ANNUAL REPORT
- --------------------------------------------------------------------------------
Independence
Equity Fund
DECEMBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<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
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 02109-1803
INDEPENDENT AUDITORS
PRICE WATERHOUSE LLP
160 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 were anything but dull. Bond investors enjoyed the
benefits of a strong economy with no inflation. Stock investors were treated to
record-breaking performance by the Dow Jones Industrial Average, but with
record-breaking volatility. After two years of strong advances with relatively
minor swings, the stock market's recent sharp drops and enormous rebounds have
caused a fair share of investor concern.
The latest round began in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had bounced back, yet it and many markets remained edgy and more
volatile as investors sorted out the Asian turmoil and its implications on
economic growth, interest rates and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ Edward J. Boudreau, Jr.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1 1/4" x 1" photo of Edward J. Boudreau, Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
2
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BY PAUL MCMANUS FOR THE PORTFOLIO MANAGEMENT TEAM
John Hancock
Independence Equity Fund
Stock market's bull run continues in 1997
with heightened volatility
With the economy buoyant and interest rates and inflation low, stocks continued
their long bull-market run throughout 1997. Just as in 1996, the market's charge
was led for much of the year by the well-known mega-cap stocks. They lured
investors with their strong and stable earnings growth. The group only
retrenched in the third quarter after their stock prices soared to pricey
levels, a stronger dollar cut into their overseas profits and small-company
stocks looked relatively more attractive. Overall, the near-perfect economic
environment pushed the major market indexes to historic highs through July.
Beginning in August, however, volatility increased. Concerns grew that a slowing
economy would curtail earnings growth and the winds of economic turmoil in Asia
blew around the world and onto Wall Street, which suffered its largest-ever
one-day point drop in late October. Although volatility soared as investors
fretted about the effects of Asia's currency and financial problems on economic
growth and corporate profits here, the market still managed to recover enough to
turn in a surprisingly strong showing.
For calendar year 1997, the Standard & Poor's 500 Stock Index, a broad
measure of market performance, returned 33.36% including reinvested dividends.
John Hancock Independence Equity Fund also posted a strong return, performing
well on both an absolute and relative basis. For the year ended December 31,
1997, the Fund's Class A and Class B shares posted
"...the
market's charge was led...by
the well-known
mega-cap stocks."
[PHOTO]
[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 and Coreen Kraysler."]
3
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John Hancock Funds - Independence Equity Fund
"Financial stocks were
among the biggest
contributors to the
Fund's
performance."
total returns of 29.19% and 28.39%, respectively, at net asset value. By
comparison, the average growth and income fund returned 27.14% for the same
period, according to Lipper Analytical Services, Inc.(1) Longer-term performance
information can be found on pages six and seven.
Finance and drug stocks outperform
Financial stocks were among the biggest contributors to the Fund's performance.
The combination of falling interest rates, growing profits and heightened
industry consolidations propelled such Fund holdings as Travelers, General Re,
and Citicorp. We have continued to overweight the finance sector since the
fundamentals remain attractive, but lately we've made several shifts. We've
begun to place more emphasis on insurance companies, since their prices remain
relatively attractive, while many bank stocks have risen to a point that they
currently reflect the value of any potential mergers. What's more, we have
become more focused on domestic names, such as Norwest, which do not have
exposure to the Asian markets.
We also scored with our health-care stocks throughout the year, especially
the large drug companies, such as Merck and Warner-Lambert. Their fortunes
continued to be boosted by the strong flow of new products, which have propelled
revenues and earnings. Within the sector, our focus remains on the drug
companies and the distribution companies such as Cardinal Health, while we
avoided the problem-plagued HMO group. Our specialty retail stocks also served
us well, especially industry leader Home Depot, whose stock price rose by 76%
during the year as it maintained its clear market dominance and dependable
growth.
Technology mixed; apparel drab
Technology was a treacherous sector to negotiate during the year. The real
standouts were the large personal computer makers, such as Fund holding Compaq
Computer, which benefited from the growth in personal computer demand. On the
other hand, semiconductor companies, both large and specialty ones, were hit by
competitive pricing pressures and Asia's meltdown. That resulted in
disappointing performance from Intel. We continue to believe that it's a solid
company for the long term, but the volatile price environment during the year
held the sector back.
Despite strong consumer confidence, apparel companies are still struggling
with overcapacity, too much merchandise and a slowdown in orders. As a result,
we sold some of our apparel holdings in the second half, such as Federated, Nine
West and Nike, but kept our stake in Liz Claiborne.
[Chart with heading "Top Five Common Stock Holdings" at top of left hand column.
The chart lists five holdings: 1) General Re 3.0% 2) PepsiCo. 2.9% 3) Merck 2.9%
4) Home Depot 2.7% 5) Cendant 2.7%. A footnote below reads "As a percentage of
net assets on December 31, 1997."]
[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 "Ford Motor
Company" followed by an up arrow and the phrase "Increasing sales of high-profit
sport utility vehicles". The second listing is "Southwest Airlines" followed by
an up arrow and the phrase "Low-cost carrier sees further market expansion". The
third listing is "Entergy" followed by a down arrow and the phrase "Electric
utility experienced regulatory setbacks". Footnote below reads: "See "Schedule
of Investments." Investment holdings are subject to change."]
4
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John Hancock Funds - Independence Equity Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote "For the year ended December 31, 1997." The chart is
scaled in increments of 10% from top to bottom with 30% at the top and 0% at the
bottom. Within the chart, there are three solid bars. The first represents the
29.19% total return for John Hancock Independence Equity Fund: Class A. The
second represents the 28.39% total return for John Hancock Independence Equity
Fund: Class B. The third represents the 27.14% total return for the average
growth and income fund. Footnote below reads: "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, Inc. (1) See the following two pages for historical performance
information.]
Stock shifts
During the year, we sold or cut our positions in some stocks whose prices we
felt had either gotten ahead of earnings expectations, such as specialty
retailer Costco, or had reached full valuation levels, given their prospects for
earnings growth. United Technologies, our largest holding six months ago, was a
prime example. We sold some of that stake after the earnings estimates were
revised downward to account for Asia's woes and the announced slowdown in jet
engine orders by subsidiary Pratt & Whitney. With the cash, we added to our
positions in companies whose prices we believed were too low for their earnings
prospects. That included PepsiCo, whose sale of its restaurant divisions and
return to its core bottling business bode well for its stock. We also increased
our stake in Cendant (formerly HFS), which owns Avis and Century 21. We like the
fact that it's a consolidator increasing its revenues through smart combinations
of compatible industries. Finally, we shifted some assets within the
telecommunications group from long-distance carrier GTE, whose earnings are
slowing with growing capital expenditures, to local Bell Atlantic, which is
benefiting from its recent merger with Nynex.
Outlook
As stock investors, we couldn't ask for a better economic environment, and that
keeps our outlook positive for 1998. The economy, even if slowing, shows signs
that it will continue to grow at a reasonable pace. At the same time, the
interest-rate picture remains good, given tame inflation and a shrinking budget
deficit. That said, we do not believe it is reasonable to expect the market to
produce a fourth year of 20%-plus returns. Even though we said it a year ago and
were proven wrong, we still believe investors would do well to scale back their
expectations for 1998. Historically, the market has produced annual returns in
the 8% to 10% range. What's more, we expect the volatile conditions of the
fourth quarter to remain in place.
No matter what the market does next, we will stick to our proven strategy
of buying companies with attractive stock prices and improving earnings
prospects. We remain focused on providing shareholders with above-average total
returns by investing in a diversified stock portfolio that has a risk level
comparable to that of the S&P 500.
"...investors would do
well to scale back their
expectations for 1998."
- --------------------------------------------------------------------------------
This commentary reflects the views of the portfolio managers through the end of
the Fund's period discussed in this report. Of course, the managers' views are
subject to change as market and other conditions warrant.
(1)Figures 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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John Hancock Funds - Independence Equity Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
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
measures the change in value of an investment from the beginning to the end of a
period, assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended December 31, 1997
SINCE
ONE FIVE INCEPTION
YEAR YEARS (6/10/91)
---- ----- ---------
Cumulative Total Returns 22.73% 131.99% 174.76%
Average Annual Total Returns(1) 22.73% 18.33% 16.66%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (9/7/95)
---- --------
Cumulative Total Returns 23.39% 64.05%
Average Annual Total Returns(1) 23.39% 23.51%
Notes to Performance
(1) 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 average 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 returns for the one-year
period, five-year period and since inception for Class A shares would have
been 22.71%, 17.65% and 15.86%, respectively.Without the limitation of
expenses, the average annualized returns for the one-year period and since
inception for Class B shares would have been 23.37% and 23.02%,
respectively.
6
<PAGE>
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John Hancock Funds - Independence Equity Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Independence Equity Fund would be worth, assuming all distributions were
reinvested for the period indicated. 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 often used as a
measure of stock market performance. Past performance is not indicative of
future results.
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 $29,471 as of December 31, 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 $28,922 as of December 31, 1997. The third line represents the Independence
Equity Fund, after sales charge, and is equal to $27,476 as of December 31,
1997.]
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 $18,114 as of December 31, 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 $16,705 as of December 31, 1997. The third line represents the value of
the Independence Equity Fund, after sales charge, and is equal to $16,405 as of
December 31, 1997.]
7
<PAGE>
==============================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 December 31, 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
December 31, 1997
- --------------------------------------------------------------------------------
Assets:
Investments at value - Note C:
Common stocks (cost - $194,022,079) ....................... $225,790,379
Joint repurchase agreement (cost - $884,000) .............. 884,000
Corporate savings account ................................. 4,752
-------------
226,679,131
Receivable for shares sold ................................. 557,612
Dividends and interest receivable .......................... 359,106
Other assets ............................................... 2,771
-------------
Total Assets ................................... 227,598,620
------------------------------------------------------------------
Liabilities:
Payable for investments purchased .......................... 137,685
Payable for shares repurchased ............................. 54,356
Payable to John Hancock Advisers, Inc.
and affiliates - Note B ................................... 60,172
Accounts payable and accrued expenses ...................... 203,904
-------------
Total Liabilities .............................. 456,117
------------------------------------------------------------------
Net Assets:
Capital paid-in ............................................ 194,324,709
Accumulated net realized gain on investments ............... 1,051,202
Net unrealized appreciation of investments ................. 31,768,811
Distributions in excess of net investment income ........... (2,219)
-------------
Net Assets ..................................... $227,142,503
==================================================================
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 - $92,203,559/3,853,006 ............................ $23.93
===============================================================================
Class B - $134,938,944/5,670,818 ........................... $23.80
===============================================================================
Maximum Offering Price Per Share*
Class A - ($23.93 x 105.26%) ............................... $25.19
===============================================================================
* 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
Year ended December 31, 1997
- -----------------------------------------------
Investment Income:
Dividends
(net of foreign withholding taxes of $11,997) .............. $2,702,460
Interest .................................................... 276,613
-------------
2,979,073
-------------
Expenses:
Investment management fee - Note B ........................ 1,192,014
Distribution and service fee - Note B
Class A ................................................. 192,783
Class B ................................................. 946,743
Transfer agent fee - Note B ............................... 400,101
Registration and filing fees .............................. 99,471
Custodian fee ............................................. 50,431
Financial services fee - Note B ........................... 28,710
Auditing fee .............................................. 19,000
Printing .................................................. 13,741
Trustees' fees ............................................ 6,795
Miscellaneous ............................................. 4,831
Legal fees ................................................ 2,071
-------------
Total Expenses .................................. 2,956,691
------------------------------------------------------------------
Less Expense Reductions -
Note B ......................................... (30,674)
------------------------------------------------------------------
Net Expenses .................................... 2,926,017
------------------------------------------------------------------
Net Investment Income ........................... 53,056
------------------------------------------------------------------
Realized and Unrealized Gain on Investments:
Net realized gain on investments sold ........................ 11,206,508
Change in net unrealized appreciation/depreciation
of investments .............................................. 25,810,786
-------------
Net Realized and Unrealized
Gain on Investments .............................. 37,017,294
------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ........................ $37,070,350
==================================================================
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM YEAR ENDED
YEAR ENDED JUNE 1, 1996 TO DECEMBER 31,
MAY 31, 1996 DECEMBER 31, 1996(1) 1997
------------ -------------------- ----
<S> <C> <C> <C>
Increase (Decrease) in Net Assets:
From Operations:
Net investment income .................................................... $224,281 $225,132 $53,056
Net realized gain on investments sold .................................... 13,818,303 1,034,147 11,206,508
Change in net unrealized appreciation/depreciation of investments ........ (9,915,169) 4,069,742 25,810,786
------------ ------------ ------------
Net Increase in Net Assets Resulting from Operations ................... 4,127,415 5,329,021 37,070,350
------------ ------------ ------------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.2181, $0.1414 and $0.0427 per share, respectively) ...... (468,688) (167,880) (99,081)
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 $1.0977 per share, respectively) ...... (2,049,001) (414,417) (4,040,583)
Class B - (none, $0.2683 and $1.0977 per share, respectively) ......... -- (564,553) (5,860,104)
------------ ------------ ------------
Total Distributions to Shareholders .................................. (2,530,757) (1,202,014) (10,041,677)
------------ ------------ ------------
From Fund Share Transactions - Net:* ....................................... (73,011,934) 39,344,533 126,639,255
------------ ------------ ------------
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 $2,219, respectively) .......................................... $30,003,015 $73,474,575 $227,142,503
============ ============ ============
</TABLE>
* Analysis of Fund Share Transactions:
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED JUNE 1, 1996 TO YEAR ENDED
MAY 31, 1996 DECEMBER 31, 1996 (1) DECEMBER 31, 1997
--------------------------- ------------------------ -------------------------
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 2,917,766 $ 65,492,230
Shares issued to shareholders in
reinvestment of distributions ........... 176,962 2,504,943 27,332 526,305 159,427 3,773,395
----------- ------------- --------- ------------ --------- ------------
1,126,964 18,194,321 1,151,919 21,424,670 3,077,193 69,265,625
Less shares repurchased ................. (7,336,631) (105,475,141) (382,213) (7,170,830) (821,416) (18,986,208)
----------- ------------- --------- ------------ --------- ------------
Net increase (decrease) ................. (6,209,667) ($87,280,820) 769,706 $ 14,253,840 2,255,777 $ 50,279,417
=========== ============= ========= ============ ========= ============
CLASS B **
Shares sold ............................. 904,689 $ 15,323,273 1,443,084 $ 26,902,723 4,007,681 $ 87,926,902
Shares issued to shareholders in
reinvestment of distributions ........... 1,324 21,802 28,065 544,384 219,752 5,188,064
----------- ------------- --------- ------------ --------- ------------
906,013 15,345,075 1,471,149 27,447,107 4,227,433 93,114,966
Less shares repurchased ................. (63,879) (1,076,189) (126,145) (2,356,414) (743,753) (16,755,128)
----------- ------------- --------- ------------ --------- ------------
Net increase (decrease) ................. 842,134 $ 14,268,886 1,345,004 $ 25,090,693 3,483,680 $ 76,359,838
=========== ============= ========= ============ ========= ============
</TABLE>
** 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.
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
<PAGE>
==============================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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED MAY 31, JUNE 1, 1996 YEAR ENDED
-------------------------------------------- TO DECEMBER 31, DECEMBER
1993 1994 1995 1996 1996(9) 31, 1997
-------- -------- -------- -------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
CLASS A
Per Share Operating Performance
Net Asset Value, Beginning of Period ............ $10.98 $12.16 $12.68 $14.41 $17.98 $19.42
-------- -------- -------- -------- -------- --------
Net Investment Income ........................... 0.22 0.28(2) 0.32(2) 0.20(2) 0.13(2) 0.10(2)
Net Realized and Unrealized Gain on
Investments ................................. 1.25 0.52 1.77 3.88 1.72 5.55
-------- -------- -------- -------- -------- --------
Total from Investment Operations .............. 1.47 0.80 2.09 4.08 1.85 5.65
-------- -------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income .......... (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) (1.10)
-------- -------- -------- -------- -------- --------
Total Distributions ......................... (0.29) (0.28) (0.36) (0.51) (0.41) (1.14)
-------- -------- -------- -------- -------- --------
Net Asset Value, End of Period ................. $12.16 $12.68 $14.41 $17.98 $19.42 $23.93
======== ======== ======== ======== ======== ========
Total Investment Return
at Net Asset Value (3) ........................ 13.58% 6.60% 16.98% 29.12% 10.33%(6) 29.19%
Total Adjusted Investment Return
at Net Asset Value (3,4) ...................... 11.40% 6.15% 16.94% 28.47% 10.08%(6) 29.17%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ........ $12,488 $66,612 $101,418 $14,878 $31,013 $92,204
Ratio of Expenses to Average Net Assets ......... 0.76% 0.70% 0.70% 0.94% 1.30%(7) 1.42%
Ratio of Adjusted Expenses to Average Net
Assets (5) .................................... 2.94% 1.15% 0.74% 1.59% 1.73%(7) 1.44%
Ratio of Net Investment Income to Average Net
Assets ........................................ 2.36% 2.20% 2.43% 1.55% 1.16%(7) 0.45%
Ratio of Adjusted Net Investment Income to
Average Net Assets (5) ....................... 0.18% 1.75% 2.39% 0.90% 0.73%(7) 0.43%
Portfolio Turnover Rate ......................... 53% 43% 71% 157% 35% 62%
Fee Reduction Per Share ......................... $0.20 $0.06(2) $0.005(2) $0.08(2) $0.05(2) --(2,10)
Average Brokerage Commission Rate (8) ........... N/A N/A N/A N/A $0.0326 $0.0440
</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
PERIOD ENDED JUNE 1, 1996 TO YEAR ENDED
MAY 31, 1996(1) DECEMBER 31, 1996(9) DECEMBER 31, 1997
--------------- -------------------- -----------------
<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 (Loss)(2) ............................................ 0.09 0.05 (0.06)
Net Realized and Unrealized Gain on Investments ............................ 2.71 1.72 5.56
-------- -------- --------
Total from Investment Operations ....................................... 2.80 1.77 5.50
-------- -------- --------
Less Distributions:
Dividends from Net Investment Income ..................................... (0.09) (0.05) (0.01)
Distributions from Net Realized Gain on Investments Sold ................. -- (0.27) (1.10)
-------- -------- --------
Total Distributions .................................................... (0.09) (0.32) (1.11)
-------- -------- --------
Net Asset Value, End of Period ............................................. $17.96 $19.41 $23.80
======== ======== ========
Total Investment Return at Net Asset Value (3) ............................. 18.46%(6) 9.83%(6) 28.39%
Total Adjusted Investment Return at Net Asset Value (3,4) .................. 17.59%(6) 9.58%(6) 28.37%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ................................... $15,125 $42,461 $134,939
Ratio of Expenses to Average Net Assets .................................... 2.00%(7) 2.00%(7) 2.12%
Ratio of Adjusted Expenses to Average Net Assets (5) ....................... 3.21%(7) 2.43%(7) 2.14%
Ratio of Net Investment Income (Loss) to Average Net Assets ................ 0.78%(7) 0.45%(7) (0.25%)
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (5) ... (0.43%)(7) 0.02%(7) (0.27%)
Portfolio Turnover Rate .................................................... 157% 35% 62%
Fee Reduction Per Share (2) ................................................ $0.13 $0.05 --(10)
Average Brokerage Commission Rate (8) ...................................... N/A $0.0326 $0.0440
</TABLE>
(1) Class B shares commenced operations on September 7, 1995.
(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) An estimated total return calculation that does not take into
consideration fee reductions by the Adviser during the periods shown.
(5) Unreimbursed, without fee reduction.
(6) Not annualized.
(7) Annualized.
(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.
(10) Less than $0.01 per share.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Independence Equity Fund on December 31, 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 (3.03%)
Northrop Grumman Corp. ....................... 13,200 $1,518,000
Precision Castparts Corp. .................... 6,900 416,156
Raytheon Co. ................................. 2,308 113,837
United Technologies Corp. .................... 66,300 4,827,469
------------
6,875,462
------------
Automobile/Trucks (3.00%)
Dana Corp. ................................... 6,000 285,000
Ford Motor Co. ............................... 89,000 4,333,187
General Motors Corp. ......................... 36,200 2,194,625
------------
6,812,812
------------
Banks - United States (6.52%)
Bank of New York Co., Inc. ................... 5,900 341,094
BankAmerica Corp. ............................ 65,800 4,803,400
Bankers Trust New York Corp. ................. 17,800 2,001,387
Citicorp ..................................... 43,000 5,436,812
Comerica, Inc. ............................... 13,100 1,182,275
Norwest Corp. ................................ 18,000 695,250
State Street Corp. ........................... 6,100 354,944
------------
14,815,162
------------
Beverages (2.93%)
PepsiCo, Inc. ................................ 182,500 6,649,844
------------
Building (0.54%)
Masco Corp. .................................. 23,900 1,215,913
------------
Business Services - Misc. (0.14%)
Dun & Bradstreet Corp. ....................... 10,300 318,656
------------
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Chemicals (1.70%)
Air Products & Chemicals, Inc. .................. 27,900 $2,294,775
Millennium Chemicals, Inc. ...................... 16,000 377,000
Morton International, Inc. ...................... 15,200 522,500
Praxair, Inc. ................................... 14,700 661,500
------------
3,855,775
------------
Computers (7.09%)
Autodesk, Inc. .................................. 18,500 684,500
Bay Networks, Inc.* ............................ 18,200 465,237
Cadence Design Systems, Inc.* ................... 30,200 739,900
Compaq Computer Corp.* .......................... 26,700 1,506,881
Computer Associates International, Inc. ......... 33,800 1,787,175
Hewlett-Packard Co. ............................. 49,700 3,106,250
International Business Machines Corp. ........... 17,600 1,840,300
Microsoft Corp.* ................................ 33,100 4,278,175
Parametric Technology Corp.* .................... 9,313 441,203
PeopleSoft, Inc.* ............................... 32,400 1,263,600
------------
16,113,221
------------
Cosmetics & Personal Care (1.06%)
Dial Corp. (The) ................................ 95,100 1,979,269
Revlon, Inc. (Class A) * ........................ 12,300 434,344
------------
2,413,613
------------
Diversified Operations (4.05%)
Allied Signal, Inc. ............................. 40,200 1,565,288
Corning, Inc. ................................... 40,900 1,518,412
Du Pont (E.I.) De Nemours & Co. ................. 41,700 2,504,606
National Service Industries, Inc. ............... 13,500 669,094
Tenneco, Inc. ................................... 6,500 256,750
Textron, Inc. ................................... 43,100 2,693,750
------------
9,207,900
------------
Electronics (5.55%)
General Electric Co. ............................ 78,500 5,759,937
Honeywell, Inc. ................................. 40,800 2,794,800
Intel Corp. ..................................... 24,900 1,749,225
Linear Technology Corp. ......................... 12,100 697,263
Raychem Corp. ................................... 25,600 1,102,400
Texas Instruments, Inc. ......................... 11,100 499,500
------------
12,603,125
------------
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Finance (3.23%)
Ahmanson (H.F.) & Co. .......................... 11,100 $743,006
American Express Co. ........................... 15,400 1,374,450
Household International, Inc. .................. 7,600 969,475
MBNA Corp. ..................................... 44,250 1,208,578
Morgan Stanley, Dean Witter,
Discover & Co. ............................... 51,500 3,044,938
------------
7,340,447
------------
Food (1.58%)
ConAgra, Inc. .................................. 58,000 1,903,125
Quaker Oats Co. ................................ 32,000 1,688,000
------------
3,591,125
------------
Funeral Services & Related (0.13%)
Service Corp. International .................... 7,800 288,113
------------
Instruments - Scientific (0.51%)
Perkin-Elmer Corp. ............................. 16,400 1,165,425
------------
Insurance (7.95%)
American International Group, Inc. ............. 15,800 1,718,250
CIGNA Corp. .................................... 2,000 346,125
Equitable Cos., Inc. (The) ..................... 28,800 1,432,800
General Re Corp. ............................... 31,800 6,741,600
Hartford Financial Services
Group, Inc. (The) ........................... 18,900 1,768,331
Marsh & McLennan Cos., Inc. .................... 32,400 2,415,825
Travelers Group, Inc. .......................... 56,700 3,054,713
Travelers Property Casualty Corp. ..............
(Class A) .................................... 13,000 572,000
------------
18,049,644
------------
Leisure (2.79%)
Cendant Corp. .................................. 176,806 6,077,712
Promus Hotel Corp.(new) ........................ 6,290 264,180
------------
6,341,892
------------
Machinery (0.59%)
Cooper Industries, Inc. ........................ 13,000 637,000
Deere & Co. .................................... 11,900 693,919
------------
1,330,919
------------
Medical (11.34%)
Abbott Laboratories ............................ 30,700 2,012,769
Allegiance Corp. ............................... 26,000 921,374
Becton, Dickinson & Co. ........................ 9,400 470,000
Bristol-Myers Squibb Co. ....................... 42,200 3,993,175
Cardinal Health, Inc. .......................... 31,700 2,381,462
Glaxo Wellcome PLC American Depositary
Receipts (ADR) (United Kingdom) .............. 20,700 991,012
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Medical (continued)
Health Management Associates, Inc. .............
(Class A)* ................................... 26,700 $674,175
HEALTHSOUTH Corp.* ............................. 80,500 2,233,875
Johnson & Johnson .............................. 45,400 2,990,725
Merck & Co., Inc. .............................. 62,000 6,587,500
Schering-Plough Corp. .......................... 19,800 1,230,075
Warner-Lambert Co. ............................. 10,300 1,277,200
------------
25,763,342
------------
Mortgage Banking (1.06%)
Fannie Mae ..................................... 42,000 2,396,625
------------
Office (3.03%)
Avery Dennison Corp. ........................... 15,600 698,100
Pitney Bowes, Inc. ............................. 24,000 2,158,500
Xerox Corp. .................................... 54,800 4,044,925
------------
6,901,525
------------
Oil & Gas (10.11%)
Anadarko Petroleum Corp. ....................... 12,800 776,800
Atlantic Richfield Co. ......................... 10,000 801,250
Baker Hughes, Inc. ............................. 17,000 741,625
British Petroleum Co. PLC (ADR)
(United Kingdom) ............................. 29,500 2,350,781
Chevron Corp. .................................. 40,800 3,141,600
Dresser Industries, Inc. ....................... 27,500 1,153,281
El Paso Natural Gas Co. ........................ 14,000 931,000
Exxon Corp. .................................... 25,500 1,560,281
Imperial Oil Ltd. (Canada) ..................... 7,400 473,137
Mobil Corp. .................................... 6,800 490,875
Phillips Petroleum Co. ......................... 76,800 3,734,400
Rowan Cos., Inc.* .............................. 14,000 427,000
Schlumberger, Ltd. ............................. 29,400 2,366,700
Texaco, Inc. ................................... 30,300 1,647,563
USX - Marathon Group ........................... 70,300 2,372,625
------------
22,968,918
------------
Paper & Paper Products (0.57%)
Fort James Corp. ............................... 17,300 661,725
International Paper Co. ........................ 14,700 633,938
------------
1,295,663
------------
Retail (4.80%)
Costco Cos., Inc.* ............................. 7,400 330,225
Home Depot, Inc. ............................... 104,550 6,155,381
Lowe's Cos., Inc. .............................. 47,000 2,241,313
Staples, Inc.* ................................. 33,150 919,913
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Retail (continued)
TJX Cos., Inc. ................................. 19,400 $666,875
Wal-Mart Stores, Inc. .......................... 14,900 587,619
------------
10,901,326
------------
Soap & Cleaning Preparations (1.69%)
Proctor & Gamble Co. (The) ..................... 48,000 3,831,000
------------
Steel (0.25%)
British Steel PLC (ADR)
(United Kingdom) ........................... 26,200 561,662
------------
Telecommunications (2.38%)
Lucent Technologies, Inc. ...................... 67,800 5,415,524
------------
Textile (0.73%)
Liz Claiborne, Inc. ............................ 23,000 961,688
Tommy Hilfiger Corp.* .......................... 19,800 695,475
------------
1,657,163
------------
Tobacco (1.34%)
Philip Morris Cos., Inc. ....................... 67,100 3,040,469
------------
Transport (1.84%)
Burlington Northern Santa Fe ................... 15,200 1,412,650
Norfolk Southern Corp. ......................... 17,400 536,138
Southwest Airlines Co. ......................... 91,000 2,240,875
------------
4,189,663
------------
Utilities (7.88%)
Baltimore Gas & Electric Co. ............... 51,900 1,767,844
Bell Atlantic Corp. ........................ 60,600 5,514,600
BellSouth Corp. ............................ 12,700 715,169
Consolidated Natural Gas Co. ............... 32,600 1,972,300
Entergy Corp. .............................. 26,300 787,356
Florida Progress Corp. ..................... 29,000 1,138,250
FPL Group, Inc. ............................ 15,600 923,325
GTE Corp. .................................. 50,600 2,643,850
Houston Industries, Inc. ................... 22,200 592,463
Montana Power Co. .......................... 18,500 588,531
Texas Utilities Co. ........................ 18,200 756,438
US WEST Communications Group ............... 10,600 478,325
------------
17,878,451
------------
TOTAL COMMON STOCKS
(Cost $194,022,079) (99.41%) 225,790,379
------- ------------
INTEREST PAR VALUE MARKET
ISSUER, DESCRIPTION RATE (000s OMITTED) VALUE
- ------------------- ---- -------------- -----
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (0.39%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc., Dated 12-31-97,
Due 01-02-98 (Secured by U.S.
Treasury Notes, 6.50% thru
13.25%, Due 04-30-99 thru
11-15-16) - Note A ................. 6.60% $884 $884,000
------------
CORPORATE SAVINGS ACCOUNT (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% ................. 4,752
------------
TOTAL SHORT-TERM INVESTMENTS (0.39%) 888,752
-------- ------------
TOTAL INVESTMENTS (99.80%) 226,679,131
-------- ------------
OTHER ASSETS AND LIABILITIES (0.20%) 463,372
-------- ------------
TOTAL NET ASSETS (100.00%) $227,142,503
======== ============
* 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>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Independence Equity Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust"), is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series portfolios: John Hancock Independence Equity Fund (the "Fund"),
and John Hancock Special Value Fund. The other series of the Trust is 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 obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
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. 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 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
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Independence Equity Fund
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. These agreements enable
the Fund to participate with other Funds managed by the Adviser in an unsecured
line of credit with banks which permits borrowings up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended December 31, 1997.
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.
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 had agreed to limit Fund expenses to 1.30% and 2.00%
attributable to Class A and Class B shares, respectively, of the Classes'
average daily net assets though 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 year ended December
31,1997, JH Funds received net sales of $842,977 with regard to sales of Class A
shares. Out of this amount, $134,403 was retained and used for printing
prospectuses, advertising, sales literature and other purposes, $376,719 was
paid as sales commissions to unrelated broker-dealers, and $331,855 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 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 year ended December 31,1997, the contingent deferred
sales charges received by JH Funds amounted to $146,844.
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
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Independence Equity Fund
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 year was at
an annual rate of less than 0.02% 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 December 31, 1997, the Fund's investments to cover the defined
compensation liability had unrealized appreciation of $520.
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 year
ended December 31,1997, aggregated $212,079,475 and $93,992,856, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended December 31,1997.
The cost of investments owned at December 31,1997 (excluding the corporate
savings account) for federal income tax purposes was $194,927,244. Gross
unrealized appreciation and depreciation of investments aggregated $35,493,999
and $3,746,864, respectively, resulting in net unrealized appreciation of
$31,747,135.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the year ended December 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of $842,302,
a decrease in distributions in excess of net investment income of $77,185 and an
increase in capital paid-in of $765,117. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of December 31, 1997. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on the net
asset value of the Fund, are primarily attributable to certain differences in
the computation of distributable income and capital gains under federal tax
rules versus generally accepted accounting principles and the Fund's use of the
tax accounting practice known as equalization. The calculation of net investment
income per share in the financial highlights excludes these adjustments.
14
<PAGE>
================================================================================
John Hancock Funds - Independence Equity Fund
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of John Hancock Independence Equity Fund and the Trustees of
John Hancock Capital Series
In our opinion, the accompanying statement of assets and liabilities, including
the schedule of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of John Hancock Independence Equity
Fund (the "Fund") (a series of John Hancock Capital Series) at December 31,
1997, and the results of its operations, the changes in its net assets and the
financial highlights for the periods indicated, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities owned at December 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where investments purchased were not yet received by the custodian,
provide a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Boston, Massachusetts
February 6, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during the fiscal year ended December
31, 1997.
The Fund designated a distribution to shareholders of $3,771,764 as a
long-term capital gain dividend, of which $2,228,495 is a 28% rate gain
distribution and $1,543,269 is a 20% rate gain distribution. These amounts were
reported on the 1997 U.S. Treasury Department Form 1099-DIV.
With respect to the dividends paid by the Fund for the fiscal year ended
December 31,1997, 39.50% of the dividends qualify for the corporate dividends
received deduction.
18
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Independence Equity 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
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 2500A 12/97
2/98
<PAGE>
ANNUAL REPORT
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
Special
Value Fund
DECEMBER 31, 1997
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
<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 02109-1803
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
---------------------------------------
===============================CHAIRMAN'S MESSAGE===============================
DEAR FELLOW SHAREHOLDERS:
The financial markets in 1997 were anything but dull. Bond investors
enjoyed the benefits of a strong economy with no inflation. Stock investors were
treated to record-breaking performance by the Dow Jones Industrial Average, but
with record-breaking volatility. After two years of strong advances with
relatively minor swings, the stock market's recent sharp drops and enormous
rebounds have caused a fair share of investor concern.
The latest round began in October and was largely due to uncertainty in
foreign markets. Southeast Asia sneezed and the rest of the world caught a cold.
On October 27, the Dow experienced its largest one-day point decline, dropping
554 points. In percentage terms, however, that roughly 7% decline didn't even
register on the list of 10 largest drops. The next day, the market bounced right
back, as the Dow had a record one-day vault of 337 points. In short order, the
U.S. market had bounced back, yet it and many markets remained edgy and more
volatile as investors sorted out the Asian turmoil and its implications on
economic growth, interest rates and corporate earnings.
In the face of such uncertainty, a trusted investment professional can be
your best ally. Now, more than ever, your investment professional can help you
take the emotion out of investment decisions. At a time when your instincts
might have you react to the heat of the market's moment, your investment
professional can serve as an objective voice to put current events in a
longer-term perspective. He or she can also help you evaluate your investments
in any market environment to ensure that they fit your risk tolerance and time
horizons. On an ongoing basis, your investment professional is there for you to
check out new investment ideas or to get an informed opinion about current
economic and market conditions.
We encourage you to take advantage of this important resource. Working
together, you can draw up a detailed road map to help reach your financial
destination regardless of the conditions along the way.
Sincerely,
/s/ EDWARD J. BOUDREAU, JR.
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief
Executive Officer, flush right, next to second paragraph.]
2
<PAGE>
================================================================================
BY TIMOTHY KEEFE, CFA, PORTFOLIO MANAGER
John Hancock
Special Value Fund
Large-company stocks outperform small ones
in stock market's 1997 advance
The stock market produced spectacular returns for a third straight year, swept
along on the favorable currents of a buoyant economy, falling interest rates and
remarkably tame inflation. The result was greater-than-expected corporate
earnings and rising stock prices, although not all companies shared equally in
the bounty. The market had a decidedly two-tiered complexion, as the sun shone
for much of 1997 on the biggest stocks, driving up the return of the Standard &
Poor's 500 Stock Index to 33.36%. Investors were drawn to these companies'
sizable and more predictable earnings. Overall, small-company stocks -- which
are the Fund's main focus -- stayed in the shadows, except for a brief interlude
in the third quarter, when they emerged amid concerns that the strong dollar was
eroding the multinationals' profits. But their reign ended in late October, when
the spreading Asian market tumult hit Wall Street with its largest one-day point
drop ever, and pushed investors back into the safe-haven arms of larger
companies. The U.S. market rebounded quickly, but investor confidence was shaken
and volatility spiked through year end.
Performance review
Over the last 12 months, John Hancock Special Value Fund produced a strong
absolute return. For the year ended December 31, 1997, the Fund's Class A and
Class B shares posted total returns of 25.25% and 24.41%, respectively, at net
asset value. That compared to the 27.14% return of the average growth and income
fund.
"The stock market produced spectacular returns for a third straight year..."
[A 2 1/4" x 3 1/2" photo of the portfolio management team at bottom
right. Caption reads: "Special Value Fund management team members (l - r):
Anurag Pandit, Tim Keefe and Ben Hock."]
3
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
"Several of our top holdings were among our best performers."
We attribute the Fund's slight lag to its greater focus on small stocks than
that of many of its growth and income peers.
Several of our top holdings were among our best performers. Number one
holding AmerUs Life Holdings, a consolidator in the life insurance industry,
benefited from its takeover of insurer AMV. We bought AMV after its buyout was
announced, as an inexpensive way to have access to AmerUs' growing earnings
potential. We bought the preferred stock of our second-largest holding,
Financial Security Assurance Holding (Salomon, Inc.-FSA), at a very compelling
price, and it served us very well during the year. This insurer of municipal
bonds benefited from falling interest rates and the growing number of municipal
bonds coming to the market insured. It also reaped the rewards of the market's
recognition of its stable, growing business. The potential for large-scale
refinancings of municipal debt continues to bode well for the company.
Finance mixed
Overall, our financial group had its share of ups and downs. Executive Risk was
a stellar performer in the specialty insurance area, focusing on several
highly-defined niche markets while growing rapidly and intelligently. The stock
of savings and loan Astoria Financial took off and we took profits, as it
successfully grew earnings through consolidations within its New York-area
market.
Our bet in the consumer finance subsector proved troubling during the
year, however, as we basically "round tripped" the sector. In the second
quarter, we bought several of what we considered to be the best companies in the
group at a point when their stocks were very attractive. Back then, the group
had come under pressure with the perception of rising payment delinquencies and
personal bankruptcies. After we bought them, the stocks climbed nicely
throughout the third quarter. The sector had another setback, however, when one
of its category leaders, which the Fund never owned, fell upon hard times. Its
fate tainted the entire group and our holding in ContiFinancial. The Money Store
and AMRESCO basically returned to the levels at which we bought them during the
year. On top of that, another holding, FIRSTPLUS Financial, had its stock hit by
concerns about accounting issues, but management's changes to the accounting
methods subsequently reassured the market. Despite the sector's temporary woes,
we not only held on, but also took advantage of the price weakness to increase
our stake in ContiFinancial. We think the market has punished the sector more
than it deserves and that the current valuation levels reflect the worst-case
scenario, given the earnings growth potential that we believe still exists.
[Chart with the heading "Top Five Common Stock Holdings" at top of left
hand column. The chart lists five holdings: 1) AmerUs Life Holdings 3.7%; 2)
Salomon, Inc. (FSA) 3.6%; 3) DECS Trust 3.2%; 4) Oak Industries 2.7%; 5) Daniel
Industries 2.7%. A footnote below states: "As a percentage of net assets on
December 31, 1997."]
[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 AmerUs Life
Holdings followed by an up arrow and the phrase "Favorable acquisition boosts
stock." The second listing is "Executive Risk" followed by an up arrow and the
phrase "Dominant player in specialty insurance." The third listing is
"CalEnergy" followed by a down arrow and the phrase "Market fears utility
company's Asian exposure." Footnote below states "See "Schedule of Investments."
Investment holdings are subject to change."]
4
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
[Page 5 Bar chart with heading "Fund Performance" at top of left hand column.
Under the heading is the footnote: "For the year ended December 31, 1997." The
chart is scaled in increments of 5% from bottom to top, with 30% at the top and
0% at the bottom. Within the chart, there are three solid bars. The first
represents the 25.25% total return for John Hancock Special Value Fund: Class A.
The second represents the 24.41% return for John Hancock Special Value Fund:
Class B. The third represents the 27.14% return for the average growth and
income fund. The footnote below states: "Total returns for John Hancock Special
Value Fund are at net asset value with all distributions reinvested. The average
growth and income fund is tracked by Lipper Analytical Services, Inc. (1) See
the following two pages for historical performance information."]
Buys and sells
As always, we continued to pursue our strategy of owning good, solid long-term
companies that we could buy at prices not reflective of their true worth. We
added auto insurer 20th Century Industries because we like the dynamics of the
industry, given the decline in both auto repair and medical costs. We also
bought several utility stocks, which disappointed in the near term. We were
drawn to CalEnergy after its stock fell to very attractive valuation levels in
the wake of the Asian turmoil, due to its exposure to the region. Unfortunately,
we didn't buy at the bottom, and its stock price dropped another 20%. We don't
believe we were wrong about the company's prospects, just early. New buy Calpine
suffered an earnings disappointment because of a change in natural gas prices.
Conversely, we sold our stake in companies where we believed the
fundamentals of the business peaked along with stock prices. These included real
estate company Trizec Hahn, commodity paper company Glatfelter and envelope
company Mail-well. Mail-well's stock rose by 271% in the year, making it the New
York Stock Exchange's number three performer and giving the Fund some of its
best gains.
The year ahead
We remain optimistic about the prospects for small-company stocks in 1998. After
lagging large-cap stocks for more than a year now, their prices remain very
attractive compared to their larger brethren's. While market volatility will
persist as events in Asia continue to unfold, we believe that investors will
inevitably turn back to the smaller companies. Not only are they a good buy, but
also they derive the bulk of their earnings at home, eliminating overseas
currency and slowdown concerns. Whenever the turn comes, the move up could be
swift, as often happens with the small-cap world. In any event, we'll keep
applying our disciplined strategy to find good companies currently selling at
prices that don't reflect their earnings potential. We believe that's the best
way to capture the price gains and manage risk.
"We remain optimistic about the prospects for small-company stocks in 1998."
- --------------------------------------------------------------------------------
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.
(1)Figures from Lipper Analytical Services, Inc. include reinvested dividends
and do not take into account sales charges. Actual load-adjusted performance is
lower.
5
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
- --------------------------------------------------------------------------------
A LOOK AT PERFORMANCE
- --------------------------------------------------------------------------------
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Special Value Fund. Total return measures the
change in value of an investment from the beginning to the end of a period,
assuming all distributions were reinvested.
For Class A shares, total return figures include a maximum applicable sales
charge of 5%. Class B performance reflects a maximum contingent deferred sales
charge (maximum 5% and declining to 0% over six years).
All figures represent past performance and are no guarantee of future results.
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 read your
prospectus carefully before you invest or send money.
- --------------------------------------------------------------------------------
CLASS A
- --------------------------------------------------------------------------------
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (1/3/94)
-------------- --------------
Cumulative Total Returns 18.99% 74.18%
Average Annual Total Returns (1) 18.99% 14.91%
- --------------------------------------------------------------------------------
CLASS B
- --------------------------------------------------------------------------------
For the period ended December 31, 1997
SINCE
ONE INCEPTION
YEAR (1/3/94)
-------------- --------------
Cumulative Total Returns 19.41% 75.05%
Average Annual Total Returns (1) 19.41% 15.06%
Notes to Performance
(1) The Adviser has voluntarily undertaken to limit the Fund's expenses,
including the management fee (but not including the transfer fee and the
12b-1 fee), to the extent required to prevent expenses from exceeding
0.40% of the Fund's net asset value. Without the limitation of expenses,
the average annualized total returns for the one-year period and since
inception for Class A shares would have been 18.39% and 13.37%,
respectively. The average annualized total returns for the one-year period
and the since inception for Class B shares would have been 18.81% and
13.52%, respectively.
6
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
- --------------------------------------------------------------------------------
WHAT HAPPENED TO A $10,000 INVESTMENT...
- --------------------------------------------------------------------------------
The charts on the right show how much a $10,000 investment in the John Hancock
Special Value Fund would be worth, assuming all distributions were reinvested
for the periods indicated. 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 often used as a measure of stock
market performance. Past performance is not indicative of future results.
[CHARTS OMITTED]
[Line chart with the heading Special Value Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Standard &
Poor's 500 Stock Index and is equal to $22,845 as of December 31, 1997. The
second line represents the value of the hypothetical $10,000 investment made in
the Special Value Fund on January 3, 1994, before sales charge, and is equal to
$18,335 as of December 31, 1997. The third line represents the value of the
hypothetical $10,000 investment made in the Special Value Fund on January 3,
1994, after sales charge, and is equal to $17,418 as of December 31, 1997.]
[Line chart with the heading Special Value Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines. The first line represents the value of the Standard &
Poor's 500 Stock Index and is equal to $22,845 as of December 31, 1997. The
second line represents the value of the hypothetical $10,000 investment made in
the Special Value Fund, before sales charge, on January 3, 1994, and is equal to
$17,805 as of December 31, 1997. The third line represents the value of the
hypothetical $10,000 investment made in the Special Value Fund on January 3,
1994, after sales charge, and is equal to $17,505 as of December 31, 1997.]
7
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
The Statement of Assets and Liabilities is the Fund's balance sheet and shows
the value of what the Fund owns, is due and owes on December 31, 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
December 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C>
Assets:
Investments at value - Note C:
Common stocks (cost - $38,849,266) ...................................... $ 45,209,686
Preferred stocks (cost - $3,565,183) .................................... 4,357,500
Joint repurchase agreement (cost - $6,362,000) .......................... 6,362,000
Corporate savings account ............................................... 551
------------
55,929,737
Receivable for shares sold ............................................... 82,932
Dividends and interest receivable ........................................ 26,541
Receivable from John Hancock Advisers, Inc.
and affiliates - Note B ................................................. 11,811
Deferred organization expenses - Note A .................................. 22,752
Other assets ............................................................. 699
------------
Total Assets ................................................. 56,074,472
----------------------------------------------------------------------------
Liabilities:
Payable for shares repurchased ........................................... 52,537
Accounts payable and accrued expenses .................................... 27,912
------------
Total Liabilities ............................................ 80,449
----------------------------------------------------------------------------
Net Assets:
Capital paid-in .......................................................... 48,876,419
Accumulated net realized loss on investments and
foreign currency transactions ........................................... (34,386)
Net unrealized appreciation of investments ............................... 7,152,845
Distributions in excess of net investment income ......................... (855)
------------
Net Assets ................................................... $ 55,994,023
============================================================================
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)
Class A - $20,961,241/1,708,928 .......................................... $12.27
========================================================================================
Class B - $35,032,782/2,869,401 .......................................... $12.21
========================================================================================
Maximum Offering Price Per Share*
Class A - ($12.27 x 105.26%) ............................................. $12.92
========================================================================================
</TABLE>
* On single retail sales of less than $50,000. On sales of $50,000 or more and
on group sales the offering price is reduced.
The Statement of Operations summarizes the Fund's investment income earned and
expenses incurred in operating the Fund. It also shows net gains (losses) for
the period stated.
Statement of Operations
Year ended December 31, 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
<S> <C>
Investment Income:
Dividends (net of foreign withholding taxes of $4,357) ................... $515,479
Interest ................................................................. 127,132
------------
642,611
------------
Expenses:
Investment management fee - Note B ..................................... 308,999
Distribution and service fee - Note B
Class A .............................................................. 52,844
Class B .............................................................. 265,281
Transfer agent fee - Note B ............................................ 128,930
Custodian fee .......................................................... 45,089
Registration and filing fees ........................................... 26,433
Organization expense - Note A .......................................... 22,561
Printing ............................................................... 11,171
Financial services fee - Note B ........................................ 7,999
Auditing fee ........................................................... 12,300
Trustees' fees ......................................................... 3,026
Miscellaneous .......................................................... 1,661
Legal fees ............................................................. 505
------------
Total Expenses ............................................... 886,799
----------------------------------------------------------------------------
Less Expense Reductions -
Note B ....................................................... (263,172)
----------------------------------------------------------------------------
Net Expenses ................................................. 623,627
----------------------------------------------------------------------------
Net Investment Income ........................................ 18,984
----------------------------------------------------------------------------
Realized and Unrealized Gain (Loss) on Investments
and Foreign Currency Transactions:
Net realized gain on investments sold .................................... 2,743,998
Net realized loss on foreign currency transactions ....................... (733)
Change in net unrealized appreciation/depreciation
of investments ......................................................... 5,495,186
------------
Net Realized and Unrealized
Gain on Investments .......................................... 8,238,451
----------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations .................................... $8,257,435
============================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
--------------------------
Increase (Decrease) in Net Assets:
From Operations:
<S> <C> <C>
Net investment income ................................................... $312,838 $18,984
Net realized gain on investments sold and foreign currency transactions.. 4,332,628 2,743,265
Change in net unrealized appreciation/depreciation of investments ....... (652,765) 5,495,186
----------- -----------
Net Increase in Net Assets Resulting from Operations ................... 3,992,701 8,257,435
----------- -----------
Distributions to Shareholders:
Dividends from net investment income
Class A - ($0.1419 and $0.0321 per share, respectively) ............... (190,450) (45,691)
Class B - ($0.0658 and none per share, respectively) ................... (122,533) --
Distributions from net realized gain on investments sold
Class A - ($1.2413 and $0.6043 per share, respectively) ............... (1,697,467) (969,735)
Class B - ($1.2413 and $0.6043 per share, respectively) ............... (2,382,887) (1,638,314)
----------- -----------
Total Distributions to Shareholders .................................... (4,393,337) (2,653,740)
----------- -----------
From Fund Share Transactions-- Net* ....................................... 8,511,666 12,440,562
----------- -----------
Net Assets:
Beginning of period ..................................................... 29,838,736 37,949,766
----------- -----------
End of period (including distributions in excess of net investment income
of $521 and $855, respectively) ........................................ $37,949,766 $55,994,023
=========== ===========
<CAPTION>
* Analysis of Fund Share Transactions:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1997
-------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold .................................................. 949,766 $10,398,879 912,881 $11,525,980
Shares issued to shareholders in reinvestment of distributions 175,933 1,796,295 80,006 955,849
----------- ------------ ----------- ------------
1,125,699 12,195,174 992,887 12,481,829
Less shares repurchased ...................................... (825,851) (8,997,914) (820,449) (9,680,373)
----------- ------------ ----------- ------------
Net increase ................................................. 299,848 $3,197,260 172,438 $2,801,456
=========== ============ =========== ============
CLASS B
Shares sold .................................................. 716,837 $7,786,094 1,324,877 $16,869,969
Shares issued to shareholders in reinvestment of distributions 206,399 2,101,655 116,538 1,394,961
----------- ------------ ----------- ------------
923,236 9,887,749 1,441,415 18,264,930
Less shares repurchased ...................................... (417,470) (4,573,343) (714,300) (8,625,824)
----------- ------------ ----------- ------------
Net increase ................................................. 505,766 $5,314,406 727,115 $9,639,106
=========== ============ =========== ============
</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 and foreign currency 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 two periods, along with
the corresponding dollar value.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value 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>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994(1) 1995 1996 1997
--------- --------- --------- ---------
CLASS A
Per Share Operating Performance
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................................... $8.50 $8.99 $10.39 $10.32
--------- --------- --------- ---------
Net Investment Income (2) .............................................. 0.18 0.21 0.14 0.06
Net Realized and Unrealized Gain on Investments ........................ 0.48 1.60 1.17 2.52
--------- --------- --------- ---------
Total from Investment Operations .................................... 0.66 1.81 1.31 2.58
--------- --------- --------- ---------
Less Distributions:
Dividends from Net Investment Income .................................. (0.17) (0.20) (0.14) (0.03)
Distributions from Net Realized Gain on Investments Sold .............. -- (0.21) (1.24) (0.60)
--------- --------- --------- ---------
Total Distributions ................................................. (0.17) (0.41) (1.38) (0.63)
--------- --------- --------- ---------
Net Asset Value, End of Period ......................................... $8.99 $10.39 $10.32 $12.27
========= ========= ========= =========
Total Investment Return at Net Asset Value (3) ........................ 7.81%(4) 20.26% 12.91% 25.25%
Total Adjusted Investment Return at Net Asset Value (3,5) ............. 7.30%(4) 19.39% 12.20% 24.65%
Ratios and supplemental data
Net Assets, End of Period (000s omitted) ............................... $4,420 $12,845 $15,853 $20,961
Ratio of Expenses to Average Net Assets ................................ 0.99%(7) 0.98% 0.99% 0.99%
Ratio of Adjusted Expenses to Average Net Assets (6) ................... 4.98%(7) 1.85% 1.70% 1.59%
Ratio of Net Investment Income to Average Net Assets ................... 2.10%(7) 2.04% 1.31% 0.47%
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (6) (1.89%)(7) 1.17% 0.60% (0.13%)
Portfolio Turnover Rate ................................................ 0.3% 9% 72% 140%
Fee Reduction Per Share (2) ............................................ $0.34 $0.09 $0.08 $0.07
Average Broker Commission Rate (8) ..................................... N/A N/A $0.0658 $0.0654
</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 - Special Value Fund
Financial Highlights (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1994(1) 1995 1996 1997
---------- ---------- ---------- ----------
CLASS B
Per Share Operating Performance
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period ................................... $8.50 $9.00 $10.38 $10.31
---------- ---------- ---------- ----------
Net Investment Income (Loss) (2) ....................................... 0.13 0.12 0.07 (0.03)
Net Realized and Unrealized Gain on Investments ........................ 0.48 1.59 1.17 2.53
---------- ---------- ---------- ----------
Total from Investment Operations .................................... 0.61 1.71 1.24 2.50
---------- ---------- ---------- ----------
Less Distributions:
Dividends from Net Investment Income .................................. (0.11) (0.12) (0.07) --
Distributions from Net Realized Gain on Investments Sold .............. -- (0.21) (1.24) (0.60)
---------- ---------- ---------- ----------
Total Distributions ................................................. (0.11) (0.33) (1.31) (0.60)
---------- ---------- ---------- ----------
Net Asset Value, End of Period ......................................... $9.00 $10.38 $10.31 $12.21
========== ========== ========== ==========
Total Investment Return at Net Asset Value (3) ........................ 7.15%(4) 19.11% 12.14% 24.41%
Total Adjusted Investment Return at Net Asset Value (3,5) ............. 6.64%(4) 18.24% 11.43% 23.81%
Ratios and Supplemental Data
Net Assets, End of Period (000s omitted) ............................... $3,296 $16,994 $22,097 $35,033
Ratio of Expenses to Average Net Assets ................................ 1.72%(7) 1.73% 1.69% 1.69%
Ratio of Adjusted Expenses to Average Net Assets (6) ................... 5.71%(7) 2.60% 2.40% 2.29%
Ratio of Net Investment Income (Loss) to Average Net Assets ............ 1.53%(7) 1.21% 0.62% (0.24%)
Ratio of Adjusted Net Investment Income (Loss) to Average Net Assets (6) (2.46%)(7) 0.34% (0.09%) (0.84%)
Portfolio Turnover Rate ................................................ 0.3% 9% 72% 140%
Fee Reduction Per Share (2) ............................................ $0.34 $0.09 $0.08 $0.07
Average Broker Commission Rate (8) ..................................... N/A N/A $0.0658 $0.0654
</TABLE>
(1) Class A and Class B shares commenced operations on January 3, 1994.
(2) Based on the average of the shares outstanding at the end of each month.
(3) Assumes dividend reinvestment and does not reflect the effect of sales
charges.
(4) Not annualized.
(5) An estimated total return calculation that does not take into
consideration expense reductions by the Adviser during the periods shown.
(6) Unreimbursed, without fee reduction.
(7) Annualized.
(8) Per portfolio share traded. Required for fiscal years that began September
1, 1995 or later.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
Schedule of Investments
December 31, 1997
- --------------------------------------------------------------------------------
The Schedule of Investments is a complete list of all securities owned by the
Special Value Fund on December 31, 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
Advertising (1.51%)
Princeton Video Image, Inc.* ..................... 90,000 $843,750
----------
Aerospace (1.11%)
AAR Corp. ........................................ 16,000 620,000
----------
Agricultural Operations (2.74%)
Scheid Vineyards Inc. (Class A)* ................. 7,000 63,875
Tejon Ranch Co. .................................. 60,500 1,470,906
----------
1,534,781
----------
Banks - United States (1.65%)
First Union Corp. ................................ 18,000 922,500
----------
Building (1.43%)
Coachmen Industries, Inc. ........................ 37,000 797,812
----------
Business Services - Misc (0.47%)
Securacom, Inc.* ................................. 1,700 16,575
Sensormatic Electronics Corp. .................... 15,000 246,563
----------
263,138
----------
Chemicals (2.65%)
Millennium Chemicals, Inc. ....................... 6,285 148,090
Solutia, Inc. * .................................. 5,000 133,437
Sybron Chemicals, Inc.* .......................... 35,900 1,202,650
----------
1,484,177
----------
Computers (4.36%)
Advanced Digital Information Corp.* .............. 15,000 247,500
Award Software International, Inc.* .............. 20,000 150,000
Computer Sciences Corp.* ......................... 10,000 835,000
Creative Technology Ltd.* (Singapore) ............ 20,000 440,000
Data Dimensions, Inc.* ........................... 7,500 129,374
OAO Technology Solutions, Inc.* .................. 900 8,325
Quantum Corp.* ................................... 20,000 401,250
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Computers (continued)
Symix Systems, Inc.* ............................. 15,000 $232,500
----------
2,443,949
----------
Consumer Products, Misc. (5.33%)
Gibson Greetings, Inc.* .......................... 50,900 1,113,437
Russ Berrie & Co., Inc. .......................... 54,300 1,425,375
Samsonite Corp.* ................................. 14,100 445,913
----------
2,984,725
----------
Diversified Operations (1.71%)
Viad Corp. ....................................... 49,500 955,969
----------
Electronics (5.92%)
DII Group, Inc.* ................................. 26,400 719,400
Oak Industries, Inc.* ............................ 51,000 1,514,063
Sanmina Corp. .................................... 13,398 907,714
SCI Systems, Inc.* ............................... 4,000 174,250
----------
3,315,427
----------
Energy (3.46%)
CalEnergy Co., Inc* ............................. 26,000 747,500
Calpine Corp.* ................................... 80,000 1,190,000
----------
1,937,500
----------
Finance (8.97%)
Ahmanson (H.F.) & Co. ............................ 7,000 468,563
AMRESCO, Inc.* ................................... 10,200 308,550
ContiFinancial Corp.* ............................ 42,300 1,065,431
Core Cap, Inc. (r) ............................... 22,200 444,000
FIRSTPLUS Financial Group, Inc.* ................. 27,000 1,036,125
GreenPoint Financial Corp. ....................... 10,000 725,625
MoneyGram Payment Systems, Inc.* ................ 77,500 833,125
Safeguard Scientifics, Inc.* .................... 4,500 141,188
----------
5,022,607
----------
Food (0.93%)
Authentic Specialty Foods, Inc.* ................ 10,000 136,250
Morrison Health Care, Inc. ...................... 19,333 386,660
----------
522,910
----------
Instruments - Scientific (0.78%)
Millipore Corp. ................................. 12,800 434,400
----------
Insurance (12.67%)
Allmerica Financial Corp. ....................... 18,500 923,844
AmerUs Life Holdings, Inc. (Class A) ............ 56,482 2,082,759
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Insurance (continued)
CMAC Investment Corp. ........................... 24,000 $1,449,000
ESG Re Ltd.* (Bermuda) .......................... 3,900 91,650
Executive Risk, Inc. ............................ 15,000 1,047,187
Frontier Insurance Group, Inc. .................. 17,500 400,313
HCC Insurance Holdings, Inc. .................... 10,200 216,750
Penn-America Group, Inc. ........................ 4,100 84,050
20th Century Industries ......................... 30,800 800,800
----------
7,096,353
----------
Leisure (2.12%)
Circus Circus Enterprises, Inc.* ................ 10,000 205,000
Equity Marketing, Inc.* ......................... 23,900 597,500
Galileo International, Inc. ..................... 14,100 389,513
----------
1,192,013
----------
Linen Supply & Related (1.82%)
Angelica Corp. .................................. 45,000 1,018,125
----------
Media (1.29%)
Central Newspapers, Inc. (Class A) .............. 5,200 384,475
Holdingmaatschappij De Telegraaf
(Netherlands) ................................. 18,000 339,181
----------
723,656
----------
Mortgage Banking (1.31%)
Money Store, Inc. (The) ......................... 35,000 735,000
----------
Oil & Gas (4.52%)
Daniel Industries, Inc. ......................... 78,300 1,507,275
Parker Drilling Co.* ............................ 74,200 904,312
Triton Energy Ltd.* ............................ 4,000 116,750
----------
2,528,337
----------
Pollution Control (0.69%)
Philip Services Corp.* (Canada) ................. 27,000 388,125
----------
Retail (6.47%)
Darden Restaurants, Inc. ........................ 25,000 312,500
Dominick's Supermarkets, Inc.* .................. 33,000 1,204,500
Ruddick Corp. ................................... 80,000 1,395,000
Savoir Technology Group, Inc.* .................. 30,000 311,250
SED International Holdings, Inc.* ............... 35,300 397,125
----------
3,620,375
----------
Telecommunications (6.02%)
Cable Design Technologies* ...................... 9,000 349,875
EIS International, Inc.* ........................ 158,700 872,850
MCI Communications Corp. ........................ 4,500 192,656
RCN Corp.* ...................................... 25,000 856,250
U.S. West Media Group* .......................... 18,000 519,750
MARKET
ISSUER, DESCRIPTION NUMBER OF SHARES VALUE
- ------------------- ---------------- -----
Telecommunications (continued)
360 Communications Co.* ......................... 28,600 $577,363
----------
3,368,744
----------
Transport (0.81%)
Northwest Airlines Corp. (Class A)* ........... 2,500 119,688
Teekay Shipping Corp. ......................... 10,000 335,625
----------
455,313
----------
TOTAL COMMON STOCK
(Cost $38,849,266) (80.74%) 45,209,686
------- ----------
PREFERRED STOCK
Broker Services (3.57%)
Salomon Inc. 7.625%, Ser FSA .................. 50,000 2,000,000
----------
Finance (0.99%)
Core Cap, Inc. 10%, Ser A/I (r) ............... 22,200 555,000
----------
Tobacco (3.22%)
DECS Trust, 8.50% ............................. 70,000 1,802,500
----------
TOTAL PREFERRED STOCK
(Cost $3,565,183) (7.78%) 4,357,500
------- ----------
INTEREST PAR VALUE
RATE (000s OMITTED)
-------- --------------
SHORT-TERM INVESTMENTS
Joint Repurchase Agreement (11.37%)
Investment in a joint repurchase
agreement transaction with HSBC
Securities, Inc. - Dated 12-31-97,
Due 01-02-97 (Secured by U.S.
Treasury Bonds, 7.25% thru 13.25%
Due 11-15-08 thru 11-15-16, and
U.S. Treasury Note 6.50%
Due 04-30-99) - Note A ............. 6.60% $6,362 6,362,000
----------
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
==============================FINANCIAL STATEMENTS==============================
John Hancock Funds - Special Value Fund
PAR VALUE MARKET
ISSUER, DESCRIPTION (000S OMITTED) VALUE
- ------------------- -------------- -----
Corporate Savings Account (0.00%)
Investors Bank & Trust Company
Daily Interest Savings Account
Current Rate 4.95% .................... $551
-----------
TOTAL SHORT-TERM INVESTMENTS (11.37%) 6,362,551
--------- -----------
TOTAL INVESTMENTS (99.89%) 55,929,737
--------- -----------
OTHER ASSETS AND LIABILITIES, NET (0.11%) 64,286
--------- -----------
TOTAL NET ASSETS (100.00%) $55,994,023
========= ===========
* Non-income producing security
(r) The security listed below is a direct placement security and is restricted
as to resale. The Fund has limited rights to registration under the
Securities Act of 1933 with respect to restricted securities (not
including rule 144A securities). In certain circumstances the Fund may
bear a portion of the cost of such registrations; otherwise, such costs
would be borne by the issuer. Additional information on this restricted
security is as follows:
<TABLE>
<CAPTION>
Market Value
As a Percentage Market Value
Acquisition Acquisition of Funds at December 31
Date Cost Net Assets 1997
---- ---- ---------- ----
<S> <C> <C> <C> <C>
Core Cap, Inc. (Common) 10-31-97 $444,000 0.79% $444,000
Core Cap, Inc. (Preferred) 10-31-97 555,000 0.99% 555,000
</TABLE>
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 - Special Value Fund
NOTE A -
ACCOUNTING POLICIES
John Hancock Capital Series (the "Trust") is an open-end management investment
company, registered under the Investment Company Act of 1940. The Trust consists
of two series: John Hancock Special Value Fund (the "Fund"), and John Hancock
Independence Equity. The other series of the Trust is reported in separate
financial statements. The investment objective of the Fund is to seek capital
appreciation with income as a secondary consideration by investing primarily in
equity securities that are comparatively undervalued and are out of favor.
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 accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required.
DIVIDENDS, INTEREST AND DISTRIBUTIONS Dividend income on investment securities
is recorded on the ex-dividend date or, in the case of some foreign securities,
on the date thereafter when the Fund is made aware of the dividend. Interest
income on investment securities is recorded on the accrual basis. Foreign income
may be subject to foreign withholding taxes which are accrued as applicable.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting 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 calculated at the Fund level and allocated daily to each class of
shares based on the appropriate 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 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.
15
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Value Fund
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. These agreements enable
the Fund to participate with other Funds managed by the Advisor in an unsecured
line of credit with banks which permits borrowings of up to $600 million,
collectively. Interest is charged to each Fund, based on its borrowing, at a
rate equal to 0.50% over the Fed Funds Rate. In addition, a commitment fee, at a
rate of 0.075% per annum based on the average daily unused portion of the line
of credit, is allocated among the participating Funds. The Fund had no borrowing
activity for the year ended December 31, 1997.
FOREIGN CURRENCY TRANSLATION All assets and liabilities initially expressed in
terms of foreign currencies are translated into U.S. dollars based on London
currency exchange quotations as of 5:00 P.M. London time on the date of any
determination of the net asset value of the Fund. Transactions affecting
statement of operations accounts and net realized gain/(loss) on investments are
translated at the rates prevailing at the dates of the transactions.
The Fund does not isolate that portion of the results of operations resulting
from changes in foreign exchange rates on investments from the fluctuations
arising from changes in market prices of securities held. Such fluctuations are
included with the net realized and unrealized gain or loss from investments.
Reported net realized foreign exchange gains or losses arise from sales of
foreign currency, currency gains or losses realized between the trade and
settlement dates on securities transactions and the difference between the
amounts of dividends, interest and foreign withholding taxes recorded on the
Fund's books and the U.S. dollar equivalent of the amounts actually received or
paid. Net unrealized foreign exchange gains or losses arise from changes in the
value of assets and liabilities other than investments in securities at fiscal
year end, resulting from changes in the exchange rate.
NOTE B -
MANAGEMENT FEE AND TRANSACTIONS
WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of 0.70% of the Fund's average daily net asset
value.
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the transfer agent fee and the 12b-1 fee), to 0.40% of the
Fund's average daily net assets. Accordingly, the reduction in the Adviser's fee
amounted to $263,172 for the year ended December 31, 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 year ended December
31, 1997, net sales charges received with regard to sales of Class A shares
amounted to $122,064. Out of this amount, $18,087 was retained and used for
printing prospectuses, advertising, sales literature and other purposes, $65,511
was paid as sales commissions to unrelated broker-dealers and $38,466 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 will be subject
to a contingent deferred sales charge ("CDSC") at declining rates beginning at
5.0% of the lesser of the current market value at the time of redemption or the
original purchase cost of the shares being redeemed. Proceeds from the CDSC are
paid to JH Funds and are used in whole or in part to defray its expenses related
to providing
16
<PAGE>
==========================NOTES TO FINANCIAL STATEMENTS=========================
John Hancock Funds - Special Value Fund
distribution-related services to the Fund in connection with the sale of Class B
shares. For the year ended December 31, 1997, contingent deferred sales charges
paid to JH Funds amounted to $75,235.
In addition, to reimburse JH Funds for the services it provides as distributor
of shares of the Fund, the Fund has adopted a Distribution Plan with respect to
Class A and Class B pursuant to Rule 12b-1 under the Investment Company Act of
1940. Accordingly, the Fund will make payments to JH Funds for distribution and
service expenses, at an annual rate not to exceed 0.30% of Class A average daily
net assets and 1.00% of Class B average daily net assets to reimburse JH Funds
for its distribution/service costs. Up to a maximum of 0.25% of such payments
may be service fees as defined by the amended Rules of Fair Practice of the
National Association of Securities Dealers. Under the amended Rules of Fair
Practice, curtailment of a portion of the Fund's 12b-1 payments could occur
under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Signature Services,
Inc. ("Signature Services"), an indirect subsidiary of JHMLICo. The Fund pays
Signature Services a fee 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 year was at
an annual rate of less than 0.02% 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/or 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 December 31, 1997, the Fund's investments to cover the deferred
compensation liability had unrealized appreciation of $108.
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 year
ended December 31, 1997, aggregated $63,221,079 and $57,980,547, respectively.
There were no purchases or sales of obligations of the U.S. government and its
agencies during the year ended December 31, 1997.
The cost of investments owned at December 31, 1997 (excluding the corporate
savings account), for federal income tax purposes was $48,827,334. Gross
unrealized appreciation and depreciation of investments aggregated $10,063,582
and $2,961,730, respectively, resulting in net unrealized appreciation of
$7,101,852.
NOTE D -
RECLASSIFICATION OF ACCOUNTS
During the period ended December 31, 1997, the Fund has reclassified amounts to
reflect a decrease in accumulated net realized gain on investments of $439,002,
a decrease in distributions in excess of net investment income of $26,373 and an
increase in capital paid-in of $412,629. This represents the amount necessary to
report these balances on a tax basis, excluding certain temporary differences,
as of December 31, 1997. Additional adjustments may be needed in subsequent
reporting periods. These reclassifications, which have no impact on the net
asset value of the Fund, are primarily attributable to net foreign currency
transactions and certain differences in the computation of distributable income
and capital gains under federal tax rules versus generally accepted accounting
principles and the Fund's use of the tax accounting practice known as
equalization. The calculation of net investment income per share in the
financial highlights excludes these adjustments.
17
<PAGE>
================================================================================
John Hancock Funds - Special Value Fund
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Capital Series,
John Hancock Special Value Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Special Value Fund (the "Fund"), one of the portfolios constituting John
Hancock Capital Series, including the schedule of investments, as of December
31, 1997, and the related statement of operations for the year then ended, the
statement of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the three years in the period
then ended and for the period from January 3, 1994 (commencement of operations)
to December 31, 1994. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights. Our procedures included confirmation of
securities owned as of December 31, 1997, by correspondence with the custodian.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
John Hancock Special Value Fund portfolio of John Hancock Capital Series at
December 31, 1997, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended and
the financial highlights for each of the three years in the period then ended
and for the period from January 3, 1994 (commencement of operations) to December
31, 1994, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
February 6, 1998
TAX INFORMATION NOTICE (UNAUDITED)
For federal income tax purposes, the following information is furnished with
respect to the distributions of the Fund during the fiscal year ended December
31, 1997.
The Fund designated distributions to shareholders of $747,207 as long-term
capital gain dividend. $269,400 of this capital gain distribution is subject to
the 28% tax, and $477,807 is subject to the 20% tax. Shareholders were mailed a
U.S. Treasury Department Form 1099-DIV in January 1998 representing their
proportionate share.
With respect to the Fund's ordinary taxable income for the fiscal year ended
December 31, 1997, 20.55% of the dividends qualify for the corporate dividends
received deductions.
18
<PAGE>
======================================NOTES=====================================
John Hancock Funds - Special Value Fund
19
<PAGE>
================================================================================
----------------
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