued at amortized cost which approximates market value. All portfolio
transactions initially expressed in terms of foreign currencies have been
translated into U.S. dollars as described in "Foreign Currency Translation"
below.
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 obli-gations 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. Capital gains realized
on some foreign securities are subject to foreign taxes and are accrued as
applicable.
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.
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.
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 relative net assets of the respective classes. Distribution
and 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.
14
<PAGE>
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NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
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.
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. Actual results could differ from these estimates.
BANK BORROWINGS The Fund is permitted to have bank borrowings for temporary or
emergency purposes, including the meeting of redemption requests that otherwise
might require the untimely disposition of securities. The Fund had no borrowing
activity for the period ended June 30, 1997.
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 at fiscal
year end resulting from changes in the exchange rate.
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) 0.70% of the first $250,000,000 of the Fund's
average daily net asset value and (b) 0.65% of the Fund's average daily net
asset value in excess of $250,000,000.
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 0.50% of the
Fund's average daily net assets. Accordingly, the reduction in the Adviser's fee
amounted to $139,899 for the period ended June 30, 1997. 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,
1997, JH Funds received net sales charges of $34,772 with regard to sales of
Class A shares. Out of this amount, $5,333 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $14,132 was paid
as sales commissions to unrelated broker-dealers, and $15,307 was paid as sales
commissions to sales personnel of John Hancock Distributors, Inc.
("Distributors"), a related broker-dealer. The Adviser's indirect parent, John
Hancock Mutual Life Insurance Company ("JHMLICo"), is the indirect sole
shareholder of Distributors.
Class B shares which are redeemed within six years of purchase are subject
to a contingent deferred sales charge ("CDSC") at declining rates beginning at
5.00% 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
15
<PAGE>
================================================================================
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Utilities Fund
in whole or in part to defray its expenses for providing distribution related
services to the Fund in connection with the sale of Class B shares. For the
period ended June 30, 1997, the contingent deferred sales charges received by JH
Funds amounted to $117,297.
In addition, to reimburse JH Funds for the services it provides as
distributors 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 Signature
Services, Inc. ("Signature Services"), a wholly owned subsidiary of JHMLICo. The
Fund pays transfer agent fees based on the number of shareholder accounts and
certain out-of-pocket expenses.
The Fund has an agreement with the Adviser to perform necessary tax and
financial management services for the Fund. The compensation for the period is
at an annual rate of 0.01875% of the average net assets of the Fund.
Mr. Edward J. Boudreau, Jr., Ms. Anne C. Hodsdon and Mr. Richard S.
Scipione are trustees and/or officers of the Adviser and its affiliates, as well
as Trustees of the Fund. The compensation of unaffiliated Trustees is borne by
the Fund. 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, 1997, the Fund's investments to cover the defined
compensation liability had unrealized appreciation of $393.
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, 1997, aggregated $20,370,088 and $29,981,743, respectively. There
were no purchases or sales of obligations of the U.S. government and its
agencies during the period ended June 30, 1997.
The cost of investments owned at June 30, 1997 for federal income tax
purposes was $60,372,836. Gross unrealized appreciation and depreciation of
investments aggregated $7,520,885 and $439,502, respectively, resulting in net
unrealized appreciation of $7,081,383.
16
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NOTES
John Hancock Funds - Utilities Fund
17
<PAGE>
================================================================================
NOTES
John Hancock Funds - Utilities Fund
18
<PAGE>
================================================================================
NOTES
John Hancock Funds - Utilities Fund
19
<PAGE>
================================================================================
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A Global Investment Management Firm U.S. Postage
PAID
101 Huntington Avenue, Boston, MA 02199-7603 Randolph, MA
1-800-225-5291 1-800-554-6713 (TDD) Permit No. 75
Internet: www.jhancock.com/funds
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock Utilities
Fund. It may be used as sales literature when preceded or accompanied by the
current prospectus, which details charges, investment objectives and operating
policies.
[RECYCLE LOGO] Printed on Recycled Paper 410SA 6/97
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